Description
Medications can be classified in various ways,[3] such as by chemical properties, mode or route of administration, biological system affected, or therapeutic effects. An elaborate and widely used classification system is the Anatomical Therapeutic Chemical Classification System (ATC system).
STUDY OF RATIO ANALYSIS WITH REFERENCE TO SMS PHARMACEUTICALS LIMITED
RATIO ANALYSIS CONTENTS
CHAPTER I
1. 2. 3. 4. 5. 6. 7. 8. 1. 2.
Introduction Meaning and Rationale Importance of Ratio Analysis Standards if comparison Users of Ratio Analysis Classification of Ratios Important groups in Ratio Analysis Limitations of Ratio Analysis Profile of the Company Board of Directors
CHAPTER
II
CHAPTER III CHAPTER IV CHAPTER V CHAPTER VI
The Period of Study Ratio analysis of the Company under study Observations Suggestions and Recommendations
CHAPTER VII CHAPTER VIII
Conclusion Bibliography
INTRODUCTION
An analysis of financial statements is important aid of financial analysis. The focus of financial analysis is on key figures in the financial statements and the significant relationships that exist between them. The analysis of financial statements is a process of valuating relationships between component parts of financial statements to obtain a better understanding of the firm’s position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statement. The second step involved in financial analysis is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. However, it is to be noticed that there is a basic limitation of the traditional financial statement comprising the balance sheet and the profit and loss account i.e. they do not give all the information regarding financial operation of the firm. Accordingly ratios not only indicate the present position, they also indicate the causes leading up to the large extent. For instance accounts ratio may indicate not only the financial position and precautions but also the past policies and actions they have caused.
MEANING AND RATIONALE
Ratio analysis is a powerful tool of financial analysis. It is defined as a systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. This relationship can be expressed as (i) percentages (ii) fraction (iii) proportion of numbers. These alternative methods of expressing items, which are related to each other, are, for purpose of financial analysis, referred to as ratio analysis. An absolute accounting figures reported in the financial statements do not provide meaningful understanding of the performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. Thus, the relationship between two accounting figures, expressed mathematically, is known as financial ratio, or simply as a ratio. Ratios help to summarize the large quantities of financial date and to make qualitative judgement about the firm’s financial performance i.e., a ratio indicates a quantitative relationship which can be in turn, used to make a qualitative judgement.
IMPORTANCE OF RATIO ANALYSIS Ratio analysis, as a tool of financial management is of crucial significance. The importance of ratio analysis is in fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects. (i) Liquidity Position: Ratio analysis in drawing the conclusions regarding the liquidity position or short-term solvency of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its shortmaturing debt usually within a year as well the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans. (ii) Long-term solvency: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analysts and the present and potential owners of a business. The long-term solvency is measured by the leverage/Capital structure and profitability ratios, which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weakness of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or whether heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. (iii) Over-all profitability: Unlike the outside parties, which are interested in one-aspect of the financial position of a firm, the management is constantly concerned about the over-all profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short-term as well as longterm obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
(iv) Operating Efficiency: Another dimension of the usefulness of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of the firm is, in the ultimate analysis dependent upon the sales revenues generated by the use of its assets total as well as its components. (v) Inter-firm Comparison: Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter-firm comparison or comparison with industry averages. A single figure of particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. (vi) Trend Analysis: Ratio analysis enables a firm to take the dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fact that the analyst can know the direction of movement, i.e. whether the movement is favourable or unfavourable .
STANDARDS OF COMPARISON The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favourable or unfavourable condition. It should be compared with some standard. Standards of comparison may consists of 4 types: (1) Time series analysis or trend ratios: When financial ratios over a period of time, i.e. present ratios are compared with past ratios of a same firm it is called trend ratios. It gives an indication of the direction of the change and reflects whether the firm’s financial performance has improved, deteriorated or remained constant over time. (2) Pro-forma analysis or projected ratios: Sometimes future ratios are used as the standard of comparison. Future ratios can be developed from the projected, or pro-forma financial statements. The comparison of current or past ratios with future ratios show the firm’s relative strengths and weaknesses in the past and the future. If the future ratios indicate weak financial position, corrective action should be initiated. (3) Cross-sectional analysis or competitors ratios: Another way of comparison is to compare ratios of one firm with some selected firms in the same industry at the same point in time. This kind of comparison is known as cross-sectional analysis or competitors’ ratios. It is most useful to compare the firm’s ratios with a few carefully selected competitors, who have similar operations. This kind of comparison indicates the relative financial position and the performance of the firm. (4) Industry analysis or Industry ratios: To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of the industry of which the firm is a member. This sort of analysis is known as the industry analysis. It helps to
ascertain the financial standing and capability of the firm vis-à-vis other firms in the industry. USERS OF RATIO ANALYSIS Users of the financial ratio analysis are many. They are concerned with the economic situation of the firm and predicting its future course, basing on which decision are taken. The major groups of users are: (a) Management: Management can get an overall view of the financial operations and condition of the company, which enables them to plan and control the company’s activities more effectively. They are able to spot weaknesses in the company’s operations and can take correct action. Furthermore it tends to restrain management, as they are under pressure to maintain a favourable financial position. 1. Helps in decision-making: Financial statements are prepared primarily for decision-making. Ratio analysis helps in making decisions from the information provided in the financial statements. 2. Helps in financial forecasting and planning: Ratio Analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn for future from these ratios and thus helps in forecasting and planning. 3. 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 the financial statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the value of the financial statements. 4. Helps in co-ordination: Ratios even help in co-ordination, which is of utmost importance in effective business management. Better communication of efficiency and weakness of an enterprise results in better co-ordination in the enterprise. 5. Helps in Control: Ratio analysis even helps in making effective control of the business. Standard ratios can be based upon proforma financial statements and variances or deviations, if any, can be found by comparing the actuals with the standards so as to take a corrective action at the right time. The weaknesses or otherwise, if any, come to the knowledge of the management which helps in effective control of the business. 6. Other Uses: There are so many other uses of the ratio analysis. It is an essential part of the budgetary control and standard costing. Ratios are of
immense importance in the analysis and interpretation of financial statements as they bring the strength or weakness of a firm.
(b) Investors: Investors are concerned with the safety of their investment and the ability of the company to earn profits and in turn the dividend they earn on their investment. The investors form their own opinion as to the soundness of investing in a company. One way the investors form their opinion of the Company’s earning capacity is by computing earning per share. (c) Creditors: Creditors are interested in the company’s ability to meet its financial obligations. Those who have lent the money for short period are more interested in the company’s ability to repay the debt as and when it becomes due. In other words, they are interested in the liquid position of the company, which can be broadly measured by computing current ratio and quick ratio. The long-term creditors are not only interested in company’s ability to repay but also in the ability of the company to realize profit on the capital employed. A creditor will be interested in ascertaining whether the company can employ the funds loaned to it in such a way that it will able to meet current interest obligation and repay the loan when it falls due. If a company earns less than what is paid in the form of interest, it is not safe to lend money to that company. (d) Labour : Labour has an interest in the operating results and the financial strength of a company. The remuneration of the worker must be generated form the company revenues; thus, the workers wages, to a great extent, depend upon the success of the firm. Frequently, labour unions use the information presented in the financial statements as a basis for their demand for increase in wages. The past operating performance of the firm, as well as its current financial position, is often studied to measure the ability of the firm to meet new wage commitments. (e) Government: Government is interested to know the overall strength of the industry, Various financial statements published by industrial units are used to calculate ratios for determining short-term, long-term and overall financial position of the concerns. Profitability indexes can also be prepared with the help of ratios. Government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of overall financial strength of public as well as private sector. In the absence of the reliable economic information, governmental plans and policies may not prove successful.
CLASSIFICATION OF RATIOS
I. Liquidity Ratios: 1. Current Ratio 2. Liquidity Ratio (acid test or quick ratio) 3. Absolute liquid ratio II. Long-term solvency or leverage ratios: 1. 2. 3. 4. Debt-equity ratio Debt-total capital ratio Proprietary ratio Capital gearing ratio
III. Activity Ratios: 1. 2. 3. 4. 5. 6. 7. Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Fixed assets turnover ratio Total assets turnover ratio Working capital turnover ratio Capital employed turnover ratio
IV. Profitability Ratios: A. In relation to sales: 1. 2. 3. 4. Gross profit Ratio Net profit Ratio Operating Ratio Operating Profit Ratio
B. In relation to investment: 1. 2. 3. Return on investments Return on capital Return on total resource
4.
Earning per share
TYPES OF RATIOS Several ratios calculated from the accounting data contained in the financial statements. These ratios can be grouped into various classes. According to financial activity or function to be evaluated. The parties interested in financial analysis are short and long-term creditors, owners and management. Short-term creditors main interest is in the liquidity position or the short-term solvency of the firm. Long-term creditors are more interested in the long-term solvency and profitability of the firm. Similarly, owners concentrate on the firm’s profitability and financial condition. Management is interested in evaluating every aspect of the firm’s performance. They have to protect the interests of all parties and see that the firm grows profitably. In view of the requirements of the various users of ratios, they may be classified into four categories: (1) (2) (3) (4) Liquidity ratio Leverage ratio Activity ratio Profitability ratio
LIQUIDITY RATIO Liquidity refers to the ability of concern to meet its current obligations as and when these become due. Liquidity ratios measure the ability of the firm to meet its current obligations. In fact, liquidity is a pre-requisite for the very survival of a firm. The short-term creditors of the firm are interested in shortterm solvency of the firm. The liquidity ratios measure the ability of the firm to meet its short-term obligations and reflect the short-term financial strength or solvency of a firm. A firm should ensure that it does not suffer from lack of liquidity, and also it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in poor credit worthiness, loss of creditors confidence or even in legal tangles resulting in thee closure of the company. A very high degree of liquidity is also bad, idle assets earn nothing. Therefore, it is necessary to strike a balance between high liquidity and lack of liquidity. The most common ratios, which indicate the extent of liquidity or lack of liquidity are: (1) Current Ratio (2) Liquidity Ratio or Acid test or Quick ratio (3) Absolute Ratio
CURRENT RATIO The Current Raito is the ratio of total current to total current liabilities. It is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets Current Liabilities
The Current assets of a firm represent those assets, which in a normal course of business get converted into cash over a short period of time usually not exceeding one year. They include cash and bank balances, marketable securities, inventory of raw materials, semi-finished (work-in-progress) and finished goods, debtors net of provision for bad and doubtful debts, bills receivable and pre-paid expenses. The current liabilities are those liabilities, which are required to be paid in short period i.e., within a year. They include trade creditors, bills payable, bank credit, provision for taxation, dividends payable and outstanding expenses.
QUICK RATIO The quick ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. Acid-test Ratio = Quick assets Current liabilities
The term quick assets refer to current assets, which can be converted into cash immediately or at a short notice without diminution of value. Included in category of current assets are: Cash and bank balances, short-term marketable securities and debtors/receivables. Thus, the current assets, which are excluded, are: Pre-paid expenses and inventory. The exclusion of inventory is based on the reasoning that it is not easily and readily convertible into cash. Pre-paid expenses by their very nature are not available to pay-off debts. They merely reduce the amount of cash required in one period because of payment in prior period.
ABSOLUTE CASH RATIO
The purpose of this ratio is to show how far cash reservoir is sufficient to meet the current liabilities. Although provisions do not represent current liabilities, some provisions have the characteristics of current liabilities. Examples are tax provision and proposed dividend. It is almost certain that some liability will arise in the near future. Absolute Cash Ratio Cash Reservoir Current Liabilities = = = Cash Reservoir Current Liabilities Cash in hand + Cash at bank + marketable non-trade investments. Trade creditors + bills payable + Outstanding expenses + provision for taxation + proposed dividend + other provisions (against which liability may arise shortly).
If on the assets side there is ‘advance tax’ item, provision for taxation should be taken net of advance tax.
CASH POSITION TO TOTAL ASSETS RATIO This ratio is a measure of liquid layer of the assets deployed by business. But too high a cash reservoir is not good because this may reduce the level of resource deployment for other assets. On the other hand maintaining too low a ratio is also not good, that may create cash crisis for day-to-day operations of the business.
Cash Position to Total Assets = Cash Reservoir Total Assets
*
100
LEVERAGE/CAPITAL STRUCTURE RATIO The long-term solvency of a firm can be examined by using leverage or capital structure ratios. The leverage ratio may be defined as financial ratio, which throws light on the long-tem solvency of a firm reflected in its ability to assure the long-term creditors with regard to: (i) Periodic payment of interest during the period of the loan. (ii) Repayment of principal on maturity or in pre-determined instalments at due dates. There are, thus, two aspects of the long-term solvency of a firm: (i) Ability to repay the Principal when due (ii) Regular payment of interest. Accordingly, there are two different, but mutually dependent and interrelated, types of leverage ratios. First, ratios, which are based on the relationship between, borrowed funds and owner’s capital. These ratios are computed from balance sheet and have many variations such as: (i) Debt-equity ratio (ii) Debt-asset ratio (iii) Equity-asset ratio The second type of leverage ratios are calculated form profit and loss account. Included in this category are: (i) Interest coverage ratio (ii) Dividend coverage ratio (iii)Total fixed charges coverage ratio (iv) Cash flow coverage ratio (v) Debt-service coverage ratio
DEBT-EQUITY RATIO The Debt-Equity Ratio is the measure of the relative claims of creditors and owners against the firm’s assets. The ratio is calculated in various ways. One view is to calculate the debt-equity ratio as long-term debts (noncurrent liabilities) divided by shareholders’ equity (common shareholders’ equity plus preference shareholders’ equity.) i) Debt-Equity Ratio = Long - term Debt Shareholder’s Equity Another variation of the ratio is to divide the total debt (total liabilities) by the shareholders’ equity. ii) Debt-Equity Ratio = Total Debt Shareholder’s Equity
The Debt-Equity Ratio is an important tool of financial analysis to appraise the financial structure of a firm. It has important implications from the viewpoint of the creditors, owners, and the firm itself. The ratio reflects the relative contribution of creditors and owners of business in its financing. If the Debt-Equity Ratio is high, the owners are putting up relatively less money of their own. It is a danger signal for the creditors. A high debtequity ratio has equally serious implications from the firm’s point of view also. A high proportion of debt in the capital structure would lead to inflexibility in the operations of the firm as creditors would exercise pressure ad interfere in management. The shareholders of the firm would, however, stand to gain in two ways: i) with a limited stake, they would be able to retain control of the firm and ii) the return to them would be magnified. A low debt-equity ratio has just the opposite implications. To the creditors, a relatively high stake of the owners implies sufficient safety of margin and substantial protection against shrinkage in assets. For the company
also, the servicing of debt is less burdensome and consequently its credit standing is not adversely affected, its operational flexibility is not in jeopardy and it will be able to raise additional funds. The shareholders of the firm are deprived of the benefits of trading on equity or leverage. The reasonable relationship between debt and equity will depend upon the circumstances, prevailing practices and so on. The general proposition is: others’ money should be in reasonable proportion to the owners’ capital and the owners should have sufficient stake in the fortunes of the enterprise. For instance, in a capital-rich country, the practice is to use as little debt as possible. A debt-equity ratio of 1:3 is regarded as indicative of a fairly heavy debt; a ratio of 1:1 would indicate an extremely heavy and unsatisfactory debt situation. In under-developed countries such standards cannot be expected. It is not unusual to find firms having a debt-equity ratio of 2:1 or even 3:1 in the case of joint stock enterprises in India. The debt-equity ratio cannot be applied mechanically without regard to the circumstances of each case, such as type and size of business, the nature of the industry and the degree of risk involved. In computing the Debt-Equity Ratio of SMS Pharmaceuticals Ltd., Debt is taken as the total of secured, unsecured loans and Equity consists of equity share capital plus reserves and surplus.
DEBT TO TOTAL CAPITAL RATIO This ratio is a variation of the debt-equity ratio and gives similar indications. Debt to Total Capital Ratio is calculated by dividing the total debt by permanent capital + current liabilities. It measures the portion of the firm’s assets that are financed by creditors. A very high ratio indicates a greater risk to the creditors. A low ratio of debt to total capital is favourable to the creditors. A very low ratio is a source of worry to the shareholders, as the company is not using debt to their best advantage. A firm should have neither a high ratio nor a very low ratio. In computing the Debt to Total Capital Ratio of SMS Pharmaceuticals Ltd., Total Debt is taken as total of secured loans, unsecured loans and current liabilities and permanent capital consists of shareholders’ equity, secured loans, unsecured loans, current liabilities and Reserves and surplus.
PROPRIETARY RATIO It is a variant of debt equity ratio. It relates the proprietors’ or shareholder’s funds to the total assets. It is calculated as follows: Proprietary Ratio = Proprietary Fund Total Assets Proprietary ratio reflects the general financial strength and the proportion of Shareholder’s funds in total assets employed in the business. A high proprietary ratio indicates a relatively low degree of risk to creditors. Conversely a low proprietary ratio indicates a greater degree of risk to creditors.
CAPITAL GEARING RATIO
This ratio helps in determining the future financial structure of the business. It is calculated as follows: Capital Gearing Ratio = Funds bearing fixed interest and fixed dividend Equity shareholder’s funds = Debentures + Term Loans + Preference Share Capital Equity Share Capital + Reserves – Fictitious Assets A company is said to be highly geared if it has a high capital gearing ratio, and lowly geared if the capital gearing ratio is low. The extent of gearing determines the future financial structure of the business. A company which is highly geared will have to raise funds by issuing fresh equity shares, where as a lowly geared company would find it attractive to raise, funds by way of term loans and debentures. In computing the Capital Gearing Ratio of SMS Pharmaceuticals Ltd., Funds bearing fixed interest is taken as secured and unsecured loans and Equity Shareholder’s funds consists of Equity Share Capital and Reserves and Surplus.
FIXED ASSETS RATIO
The ratio establishes the relationship between fixed assets and shareholder’s funds i.e., share capital plus reserves, surpluses and retained earnings. The ratio can be calculated as follows: Fixed Assets Ratio = Fixed Asset (After depreciation) Capital Employed Capital Employed = Equity Share Capital + Preference Share Capital + Reserves + Long-term liabilities – Fictitious Assets
This ratio indicates the mode of financing the fixed asset. A financially well managed Company will have its fixed assets financed by long-term funds. Therefore, the Fixed Assets Ratio should never be more than 1. A ratio of 0.67 is considered ideal.
ACTIVITY RATIOS
Activity Ratios are concerned with measuring the efficiency in assets management. Sometimes, these ratios are called efficiency ratios or asset utilisation ratios. Since the efficiency of a firm is reflected in the speed and volume of business, the activity ratios are calculated with reference to sales and expressed in number of times. A firm’s efficiency in utilising its assets is measured by comparing its sales with investment in various assets including inventories, bills receivables, fixed assets, etc. The greater the rate of turnover or rotation of assets, the more efficient will be utilisation or management of assets. Following are some of the more important and widely used activity ratios.
INVENTORY TURNOVER RATIO This ratio shows the number of times the investment in inventories is turned over or replaced during the year. It measures the relationship between goods sold and the inventory level. There are two approaches of measuring inventory turnover. First, it is calculated by dividing the cost of goods sold by the average inventories. According to this approach. Inventory Turnover Ratio = Cost of Goods sold Average inventories Opening Stock + Manufacturing Cost + Purchases – Closing Stock Opening Stock + Closing Stock 2
Cost of Goods sold Average Inventory
= =
The second approach of measuring inventory turnover is based on inventories at the end of the financial year as shown in balance sheet. It is calculated by dividing total sales by the closing inventory. Thus, Inventory turnover = Total sales Closing inventory
The inventory turnover shows how rapidly the inventory is turning into receivable through sales. Generally a high inventory turnover is indicative of good inventory management and a lower inventory turnover suggests an inefficient inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slowmoving or obsolete inventory. A high level of sluggish inventory amounts to unnecessary tie-up of funds, impairment of profit and increased costs. Thus, too high and too low inventory turnover ratios are not desirable. A very high inventory turnover may be the result of very low level of inventory, which results in frequent stock outs the turnover, will also be high if the firm replenishes its inventory in too many small lot sizes. The situations of frequent stock outs and too many small inventory replacements can prove costly for the firm.
DEBTORS TURNOVER RATIO AND COLLECTION PERIOD
A firm sells goods on credit and cash basis when the firm extends credits to its customers; book debts (debtors) are created in the firm’s accounts. Debtors are expected to be converted into cash over a short period and, therefore, are included in current assets. The liquidity position of the firm depends on the quality of debtors to a great extent. Financial analysts employ two ratios to judge the quality or liquidity of debtors. The debtors turnover ratio is found out by dividing sales by debtors. Debtors turnover ratio = Sales Average Debtors
The average collection period of debtors is calculated as: Average collection period for Debtors = Days in year/months in a year Debtors turnover ratio The debtors turnover ratio indicates the number of times on the average that debtors turnover each year. A high ratio is indicative of shorter time lag between credit sales and cash collection. A low ratio shows that debts are being collected rapidly. The average collection period ratio measures the quality of debtors since it indicates the rapidity or slowness of their collect ability . The shorter the collection period, the better the quality of debtors, as a short collection period implies the prompt payments by debtors. Too low a collection period is not necessarily favourable . Rather it indicates a very restrictive credit and collection policy.
CREDITORS TURNOVER RATIO
In the course of business operations, a firm has to make credit purchases and incur short-term liabilities. A supplier of goods, i.e., creditor, is naturally interested in finding out how much time the firm is, likely to take in repaying its trade creditors. The analysis for creditors turnover is basically the same as of debtors turnover ratio except that in place of trade debtors, the trade creditors are taken as one of the components of the ratio and in place of average daily sales, average daily purchases are taken as the other component of the ratio. The creditors turnover ratio is found out by dividing sales by debtors. Creditors turnover ratio = Purchases Average Creditors
The average collection period of creditors is calculated as: Average collection period for Creditors= Days in year/months in a year Creditors turnover ratio The creditors turnover ratio of 12 or more, implying a debt payment period of 30 or less number of days, indicates that the firm is not able to get the best terms of credit. However, very less creditors turnover ratio, or high debt payment period, may indicate the firm’s inability in meeting its obligations in time. The average collection period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. But a higher payment period also implies greater credit period enjoyed by the firm and consequently larger the benefit reaped from credit suppliers.
FIXED ASSETS TURNOVER RATIO
The fixed assets turnover ratio measures the efficiency with which the firm is utilizing its investments in fixed assets, such as land, buildings, plant and machinery, furniture, etc. It also indicates the adequacy of sales in relation to the investment in fixed assets. The fixed assets turnover ratio is sales divided by net fixed assets. Fixed Assets Turnover Ratio = Sales Net Fixed Assets Generally, a high ratio indicates efficient utilization of fixed assets in generating sales, while a low ratio indicates inefficient management and utilization of fixed assets. However, the analyst should be cautious in deriving conclusions form the fixed assets turnover ratio.
TOTAL ASSETS TURNOVER RATIO
This ratio indicates the sales generated per rupee of investment in total assets. Although fixed assets are directly concerned with the generation of sales, but other assets also contributes to the production and sales activities of the firm. The firm must manage its total assets efficiently and should generate maximum sales through their proper utilisation . The total assets turnover is calculated dividing sales by total assets of the firm: Total Assets Turnover Ratio = Sales Total Assets
The total assets turnover ratio is a significant ratio since it shows the firm’s ability of generating sales from all the financial resources committed to the firm. As this ratio increases, there is more revenue generated per rupee of total investment in assets. The firm’s ability to produce a large volume of sales on a small total asset base is an important part of the firm’s overall performance in terms of profits. Idle or improperly used assets increase the firm’s need for costly financing and the expenses for maintenance and upkeep. While calculating the total assets turnover ratio of SMS Pharmaceuticals Ltd., Total Assets are taken as total of fixed assets, current assets and investments, intangible assets are not included in total assets,.
WORKING CAPITAL TURNOVER RATIO This ratio indicates the velocity of the utilisation of net working capital. Working Capital of a concern is directly related to sales. The current assets like debtors, bills receivables, cash, stock, etc., change with the increase or decrease in sales. The working capital is taken as: Working Capital = Current Assets – Current Liabilities Working Capital turnover ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilisation of working capital and low ratio indicates inefficient utilisation of the firm’s funds. But a very high working capital turnover ratio is not a good situation for any firm and hence care must be taken while interpreting the ratio. This ratio can be calculated as: Working Capital Turnover Ratio = Cost of Sales Average Working Capital
CAPITAL EMPLOYED TURNOVER RATIO
Capital Employed may be defined as net fixed assets + Working Capital. Capital Employed turnover Ratio = Sales Capital Employed
The ratio indicates the firm’s ability of generating sales per rupee of long-term investment. The higher the ratio, the more efficient the utilisation of owners’ and long-term creditors’ funds. In computing the capital employed turnover ratio, capital employed taken as the total of net fixed assets and working capital.
PROFITABILITY RATIOS
A business is run primarily for profit. So its performance has been measured in terms of profit. Profitability ratios give some yardstick to measure profit in relative terms, either with reference to sales or assets or capital employed. The term ‘profit’ is also variously defined for this purpose. Profitability based on Sales or Revenue: The term sales should be used when the source of revenue of the business is sale of goods. The service sector enterprises charge rent, fees or interest. So instead of sales the term ‘revenue’ can be used.
GROSS PROFIT TO SALES RATIO This ratio reveals the result of trading operations of the business. There is no standard norm for gross profit ratio and it may vary from business to business but the gross profit should be adequate to cover the operating (administrative and office expenses, selling and distribution expenses) and to provide for fixed charges, dividends and accumulation of reserves. Gross Profit Ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus, it is calculated by dividing the gross profit by sales: Gross Profit Ratio = Gross Profit Net Sales Gross Profit Net Sales = Net Sales – Cost of Goods Sold = Total Sales – Sales Returns
Cost of Goods Sold = Opening Stock + Purchases + Manufacturing Expenses – Closing Stock There is no ideal or standard gross profit ratio. The higher the ratio, better will be the performance of the business. A low gross profit ratio, generally indicates high cost of goods sold due to unfavourable purchasing policies, lesser sales, lower selling prices, excessive competition, overinvestment in plant and machinery, etc.
NET PROFIT TO SALES RATIO
This ratio is the overall measure of the firm’s ability to turn each rupee of sales into net profit. If the net margin is inadequate, the firm will fail to achieve satisfactory return on owners’ equity. This ratio also indicates the firm’s capacity to withstand adverse economic conditions. A firm with a high net margin ratio would be in an advantageous position to survive in the face of falling sales prices, rising costs of production or declining demand for the product. It would really be difficult for a low net margin firm to withstand these adversities. Similarly, a firm with high net profit margin can make better use of favourable conditions, such as rising sales prices, falling costs of production or increasing demand for the product. Such a firm will be able to accelerate its profits at a faster rate than a firm with low net profit margin. The Net Profit Margin Ratio or Net Profit to Sales Ratio measured by dividing net profit after taxes by sales. Net Profit Margin = Net Profit After Taxes Sales
OPERATING RATIO
This ratio establishes the relationship between cost of goods sold and other operating expenses on the one hand and the sales on the other. In other words, it measures the cost of operations per rupee of sales. The ratio is calculated by dividing operating costs with the net sales and its generally represented as a percentage. Operating Ratio = Operating Cost Net Sales Operating Cost * 100
= Cost of Goods Sold + Operating Expenses
Operating Expenses consist of: (a) Administrative and office expenses like rent, salaries to staff, insurance, directors’ fees, etc. (b) Selling and distribution expenses like advertisement, salaries of salesmen, etc. Operating ratio indicates the percentage of net sales that is consumed by operating cost. Obviously, higher the operating ratio, the less favourable it is because, it would have a small margin (operating profit) to cover interest, income tax, dividend and reserves. A low operating ratio is an indication of operating efficiency of the business.
OPERATING PROFIT RATIO This ratio establishes the relationship between operating profit and sales. It is calculated by dividing operating profit by sales. Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of Goods Sold + Administrative and Office Expenses + Selling and Distributive Expenses) Operating Profit can also be calculated as: Operating Profit = Net Profit + Non-operating Expenses - Non-Operating Income So, Operating Profit Ratio = Operating Profit * 100 Sales This ratio can also be calculated as: Operating Profit Ratio = 100 – Operating Ratio The higher the ratio, the better it is.
PROFITABILITY BASED ON CAPITAL EMPLOYED RETURN ON CAPITAL EMPLOYED (R O C E)
The return on capital employed indicates how well management used the funds supplied by creditors and owners. This ratio is also called the earning power of the firm and represents the return on the funds. Higher the ratio, better it the position of the firm and more efficient is the management in utilising the funds, entrusted to it. Return on Capital Employed = Net Profit After Taxes Capital Employed
PROFITABILITY INDICATORS FOR SHAREHOLDERS RETURN ON SHAREHOLDERS’ EQUITY
This is probably the single most important ratio to judge whether the firm has earned a satisfactory return for its equity-holders or not. The rate of return on ordinary shareholders’ equity is of crucial significance in ratio analysis form the point of the owners of the firm. It is calculated by dividing the profit after taxes and preference dividend by the equity of the ordinary shareholders. Return on Shareholders’ Equity = Net Profit After Taxes Shareholders’ Equity / Net Worth
RETURN ON TOTAL ASSET RATIO
The return on total asset is a useful measure of the profitability of all financial resources invested in the firm’s assets. It evaluates the use of total funds without any regard to the sources of funds. This ratio is particularly useful to evaluate the performance of divisions in a multi-divisional firm. Generally, these divisions have the responsibility of using and controlling assets without any responsibility towards the raising and utilising funds. Higher the ratio, more effective is the firm in using the “pool” of funds. The Return on Assets or profit-to-assets ratio is net profit after taxes divided by total assets. Return on Total Assets = Net Profit After Taxes Total Assets In computing the Return on Total Assets Ratio of SMS Pharmaceuticals Ltd., the Total Assets are taken as the total of net fixed assets, current assets and investment.
EARNINGS PER SHARE
The Earnings Per Share Ratio measures the profit available to the equity holders on a per share basis, i.e., the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by the number of the outstanding shares. The profits available to the ordinary shareholders are represented by net profits after taxes and preference dividend. Earnings Per Share = Net Profit Available to Equity holders Number of Ordinary Shares Outstanding
EPS is a widely used ratio. Its usefulness in analyzing the effect of a change in leverage on the net operating earnings to the ordinary shareholders and, given the requirement of maximising EPS. If EPS has increased over the years, it does not necessarily follow that the firm’s profitability has improved because the increased profits to the owners may be the effect of an enlarged equity capital as a result of profit retentions, though the number of ordinary shares outstanding still remains constant. Another limitation of EPS is that it does no reveal how much is paid to the owners as dividends or how much earnings are retained in the business. It only shows how much “theoretically” belongs to the ordinary shareholders.
BOOK VALUE
It is that fraction of the net worth of the business, as depicted in the Balance Sheet, which is attributable to one equity share of the business. It is calculated as: Equity Shareholders Funds No. of Equity Shares The higher the book value of a share, the more strong the business is assumed to be. The book value should not be below the paid up value of one share.
LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is a widely used technique to evaluate the financial position and performance of business. Yet it suffers from various limitations. a) It is difficult to decide on the proper basis for comparison. Ratios of a company have meaning only when they are compared with some standards. Usually, it is recommended that ratios should be compared with the industry averages. But the industry averages are not easily available. In India, no systematic and comprehensive industry ratios are compiled. b) In the case of inter-firm comparison no two firms are similar in age, size and product unit. Therefore, any comparison of ratios of two such firms must take these factors into account. c) Both the inter-period and inter-firm comparison is affected by price level changes. A change in price-level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trends in solvency and profitability of the company. Like wise, there may be two firms - one having purchased the assets at a lower price and another at a higher price. Return on investment calculated for such firms are bound to differ substantially. The firm, which has purchased the assets at a lower price, will have higher return than the firm, which has purchased the assets at a higher price. Therefore, inter-firm comparisons are also vitiated due to price-level changes. d) The differences in the definitions of items in the balance sheet and the income statements make the interpretation of ratios difficult. Diversity of view exists as to the meaning of certain terms like net worth, current assets, current liabilities, etc. Similarly, profit means different things to different people.
e) The ratios calculated at a point of time are less informative and defective as they suffer from short-term changes. The ratios do not have much use if they are not analysed over years. Although trend analysis is more useful, but, still the analysis is static to an extent. The balance sheets, prepared at different points of time, do not reveal the changes, which have taken, place between dates of two balance sheets. The statement of changes in financial position reveals this information, but these statements are not available to outside analysis. f) The basis to calculate ratios is historical financial statements. The financial analysis is more interested in what happened in the past. Management of the company has information about the company’s future plans and policies and, therefore, is able to predict future happening to a certain extent. But the outside analyst has to rely on the past ratios, which may not necessarily reflect the firm’s financial position and performance in the future. g) Ratios are simple to understand and easy to calculate. Therefore, there has been a tendency to over employ them. However, it should be clearly understood that ratios are only tools and the personal judgement of analyst is more important. Again, the analyst should not merely rely on a single ratio. He has to take several ratios (connected) into account before reaching a conclusion. h) Conclusions from analysis of statements are not sure indicators of bad or good management. They merely convey certain observations pointing to the probability of matters needing investigation. It is not wise to assume without further investigation that a condition particularly favourable or unfavourable is present.
PROFILE OF THE COMPANY
1.0 Executive Summary SMS Pharmaceuticals Ltd. (SMS) is a leading manufacturer and exporter of API (Active Pharmaceutical Ingredient) and Intermediates. SMS is also doing a major work in developing new molecules in its established R&D facility at Hyderabad. SMS is the largest manufacturer and exporter of Ranitidine and its Intermediates. SMS is sharing 70% of the domestic and 65% of the world’s non-regulatory market of Ranitidine. SMS is also a leading manufacturer and exporter of Sumatriptan Succinate and its intermediates. SMS is having the credit of producing a European pharmacopial grade product first time in India. SMS has filed for a patent for a non-infringing process and filed drug master file in US FDA and Canadian FDA. Apart from the Ranitidine and Sumatriptan, SMS is also producing Ramipril, Quinapril and Gemicitabine. One of the key features of SMS is close cooperation of IT experts, scientists and process specialists in cross-functional teams – they experts speak the same language as their customers and have intimate knowledge of industry needs. Another key feature of SMS is in-house development of R&D laboratory with the state of art technology equipped with latest precision equipments. SMS fortified its in-house R&D services by adding experienced scientists to cater to the needs of the organization in the fields of research, process development, development of new molecules and to create intellectual property. The company is already in the pursuit of arranging separate premises for the R&D activities. SMS R&D center is working on other anti cancer molecules Imatinib, Geftinib like Gemicitabine. SMS has already created a FDA facility (inspection due) for Sumatriptan at Unit II. Now SMS is going ahead to build another state of art FDA facility for Ranitidine to fulfill the US and other regulatory markets in Europe. SMS is also planning to create FDA facility for the other small volume and high volume drugs at unit II.
This business plan is part of our regular business planning process. We revise this plan semi-annually. Our keys to success and critical factors for the next year - in order of importance are: • Patenting all the processes to get a higher share of international market. • Test marketing and basic research to determine product acceptance. • Test marketing of multi-channel distribution. • Test marketing of media, PR, pricing, and product endorsement plans. • Goal of recouping production start-up costs and first year depreciation on initial three molds in year one. • Reaching all retail distribution outlets in the country and establishing the market. 1.1 Objectives The principal objectives of SMS Pharmaceuticals Limited are as follows: Rs. 400 Crore turnover by the year 2007. Upgrading the manufacturing facilities to meet the international regulatory approvals. Capitalize the gap occurred after patent expiry of the products in US and other regulatory markets. Developing Non-infringing methods of preparation for the products whose patents are expiring, and tapping the requirement of API for the 6 months exclusivity and further generic requirement. Patenting the methods. Concentrating on Research and development, for cost effective production of the existing molecules to the maximum extent for higher profit margins in growing competitive environment. Strategic alliance with MNC’s in research and development Development of new molecules.
Establishing in the Nutraceuticals market through selected product line.
1.2 Mission The mission of SMS Pharmaceuticals Limited, is
•
To develop patented cost effective process for API's, manufacture and market the API's in US and other regulatory markets. Manufacture and supply of API intermediates which are in demand, to patent holder of the API in the US and Europe. To do custom synthesis and contract research with MNC's To develop nutraceutical products and market them in India, US, Europe and Gulf countries. To develop tobacco cessation NRT products and launch in India and surrounding countries where there is a demand for them. To reach Rs.400 crore turnover from Rs.100 crore.
•
• •
•
•
The mission of SMS Pharmaceuticals Limited is to develop, process new molecular patents and to enable the life science companies to improve productivity through comprehensive process integration and decision support solutions across the research and development value chain. The objective is to bring new products to market faster and Capturing the global market. 1.3 Key to Success The key to success for SMS Pharmaceuticals Limited is as detailed below: Efficient and dedicated teamwork from all the team members towards the organizational goals Highly qualified and rich experienced technical personnel resources.
Highly sophisticated technology meeting international USFDA and cGMP Standards. Strategic marketing wing with qualitative forecasting abilities. 2.0 Company Summary SMS Pharmaceuticals Pvt. Ltd. was formed and started its operations in 1987; subsequently the unit had gone into red and declared sick. The existing management took over the sick unit in the year of 1990 and started producing bulk drugs. The company started their bulk drug business with the product called Ranitidine Hcl with a capacity of 6 MT per annum and the process consists of 12 major stages. The Ranitidine Hcl is an anti-ulcer product widely used all over the world. The Product is very sensitive molecule i.e. highly hygroscopic and oxidative. The company has upgraded its manufacturing capacity to 1440 MT per annum and also upgraded the technology to a three stage process which enabled it to stand as a competitive seller in the market. The company also acquired a second Unit at Miyapur as part of the expansion programme, and started producing Sumatriptan Succinate for which a non-infringing root of synthesis developed in the in-House R&D. the company has filed a patent for the root of synthesis. The company also filed DMF (drug master file) in US, Europe and Canada. The company also started producing ACE inhibitors Ramipril, Quinapril and Anti- cancer drug Gemcitabine. The company is now in the process of filing patents for non –infringing synthesis of the products.
The company was having 20 employees with a single manufacturing block in 1990 and single product. Now the company has expanded its operations to the level of 450 employees and a multi block manufacturing facilities in three different areas. The No. of products have also increased to 10. The company also expanded their R&D activities with five-experienced PhD’s supported by 20 senior chemists. The R&D center is mainly focusing on anti-cancer molecules, antimigraine molecules, antibacterial, anti-ulcer, important intermediates and natural plant extracts.
The company has started a nutraceutical and health care division as a part of diversification in the year 2003, by launching an OTC product called Fenudiet in consumer market. The product is a dietary food supplement for every adult and especially for Diabetics. The product is made from fenugreek seeds, which are known not only for diabetics but also for so many health reasons. Fenudiet was launched in the month of April 2003 in twin cities as a test market and after proving its potentiality, it was launched in the other areas of the state in August 2003. Fenudiet received an excellent response in the state from diabetics and hypercholestremics. The product is being promoted through ethical marketing strategies and through media.
2.1 Company Ownership SMS Pharmaceuticals Limited founding shareholders are: SHARE HOLDING COMPANY S no Particulars Directors Relatives Friends Relatives Body corporate Employees Others and and PATTERN No shares OF THE
% Holding
1063801 51.89% 157799 561500 145900 121000 2050000 7.70% 27.39% 7.12% 5.90%
3.0 Future Products
3.1 API’s The focus for the next five years will be to develop processes for the following molecules 1 Imatinib Anticancer 1 Es-Citalopram Antidepressant 2
2 3 4 5 6 7 8 9 10 11
Geftinib Bicalutamid e Irenotecan Tamsulosin Rizatriptan Naratriptan Eletriptan Rosilglitazo ne Pioglitazone Repaginide
Anticancer Antineoplastic Anticancer Venigen prostatic hyperplasia Antimigraine Antimigraine Antimigraine Antidiabetetic Antidiabetetic Antidiabetetic
1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2
Clopidogrel Venlafaxine Roxindole Reboxatine Perindopril Trandopril Fosinopril Benazapril Abaperidone
Anticoagulants Antidepressant
Anti depressant ACE inhibitor ACE inhibitor ACE inhibitor ACE inhibitor Antipsychotic
3.2 Nutraceuticals The Nutraceuticals is having the following products in its second phase of product line: 1. Nicotine Replacement Therapy (NRT) Products SMS Pharmaceuticals Limited is all set to launch different Nicotine Replacement Therapy Products for those who want to quit their smoking habit. The nicotine replacement therapy product is aimed at people who want to kick the gutkha and cigarette smoking habit, is an over-the-counter (OTC) product. The other brands that are available in the Indian market are either prescription based such as Glaxo's Zyban or drugs that contain some amount of tobacco in them. SMS products contain only pharmaceutical ingredients. The Indian tobacco market is estimated around Rs. 50,000 Crore, of which cigarettes contribute about Rs.20,000 Crore and gutkha & others contributing the balance. The
government had banned gutkha in certain parts of the country but the product is still sold illegally. Other companies involved in the manufacturing of NRT products are Pfizer, GSK and Novartis. These products, however, are strictly under prescription while our products are OTC products. a. Chewing gum The product is designed primarily as a NRT Product and in a proprietary mint flavor ethnic and Indian Gutkha flavor Each gum contains 2 mg of Nicotine in the form of NPR b. Chewetts The product is designed as an alternative and NRT product for tobacco (gutkha) chewers, jarada pan eaters The product has the look, feel and flavor of gutkha and will be the first of its kind. Available in sachets containing 2 gms of chewetts which contains 2mg of nicotine in the form of NPR 2. Night master
An aphrodisiac Product, designed specially for men sexual performance.
3. Health Drink for cancer patients 4. High calcium diet 5. High Iron syrup 6. Cardio protective Nutraceuticals dietary supplement 7. PLN Pregnant lactating Nourishing Supplement 8. HIV-AIDS Nutritional supplement 9. A Tube feeding nutrition supplement 4.1 Sales Strategy API’s The sales strategy of the company in APIs is to provide Quality products to the end formulators at a competitive price. • Quality products to the customer • Economical pricing
• Effective service • Better understanding These are the few traits that made SMS to have a largest number of satisfied customers in its journey.
4.2 Milestones ? Continues profit making company form last 13 years. ? Free reserves stood at Rs.4230.25 Lakhs and paid up share capital Rs.205 Lakhs as at 31st, March 2003. ? Regular 20% Dividend paying company over the 14 years. ? Company filed Non-infringement Process Patent for Sumatriptan Succinate. ? World largest producer of Ranitidine. ? Managed by Technical promoters having 22 years experience in core industry. ? Three Manufacturing facilities and ISO9002 Certified and located in Andhra Pradesh only. ? Having 400 work force. ? High technical background backed up by corporate level Research and Development center. ? Large and strong clientele base like Ranbaxy, Cadila and Torrent in indigenous market and world vide in Exports. ? Having export House status and winner of “Pandit Jawaharlal Nehru Silver Rolling Trophy “for Best Industrial Productivity Efforts in the State”. ? First company that is, producing Nutraceuticals for alternative to medicines for various health related problems. Process for FDA Approval for Unit-II to manufacture Sumatriptan has been in an advanced stage i.e. USFDA inspection is completed in Nov 3rd week 2003 and we are expecting the approval communication is awaited.
5.0 Management Summary The management has rich experience in all the aspects for the prosperity of the organization. 5.1 Managing Directors S.L. No 1 Name Age Academic Qualificati on MSc Organic Chemistry Designatio Experien n& ce Responsib ility in Managing 20 Director Corporate Finance, R&D and Business Strategy
P.Rames 44 h Babu
No of Previou years sly with employ SMS ed 12 Globe organics Limited
2
T.V.V.S. N. Murthy A.P. Rao
42
3
60
B.Sc in Managing 20 Chemistry Director Production and Technology MBA and Director C.A (corporate advise) Image Building, policies, growth plans
12
Chemino r Drugs Limited Dr. Reddy’s
09
5.2 Management Team S.L No Name Ag e Academic Qualificati on Designatio n& Responsib ility Exp erie nce No Previou of sly year employ s ed with
SMS 1 Dr. 56 Hariharakrish nan Ph. D. General Manager R&D Responsible for new drug developme nt M.Com SBU head Unit II Production, Purchases, Marketing and Finance B.A and SBU head Diploma in Unit I Internation Production, al Purchases, Marketing Marketing and Finance B.A General Manager HRD& Commerci al Logistics for Exports and central Excise MSc. SBU head Chemistry Unit III & General Manager (Corporat e Purchases ) Nutraceutic als and 26 IDPL
2
P. Kumar
Ravi
20
09
Chemino r Drugs
3
Y Ravi Kumar
18
09
Chemino r Drugs
4
Mr. A. Babu
Hari
17
5
Mr. Kishore
Hari 45
20
12
6
T.V. Srihari
42
corporate purchases B.E. General 22 Chemical Manager Engineering (Technical ) Process designing, scale up for new projects and new products.
Natco Pharma
BOARD OF DIRECTORS OF THE COMPANY
1) 2) 3) 4)
D RADHA KRISHNA RAO A P RAO P RAMESH BABU T V V S N MURTHY
DIRECTOR DIRECTOR CMD VC JMD
THE PERIOD OF STUDY
OBJECT OF THE STUDY
The object of the present study is to obtain a true insight into the financial position of the SMS Pharmaceuticals Ltd. It seeks to study the changes that have taken place therein over a given period of time, and to judge profitability, liquidity, stability and turnover (with the help of comparison of the firms’ present ratios with past ratios). The performance of SMS Pharmaceuticals Ltd., will be measured for the last 6 years and conclusions will be drawn which will provide guidelines to management. METHODOLOGY OF THE STUDY The date relating to the financial statements of SMS Pharmaceuticals Ltd., have been collected from the published Annual Reports for the years 1998 to 2003 which were obtained from the Administrative office of the SMS Pharmaceuticals Ltd. LIMITATIONS OF THE STUDY The Present Study is subjected to the following limitations: 1) The study is based on financial data provided by the company’s financial statements are equally applicable to the study. 2) The limitations of the financial ratio analysis are also implied.
CURRENT RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Current Assets Current Liabilities Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 19,83,82,962 30,53,24,249 32,31,84,382 33,72,20,844 41,15,08,538 36,69,10,352 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 1.59 1.56 1.65 (15 Months) 1.95 1.87 2.23 (9 Months)
-----------------------------------------------------------------------------------------As a conventional rule a current ratio of 2 to 1 or more is considered satisfactory. The ratio is not constant. There has been an increase in the current ratio from 1.65 to 1.95. The SMS Pharmaceuticals Ltd., has a current ratio of 2.23. Therefore, it may be interpreted to be sufficiently liquid. The current ratio represents a margin of safety for creditors. In 2003 the current liabilities decreased by 34% and current assets also decreased by 12%. Due to decrease in current assets and current liabilities the ratio has gone up by 16%. The year 2000 and 2003 consists of 15 and 9 months respectively. The rest of the years consist of 12 months.
QUICK RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Quick Assets Current Liabilities Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 10,14,33,770 16,96,11,528 22,10,22,655 20,98,12,920 25,20,93,267 20,27,35,529 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 0.81 0.87 1.13 1.21 1.14 1.23
-----------------------------------------------------------------------------------------The table indicates that Quick Ratio has been 1.23 during 2003, an all time high and 0.81 during 1998, an all time low. There has been an increase in the quick ratio form 0.87 to 1.13. A quick ratio of less than 1 is indicative of inadequate liquidity of the business. Generally a quick ratio of 1 to 1 is considered to represent a satisfactory current financial position. The ratio during 2000 and 2002 is nearest to 1, so, it can be called as satisfactory ratio.
ABSOLUTE CASH RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Cash Reservoir Current Liabilities Ratio (in percentage)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 1,83,66,613 3,36,53,648 2,88,79,996 5,73,05,673 6,06,17,146 5,11,19,578 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 0.14 0.17 0.14 0.33 0.27 0.31
-----------------------------------------------------------------------------------------The Cash Ratio in 1998 was 0.14, In 1999 it was increased to 0.17, In 2000 it was again decreased to 0.14, In 2001 it was increased to 0.33 and in 2002 it was decreased to 0.27 and in 2003 it was increased to 0.31. The purpose of this ratio is to show how far cash reservoir is sufficient to meet current liabilities.
CASH POSITION TO TOTAL ASSETS RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 ------------------------------------------------------------------------------------------
Year
Cash Reservoir
Total Assets
Ratio (in percentage)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 1,83,66,613 3,36,53,648 2,88,79,996 5,73,05,673 6,06,17,146 5,11,19,578 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 0.04 0.05 0.04 0.06 0.06 0.05
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In 1998, Cash position to total assets ratio was 0.04; In 1999 it was increased to 0.05; In 2000 it was again declined to 0.04; In 2001 and 2002 it was slightly increased to 0.06 and was stable; In 2003 it was declined to 0.05. Too high a cash reserve is not good because this may reduce the level of resource development for other assets. On the other hand maintaining too low a ratio is also not good, that may create cash crisis for day-to-day operations of the business.
DEBT-EQUITY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Debt Equity Pure Ratio -----------------------------------------------------------------------------------------1998 13,45,43,741 15,84,52,394 0.84
1999 2000 2001 2002 2003
21,44,60,243 21,47,46,332 32,67,19,886 32,29,54,977 39,15,69,572
18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,090
1.13 0.71 0.96 0.82 0.90
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In 1998, debt-equity ratio was 0.84:1 and in 2000 the ratio was 0.71:1 and in 2002 the ratio was 0.82:1. The main reason for fall of debt-equity ratio is due to repayment of loans from SMS in view of sound financial position and surplus cash. The debt-equity ratio was 1.13:1 in 1999 and in 2001 the ratio was 0.96:1 and in 2003 the ratio was 0.90:1. From the point of view of creditors, it represents a satisfactory capital structure of the business, since a high proportion of equity provides a larger margin of safety for them. From the shareholder’s point of view, there was an advantage during the period as the firm employs maximum amount of debt in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders.
DEBT TO CAPITAL RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Total Debt Capital Employed Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 25,15,80,183 41,00,32,577 0.61
1999 2000 2001 2002 2003
39,96,63,130 39,42,34,362 48,15,25,566 52,29,39,237 52,83,03,487
58,92,75,490 69,46,61,841 81,97,54,451 91,52,75,932 96,11,34,577
0.67 0.56 0.58 0.57 0.54
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In 1998, the ratio was 0.61; In 1999 the ratio was increased to 0.67; In 2000 it was decreased to 0.56; In 2001 it was increased to 0.58; In 2002 it was decreased to 0.57; In 2003 it was still decreased to 0.54. This ratio shows the relationship between outside liabilities and total capital. This ratio is not having any standard norm prescribed, but conventionally a ratio of 1:2 is considered as satisfactory. The Debt to Total Capital ratio of the company for the year 2003 is less than 1:2, which reveals that the company debt to total assets is desirable for the creditors as there is sufficient margin of safety available to them.
PROPRIETARY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Proprietary Fund Total Assets Ratio (in percentage)
------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089
41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948
0.37 0.31 0.42 0.40 0.41 0.43
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In 1998, the proprietary ratio was 0.37 and in 1999 it was decreased to 0.31 and in 2000 it was increased to 0.42. In 2001 t was decreased to 0.40 and then increased to 0.41 in 2002. In 2003, it was still increased to 0.43. As proprietary ratio shows what portion of total assets are financed by the owner’s capital. A high proprietary ratio indicates a relatively low degree of risk to the creditors; conversely, a low proprietary ratio indicates a greater degree of risk to the creditors. Proprietary ratio of SMS Pharmaceuticals Ltd., was high in 2003 and low in 1999.
CAPITAL GEARING RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Funds bearing Equity Shareholder’s Ratio (in percentage) fixed interest funds -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 13,45,43,741 21,44,60,243 21,47,46,332 32,67,19,886 32,29,54,977 39,15,69,572 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,090 0.84 1.13 0.71 0.96 0.82 0.90 Year
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In 1998, the Capital Gearing ratio was 0.84; In 1999 it was increased to 1.13; In 2000 it was decreased to 0.71; In 2001 it was increased to 0.96; In 2002 it was decreased to 0.82. In 2003 it was increased to 0.90. A company is said to be highly geared if it has a high capital-gearing ratio and low geared if the capital-gearing ratio is low. Capital Gearing ratio of SMS Pharmaceuticals Ltd., was high in 1999 and low in 2000. The current Capital Gearing ratio is 0.90.
FIXED ASSETS RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Fixed Assets Capital Employed Ratio (in percentage) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 14,14,81,141 20,36,67,635 29,42,54,604 40,51,84,213 44,33,53,460 50,55,49,795 29,29,96,135 40,40,72,603 51,51,73,811 66,49,48,771 71,52,91,672 82,44,00,662 0.48 0.50 0.57 0.60 0.61 0.61
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In 1998, the fixed assets ratio was 0.48; In 1999 it was increased to 0.50; In 2000 it was again increased to 0.57; In 2001 it was still increased to 0.60; In 2002 and 2003 it was constant i.e. it is 0.61. As fixed assets ratio indicates the mode of financing the fixed assets. A financially well-managed company will have its fixed assets financed by longterm funds. Therefore, the fixed assets ratio should never be more than 1. A ratio of 0.67 is considered ideal. Fixed Assets ratio of SMS Pharmaceuticals Ltd., was satisfactory in 2002 and 2003.
INVENTORY TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Cost of Goods Sold Average Inventory Ratio (in No. of times) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 41,56,71,470 47,67,55,308 74,91,93,145 38,29,45,641 49,47,66,997 30,10,64,623 8,90,08,870 9,60,09,664 10,33,38,868 11,00,04,917 14,03,60,900 15,88,53,926 4.67 4.96 7.24 3.48 3.52 1.89
-----------------------------------------------------------------------------------------In 1998, the ratio was 4.67 times and in 1999 the inventory turnover ratio was increased to 4.96. In 2000 it was still increased to 7.24. Since the inventory turnover ratio measures how quickly inventory is sold. As the ratio in 2001 was 3.48 and it was increased to 3.52 in 2002. It may be interpreted that the sales has increased from the years 1999 to 2000 and has been fluctuated from 2001 to 2003 and the very high inventory turnover may be the result of very low level of inventory which results in frequent stockouts the turnover will also be high if the firm replenishes its inventory in too many small lot sizes. The situations of frequent stock-outs and too many small inventory replacements can prove costly for the firm.
DEBTORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Ratio Collection period of Net Debtors (in No.of times) debtors in months -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 8,30,67,157 10,95,12,519 16,40,50,269 17,23,24,953 17,19,91,684 17,15,46,036 6.56 5.70 6.68 3.27 4.13 2.71 1.82 2.10 2.24 3.66 2.90 3.32 Year Sales
-----------------------------------------------------------------------------------------The Debtors Turnover ratio indicates the number of times on the average the debtors turnover each year. In 1998, the ratio was 6.56 times; In 1999 it was 5.70; In 2000 it was 6.68 times; In 2001 it was 3.27 times; In 2002 it was 4.13 times and in 2003 it was 2.71. The high debtor turnover ratio is mainly due to advances are recovered from customers. The average collection period ratio measures the quality of debtors since it indicates the rapidity or slowness of their collect ability . The shorter the collection period, the better the quality of debtors, as a short collection period implies the prompt payments by debtors. Too low a collection period is not necessarily favourable . Rather it indicates a very restrictive credit and collection policy.
CREDITORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Ratio Payment period of Creditors (in No.of times) creditors in months -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 30,29,07,127 38,70,24,915 50,16,60,874 27,63,86,029 37,06,33,852 20,09,50,292 10,98,09,585 14,41,61,097 17,24,30,796 15,44,97,544 16,55,09,674 15,77,47,256 2.75 2.68 2.90 1.78 2.23 1.27 4.36 4.47 5.17 6.74 5.38 7.08 Year Net Purchases
-----------------------------------------------------------------------------------------The Creditors Turnover ratio indicates the velocity with which the creditors are turned over in relation to purchases. In 1998, the ratio was 2.75 times; In 1999 it was 2.68 times; In 2000 it was 2.90; In 2001 it was 1.78 times; In 2002 it was 2.23 times and in 2003 it was 1.27. The higher the creditor’s velocity better it is or otherwise lower the creditor’s velocity, less favourable are the results. The average payment period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. But a higher payment period also implies greater credit period enjoyed by the firm and consequently larger the benefit reaped from credit suppliers. But one has to be careful in interpreting this ratio, as a higher ratio may also imply lesser discount facilities availed or higher prices paid for the goods purchased on credit.
WORKING CAPITAL TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Working Ratio (in No.of times) Capital -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 7,38,29,608 9,23,21,188 11,92,99,750 14,62,79,990 17,82,20,889 19,72,68,298 7.38 6.76 9.18 3.86 3.99 2.35 Year Sales
-----------------------------------------------------------------------------------------In 1998, the ratio was 7.38; In 1999 it was 6.76. The ratio in 2000 was 9.18; In 2001 it was 3.86; In 2002 it was 3.99 and in 2003 it has decreased to 2.35. Working Capital Turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. The reciprocal of the ratio of 2003 i.e. 2.35 is 0.23. Thus, it is indicated that for one rupee of sales, the company needs Re.0.23 of working capital.
NET FIXED ASSETS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Net Sales Net Fixed Assets Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 14,14,81,141 20,36,67,635 29,42,54,604 40,51,84,213 44,33,53,460 50,55,49,795 3.85 3.06 3.72 1.39 1.60 0.92
-----------------------------------------------------------------------------------------In 1998, the Fixed Assets Turnover ratio was 3.85 percent; In 1999 it was 3.06; In 2000 it was 3.72; In 2001 it was 1.39; In 2002 it was 1.60 and in 2003 it was 0.92. Generally, a high ratio indicates efficient utilisation of fixed assets in generating sales, while a low ratio indicates inefficient management and utilisation of fixed assets. Since in 2003 as the ratio is low i.e. 0.92, the interpretation is that it indicates inefficient utilisation of fixed assets as the sales has been decreased.
TOTAL ASSETS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Sales Total Assets Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 1.30 1.04 1.54 0.67 0.75 0.47
-----------------------------------------------------------------------------------------In 1998, the ratio was 1.30; In 1999 it was 1.04; In 2000 it was 1.54; In 2001 it was 0.67; In 2002 it was 0.75. The Total Assets Turnover ratio in 2003 was 0.47 implies that SMS Pharmaceuticals Ltd., generates a sale of Re.0.47 for one rupee investment in fixed and current assets together. As the ratio decreases, there is less revenue generated per rupee of total investment in assets.
CAPITAL EMPLOYED TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Sales Capital Employed Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 21,53,10,749 31,44,80,403 42,20,41,336 56,99,57,461 63,50,21,990 70,84,17,861 2.53 1.98 2.59 0.99 1.11 0.65
-----------------------------------------------------------------------------------------In 1998, the Capital Employed Turnover ratio was 2.53; In 1999 it was 1.98; In 2000 it was 2.59; In 2001 it was 0.99; In 2002 it was 1.11 and in 2003 it was decreased to 0.65. This ratio indicates the firm’s ability of generating sales per rupee of long-term investment. The higher the ratio, the more efficient the utilisation of owner’s and long-term creditor’s funds or otherwise the lower the ratio, the less efficient the utilisation of owner’s and long-term creditor’s funds.
NET PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Net Profit (After taxes) Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.04 0.05 0.10 0.07 0.08 0.09
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The Net Profit Margin in 1998 was 0.04 percent; In 1999 it was increased to 0.05; In 2000 it was still increased to 0.10; In 2000 to 2001, the ratio was slightly up and down. The net profit margin from 2002 to 2003 has been increasing. This ratio indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. It also indicates the firm’s capacity to face adverse economic conditions such as price competition, low demand, etc.
GROSS PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Gross Profit Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 12,93,98,503 14,78,84,872 34,70,51,634 18,19,55,852 21,64,18,709 16,43,13,875 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.23 0.23 0.31 0.32 0.30 0.35
-----------------------------------------------------------------------------------------In 1998 and 1999 the Gross Profit Margin was constant i.e. 0.23 percent. In 2000 it was increased to 0.31 percent; In 2001 it was still increased to 0.32; In 2002 it was slightly decreased to 0.30 and in 2003 it was increased to 0.35. The Gross Profit ratio indicates the extent to which selling prices of goods per unit may decline without resulting in losses on operations of a firm. It reflects the efficiency with which a firm produces its products.
OPERATING RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Operating Cost Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 47,70,72,198 54,70,36,625 91,20,08,264 45,84,09,059 59,00,22,675 37,92,53,591 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.87 0.87 0.83 0.81 0.82 0.81
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In 1998 and 1999 the Operating ratio was constant i.e. it was 0.87 percent; In 2000 it has decreased to 0.83 percent; In 2001 it has still decreased to 0.81; In 2002 it was increased to 0.82 and in 2003 it has slightly decreased. This ratio indicates the percentage of net sales that is consumed by operating cost. Higher the Operating ratio, the less favourable it is, because, it would have a small margin (Operating Profit) to cover interest, income tax, dividend and reserves.
OPERATING PROFIT RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Operating Profit Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 6,79,97,775 7,76,03,555 18,42,36,515 10,64,92,434 12,11,63,031 8,61,24,907 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.12 0.12 0.16 0.18 0.17 0.18
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The Operating Profit ratio in 1998 and 1999 was constant i.e. 0.12 percent; In 2000 it has increased to 0.16; In 2001 it has still increased to 0.18 and then fluctuated in the years 2002 and 2003 by 0.17 and 0.18. The Operating Profit ratio of SMS Pharmaceuticals Ltd., is high in the current year 2003 i.e. 0.18. The higher the ratio, the better it is.
RETURN ON CAPITAL EMPLOYED RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Capital Ratio (in percent) (After taxes) Employed -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 29,29,96,135 40,40,72,603 51,51,73,811 66,49,48,771 71,52,91,672 82,44,00,662 0.08 0.08 0.22 0.06 0.08 0.05 Year
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In 1998 and 1999, the Return on Capital Employed ratio was constant i.e. 0.08; In 2000 it was increased to 0.22; In 2001 it was decreased to 0.06; In 2002 it was increased to 0.08 and in 2003 it was decreased to 0.05. Higher, the ratio, better is the position of the firm ad more efficient is the management in utilising the funds, entrusted to it. So, the Return on Capital Employed of SMS Pharmaceuticals Ltd., was more satisfactory in the year 2000.
RETURN ON SHAREHOLDER’S EQUITY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Shareholder’s Equity Ratio (in percent) (After taxes) /Net Worth -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089 0.16 0.18 0.38 0.12 0.14 0.10 Year
-----------------------------------------------------------------------------------------In 1998, the Return on Shareholder’s Equity ratio was 0.16; In 1999 it was increased to 0.18; In 2000 it was still increased to 0.38; In 2001 it was decreased to 0.12 and then fluctuated in the years 2002 and 2003 by 0.14 and 0.10 percent. The Return on Shareholder’s Equity ratio is high in 2000, the higher the ratio, the better it s for the shareholders.
RETURN ON ASSETS RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Total Assets Ratio (in percent) (After taxes) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 0.06 0.05 0.16 0.05 0.06 0.04 Year
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The Return on Assets ratio in 1998 was 0.06; In 1999 it was decreased to 0.05; In 2000 it was increased to 0.16; In 2001 it was decreased to 0.05 and then fluctuated in the years 2002 and 2003 by 0.06 and 0.04 percent The Return on Assets ratio of SMS Pharmaceuticals is high in 2000, the higher the ratio, the better it is.
EARNINGS PER SHARE RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit No. of Ordinary Ratio (in percent) (After taxes) Shares Outstanding -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 12.58 17.39 56.88 20.64 28.39 21.95 Year
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In 1998, Earnings Per Share is 12.58; In 1999 it was increased to 17.39; In 2000 it was still increased to 56.88; In 2001 it was decreased to 20.64; In 2002 it was increased to 28.39 and in 2003 it has been decreased to 21.95. Earnings Per Share shows profitability of the firm on a per-share basis. It does not reflect how much is paid as dividend and how much is retained in business. Earnings Per Share of SMS Pharmaceuticals Ltd., is high in 2000, the higher the Earnings Per Share, the better is the performance of the company.
BOOK VALUE OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Equity Shareholder’s No. of Ratio (in percent) Funds Equity Shares -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 77.29 92.49 146.54 164.98 191.38 211.13 Year
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The Book Value in 1998 was 77.29; In 1999 it was increased to92.49; In 2000 it was again increased to 146.54; In 2001 it was still increased to 164.98; In 2002 it was again increased to 191.38. From 1998 to 2003 the Book Value is being increasing. The Book Value of SMS Pharmaceuticals Ltd., is high in 2003 i.e. 211.13, the higher the book value of a share, the more strong the business is assumed to be.
OBSERVATIONS
The basic objective of financial statement is to provide information useful for making economic decisions. The published financial statements are properly oriented towards the long-term investor, who is mainly interested in long-term earning power. Short-term creditors such as major suppliers of banks are usually more interested in the short run ability of the corporation to satisfy its obligations as they mature. Financial analysts usually use a company’s annual report as the springboard for their review. The primary use of financial statements consists of evaluating past performance and predicting future performance. Both of these uses can be facilitated by comparison. The ultimate effect of analysis of financial statement is usually to make some financial decisions. After comparing financial statements with past statements with those of similar companies or in the industry averages, the analyst will predict how the organization will fare. The analyst then will decide to buy, sell or hold the common stock. The current ratio is a widely used statistic. Other things being equal, the higher the ratio the more assurance the creditors have about being paid in full and on time. Annexure-I, SMS Pharmaceuticals Ltd., has increased their current ratio from 1.87 to 2.23 in 2003. The next two ratios’ the inventory turnover and the average collection period are closely watched signals. For example, a decreased in inventory turnover may suggest slower moving merchandise or working co-ordination of the buying and selling functions. An increase in the average collection period of receivables may indicate increase acceptance of poor credit risks of less energetic collection efforts.
Ratios of debt to equity will be watched by the shareholders to judge the degree of risk of insolvency and of stability of profits. SMS’s Debt-equity ratio’s reflecting average stability of profits and risk or uncertainty concerning the company’s ability to pay its debts on time. The profitability ratio’s studies the ratios of net profit to sales and gross profit to sales as indicators of operating success. To owners however the ultimate measure of overall accomplishment is the rate of return on their invested capital. To summarise the observations, the current ratio is impressive and its debt management ratios are average. Its profit ratios are outstanding.
SUGGESTIONS AND RECOMMENDATIONS
Relevance and reliability are the two major qualities that make accounting useful for decision-making. Relevance is defined as the capability of information to make a difference to the decision maker. To be relevant, information must be timely and understandable. Reliability is defined as the quality of information that allows users to depend on it to represent the conditions or events that it purports to represent. Comparable information prepared consistently over time enhances both reliability and relevance. Research in finance and accounting during the past twenty years has reinforced the idea that financial ratios and other data provide such as reputed earning provide inputs to prediction of such economic phenomenon as financial failure or earnings growth. Further more many ratios are used simultaneously rather the one at a time for same predictions. The income statement is the sole service of information about a company. Lenders and shareholders invent in a company because of its reputed earnings per share the higher the stock price and the easier it to raise capital. Financial ratios aid the intelligent analysis of statements they are used as a basis of evaluation, comparison and prediction. The rate of return on invested capital is a very popular means of comparing performance. Financial statements are only one source of information about a company. Market efficiency implies that accounting regulates should focus on issues of disclosure, not format. The ratios contain good news and bad news. The good news is that the company would appear to be slightly more liquid. The bad news is that the inventory turnover, the average collection period and the rate of return on stockholders equity are less attractive.
For example, a high inventory turnover generally considered to be indication of operating efficiency may be temporarily achieved by unwarranted price reductions, failure to maintain stock in hand or other unsound policies. Similarly, a higher current ratio although index of strong current position, may result form unreasonable accumulation of liquid resources. Even when the ratios are worked out correctly, it should be remembered that they can at best be used like a doctor uses symptoms indications that something is wrong somewhere.
CONCLUDING REMARKS
As a tool of financial management the ratio analysis is a crucial significance. Ratio analysis, a relevant in assessing to performance of a firm in respect of the liquidity position, long-term solvency, operating efficiency, over all profitability, inter firm comparison and trend analysis. Reliance and reliability of the information are very important. Reliance as a single ratio for a particular purpose may not be a conclusive indicator. Ratios are only a postmortem of what has happened between two balance sheets. In order to have meaningful derivations ratio analysis as well as common size statements should be compared both over time (trend ratios) and across companies (inter firm comparison) with in the industry. In view of its limitations, ratio analysis should be considered only as a tool for analysis rather than an end in itself. The reliability and significance attached to ratios will largely depend on the quality of data on which they are based.
BIBLIOGRAPHY
NAME OF THE TEXT BOOK
AUTHOR
1. Financial Management 2. Financial Management 3. Financial Management 4. Financial Management theory and practice
My. Khan & P .K. Jain I.M. Pandey Kuchahal Prasanna Chandra
doc_575885811.doc
Medications can be classified in various ways,[3] such as by chemical properties, mode or route of administration, biological system affected, or therapeutic effects. An elaborate and widely used classification system is the Anatomical Therapeutic Chemical Classification System (ATC system).
STUDY OF RATIO ANALYSIS WITH REFERENCE TO SMS PHARMACEUTICALS LIMITED
RATIO ANALYSIS CONTENTS
CHAPTER I
1. 2. 3. 4. 5. 6. 7. 8. 1. 2.
Introduction Meaning and Rationale Importance of Ratio Analysis Standards if comparison Users of Ratio Analysis Classification of Ratios Important groups in Ratio Analysis Limitations of Ratio Analysis Profile of the Company Board of Directors
CHAPTER
II
CHAPTER III CHAPTER IV CHAPTER V CHAPTER VI
The Period of Study Ratio analysis of the Company under study Observations Suggestions and Recommendations
CHAPTER VII CHAPTER VIII
Conclusion Bibliography
INTRODUCTION
An analysis of financial statements is important aid of financial analysis. The focus of financial analysis is on key figures in the financial statements and the significant relationships that exist between them. The analysis of financial statements is a process of valuating relationships between component parts of financial statements to obtain a better understanding of the firm’s position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statement. The second step involved in financial analysis is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. However, it is to be noticed that there is a basic limitation of the traditional financial statement comprising the balance sheet and the profit and loss account i.e. they do not give all the information regarding financial operation of the firm. Accordingly ratios not only indicate the present position, they also indicate the causes leading up to the large extent. For instance accounts ratio may indicate not only the financial position and precautions but also the past policies and actions they have caused.
MEANING AND RATIONALE
Ratio analysis is a powerful tool of financial analysis. It is defined as a systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. This relationship can be expressed as (i) percentages (ii) fraction (iii) proportion of numbers. These alternative methods of expressing items, which are related to each other, are, for purpose of financial analysis, referred to as ratio analysis. An absolute accounting figures reported in the financial statements do not provide meaningful understanding of the performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. Thus, the relationship between two accounting figures, expressed mathematically, is known as financial ratio, or simply as a ratio. Ratios help to summarize the large quantities of financial date and to make qualitative judgement about the firm’s financial performance i.e., a ratio indicates a quantitative relationship which can be in turn, used to make a qualitative judgement.
IMPORTANCE OF RATIO ANALYSIS Ratio analysis, as a tool of financial management is of crucial significance. The importance of ratio analysis is in fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects. (i) Liquidity Position: Ratio analysis in drawing the conclusions regarding the liquidity position or short-term solvency of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its shortmaturing debt usually within a year as well the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans. (ii) Long-term solvency: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analysts and the present and potential owners of a business. The long-term solvency is measured by the leverage/Capital structure and profitability ratios, which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weakness of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or whether heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. (iii) Over-all profitability: Unlike the outside parties, which are interested in one-aspect of the financial position of a firm, the management is constantly concerned about the over-all profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short-term as well as longterm obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
(iv) Operating Efficiency: Another dimension of the usefulness of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of the firm is, in the ultimate analysis dependent upon the sales revenues generated by the use of its assets total as well as its components. (v) Inter-firm Comparison: Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter-firm comparison or comparison with industry averages. A single figure of particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. (vi) Trend Analysis: Ratio analysis enables a firm to take the dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fact that the analyst can know the direction of movement, i.e. whether the movement is favourable or unfavourable .
STANDARDS OF COMPARISON The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favourable or unfavourable condition. It should be compared with some standard. Standards of comparison may consists of 4 types: (1) Time series analysis or trend ratios: When financial ratios over a period of time, i.e. present ratios are compared with past ratios of a same firm it is called trend ratios. It gives an indication of the direction of the change and reflects whether the firm’s financial performance has improved, deteriorated or remained constant over time. (2) Pro-forma analysis or projected ratios: Sometimes future ratios are used as the standard of comparison. Future ratios can be developed from the projected, or pro-forma financial statements. The comparison of current or past ratios with future ratios show the firm’s relative strengths and weaknesses in the past and the future. If the future ratios indicate weak financial position, corrective action should be initiated. (3) Cross-sectional analysis or competitors ratios: Another way of comparison is to compare ratios of one firm with some selected firms in the same industry at the same point in time. This kind of comparison is known as cross-sectional analysis or competitors’ ratios. It is most useful to compare the firm’s ratios with a few carefully selected competitors, who have similar operations. This kind of comparison indicates the relative financial position and the performance of the firm. (4) Industry analysis or Industry ratios: To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of the industry of which the firm is a member. This sort of analysis is known as the industry analysis. It helps to
ascertain the financial standing and capability of the firm vis-à-vis other firms in the industry. USERS OF RATIO ANALYSIS Users of the financial ratio analysis are many. They are concerned with the economic situation of the firm and predicting its future course, basing on which decision are taken. The major groups of users are: (a) Management: Management can get an overall view of the financial operations and condition of the company, which enables them to plan and control the company’s activities more effectively. They are able to spot weaknesses in the company’s operations and can take correct action. Furthermore it tends to restrain management, as they are under pressure to maintain a favourable financial position. 1. Helps in decision-making: Financial statements are prepared primarily for decision-making. Ratio analysis helps in making decisions from the information provided in the financial statements. 2. Helps in financial forecasting and planning: Ratio Analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn for future from these ratios and thus helps in forecasting and planning. 3. 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 the financial statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the value of the financial statements. 4. Helps in co-ordination: Ratios even help in co-ordination, which is of utmost importance in effective business management. Better communication of efficiency and weakness of an enterprise results in better co-ordination in the enterprise. 5. Helps in Control: Ratio analysis even helps in making effective control of the business. Standard ratios can be based upon proforma financial statements and variances or deviations, if any, can be found by comparing the actuals with the standards so as to take a corrective action at the right time. The weaknesses or otherwise, if any, come to the knowledge of the management which helps in effective control of the business. 6. Other Uses: There are so many other uses of the ratio analysis. It is an essential part of the budgetary control and standard costing. Ratios are of
immense importance in the analysis and interpretation of financial statements as they bring the strength or weakness of a firm.
(b) Investors: Investors are concerned with the safety of their investment and the ability of the company to earn profits and in turn the dividend they earn on their investment. The investors form their own opinion as to the soundness of investing in a company. One way the investors form their opinion of the Company’s earning capacity is by computing earning per share. (c) Creditors: Creditors are interested in the company’s ability to meet its financial obligations. Those who have lent the money for short period are more interested in the company’s ability to repay the debt as and when it becomes due. In other words, they are interested in the liquid position of the company, which can be broadly measured by computing current ratio and quick ratio. The long-term creditors are not only interested in company’s ability to repay but also in the ability of the company to realize profit on the capital employed. A creditor will be interested in ascertaining whether the company can employ the funds loaned to it in such a way that it will able to meet current interest obligation and repay the loan when it falls due. If a company earns less than what is paid in the form of interest, it is not safe to lend money to that company. (d) Labour : Labour has an interest in the operating results and the financial strength of a company. The remuneration of the worker must be generated form the company revenues; thus, the workers wages, to a great extent, depend upon the success of the firm. Frequently, labour unions use the information presented in the financial statements as a basis for their demand for increase in wages. The past operating performance of the firm, as well as its current financial position, is often studied to measure the ability of the firm to meet new wage commitments. (e) Government: Government is interested to know the overall strength of the industry, Various financial statements published by industrial units are used to calculate ratios for determining short-term, long-term and overall financial position of the concerns. Profitability indexes can also be prepared with the help of ratios. Government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of overall financial strength of public as well as private sector. In the absence of the reliable economic information, governmental plans and policies may not prove successful.
CLASSIFICATION OF RATIOS
I. Liquidity Ratios: 1. Current Ratio 2. Liquidity Ratio (acid test or quick ratio) 3. Absolute liquid ratio II. Long-term solvency or leverage ratios: 1. 2. 3. 4. Debt-equity ratio Debt-total capital ratio Proprietary ratio Capital gearing ratio
III. Activity Ratios: 1. 2. 3. 4. 5. 6. 7. Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Fixed assets turnover ratio Total assets turnover ratio Working capital turnover ratio Capital employed turnover ratio
IV. Profitability Ratios: A. In relation to sales: 1. 2. 3. 4. Gross profit Ratio Net profit Ratio Operating Ratio Operating Profit Ratio
B. In relation to investment: 1. 2. 3. Return on investments Return on capital Return on total resource
4.
Earning per share
TYPES OF RATIOS Several ratios calculated from the accounting data contained in the financial statements. These ratios can be grouped into various classes. According to financial activity or function to be evaluated. The parties interested in financial analysis are short and long-term creditors, owners and management. Short-term creditors main interest is in the liquidity position or the short-term solvency of the firm. Long-term creditors are more interested in the long-term solvency and profitability of the firm. Similarly, owners concentrate on the firm’s profitability and financial condition. Management is interested in evaluating every aspect of the firm’s performance. They have to protect the interests of all parties and see that the firm grows profitably. In view of the requirements of the various users of ratios, they may be classified into four categories: (1) (2) (3) (4) Liquidity ratio Leverage ratio Activity ratio Profitability ratio
LIQUIDITY RATIO Liquidity refers to the ability of concern to meet its current obligations as and when these become due. Liquidity ratios measure the ability of the firm to meet its current obligations. In fact, liquidity is a pre-requisite for the very survival of a firm. The short-term creditors of the firm are interested in shortterm solvency of the firm. The liquidity ratios measure the ability of the firm to meet its short-term obligations and reflect the short-term financial strength or solvency of a firm. A firm should ensure that it does not suffer from lack of liquidity, and also it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in poor credit worthiness, loss of creditors confidence or even in legal tangles resulting in thee closure of the company. A very high degree of liquidity is also bad, idle assets earn nothing. Therefore, it is necessary to strike a balance between high liquidity and lack of liquidity. The most common ratios, which indicate the extent of liquidity or lack of liquidity are: (1) Current Ratio (2) Liquidity Ratio or Acid test or Quick ratio (3) Absolute Ratio
CURRENT RATIO The Current Raito is the ratio of total current to total current liabilities. It is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets Current Liabilities
The Current assets of a firm represent those assets, which in a normal course of business get converted into cash over a short period of time usually not exceeding one year. They include cash and bank balances, marketable securities, inventory of raw materials, semi-finished (work-in-progress) and finished goods, debtors net of provision for bad and doubtful debts, bills receivable and pre-paid expenses. The current liabilities are those liabilities, which are required to be paid in short period i.e., within a year. They include trade creditors, bills payable, bank credit, provision for taxation, dividends payable and outstanding expenses.
QUICK RATIO The quick ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. Acid-test Ratio = Quick assets Current liabilities
The term quick assets refer to current assets, which can be converted into cash immediately or at a short notice without diminution of value. Included in category of current assets are: Cash and bank balances, short-term marketable securities and debtors/receivables. Thus, the current assets, which are excluded, are: Pre-paid expenses and inventory. The exclusion of inventory is based on the reasoning that it is not easily and readily convertible into cash. Pre-paid expenses by their very nature are not available to pay-off debts. They merely reduce the amount of cash required in one period because of payment in prior period.
ABSOLUTE CASH RATIO
The purpose of this ratio is to show how far cash reservoir is sufficient to meet the current liabilities. Although provisions do not represent current liabilities, some provisions have the characteristics of current liabilities. Examples are tax provision and proposed dividend. It is almost certain that some liability will arise in the near future. Absolute Cash Ratio Cash Reservoir Current Liabilities = = = Cash Reservoir Current Liabilities Cash in hand + Cash at bank + marketable non-trade investments. Trade creditors + bills payable + Outstanding expenses + provision for taxation + proposed dividend + other provisions (against which liability may arise shortly).
If on the assets side there is ‘advance tax’ item, provision for taxation should be taken net of advance tax.
CASH POSITION TO TOTAL ASSETS RATIO This ratio is a measure of liquid layer of the assets deployed by business. But too high a cash reservoir is not good because this may reduce the level of resource deployment for other assets. On the other hand maintaining too low a ratio is also not good, that may create cash crisis for day-to-day operations of the business.
Cash Position to Total Assets = Cash Reservoir Total Assets
*
100
LEVERAGE/CAPITAL STRUCTURE RATIO The long-term solvency of a firm can be examined by using leverage or capital structure ratios. The leverage ratio may be defined as financial ratio, which throws light on the long-tem solvency of a firm reflected in its ability to assure the long-term creditors with regard to: (i) Periodic payment of interest during the period of the loan. (ii) Repayment of principal on maturity or in pre-determined instalments at due dates. There are, thus, two aspects of the long-term solvency of a firm: (i) Ability to repay the Principal when due (ii) Regular payment of interest. Accordingly, there are two different, but mutually dependent and interrelated, types of leverage ratios. First, ratios, which are based on the relationship between, borrowed funds and owner’s capital. These ratios are computed from balance sheet and have many variations such as: (i) Debt-equity ratio (ii) Debt-asset ratio (iii) Equity-asset ratio The second type of leverage ratios are calculated form profit and loss account. Included in this category are: (i) Interest coverage ratio (ii) Dividend coverage ratio (iii)Total fixed charges coverage ratio (iv) Cash flow coverage ratio (v) Debt-service coverage ratio
DEBT-EQUITY RATIO The Debt-Equity Ratio is the measure of the relative claims of creditors and owners against the firm’s assets. The ratio is calculated in various ways. One view is to calculate the debt-equity ratio as long-term debts (noncurrent liabilities) divided by shareholders’ equity (common shareholders’ equity plus preference shareholders’ equity.) i) Debt-Equity Ratio = Long - term Debt Shareholder’s Equity Another variation of the ratio is to divide the total debt (total liabilities) by the shareholders’ equity. ii) Debt-Equity Ratio = Total Debt Shareholder’s Equity
The Debt-Equity Ratio is an important tool of financial analysis to appraise the financial structure of a firm. It has important implications from the viewpoint of the creditors, owners, and the firm itself. The ratio reflects the relative contribution of creditors and owners of business in its financing. If the Debt-Equity Ratio is high, the owners are putting up relatively less money of their own. It is a danger signal for the creditors. A high debtequity ratio has equally serious implications from the firm’s point of view also. A high proportion of debt in the capital structure would lead to inflexibility in the operations of the firm as creditors would exercise pressure ad interfere in management. The shareholders of the firm would, however, stand to gain in two ways: i) with a limited stake, they would be able to retain control of the firm and ii) the return to them would be magnified. A low debt-equity ratio has just the opposite implications. To the creditors, a relatively high stake of the owners implies sufficient safety of margin and substantial protection against shrinkage in assets. For the company
also, the servicing of debt is less burdensome and consequently its credit standing is not adversely affected, its operational flexibility is not in jeopardy and it will be able to raise additional funds. The shareholders of the firm are deprived of the benefits of trading on equity or leverage. The reasonable relationship between debt and equity will depend upon the circumstances, prevailing practices and so on. The general proposition is: others’ money should be in reasonable proportion to the owners’ capital and the owners should have sufficient stake in the fortunes of the enterprise. For instance, in a capital-rich country, the practice is to use as little debt as possible. A debt-equity ratio of 1:3 is regarded as indicative of a fairly heavy debt; a ratio of 1:1 would indicate an extremely heavy and unsatisfactory debt situation. In under-developed countries such standards cannot be expected. It is not unusual to find firms having a debt-equity ratio of 2:1 or even 3:1 in the case of joint stock enterprises in India. The debt-equity ratio cannot be applied mechanically without regard to the circumstances of each case, such as type and size of business, the nature of the industry and the degree of risk involved. In computing the Debt-Equity Ratio of SMS Pharmaceuticals Ltd., Debt is taken as the total of secured, unsecured loans and Equity consists of equity share capital plus reserves and surplus.
DEBT TO TOTAL CAPITAL RATIO This ratio is a variation of the debt-equity ratio and gives similar indications. Debt to Total Capital Ratio is calculated by dividing the total debt by permanent capital + current liabilities. It measures the portion of the firm’s assets that are financed by creditors. A very high ratio indicates a greater risk to the creditors. A low ratio of debt to total capital is favourable to the creditors. A very low ratio is a source of worry to the shareholders, as the company is not using debt to their best advantage. A firm should have neither a high ratio nor a very low ratio. In computing the Debt to Total Capital Ratio of SMS Pharmaceuticals Ltd., Total Debt is taken as total of secured loans, unsecured loans and current liabilities and permanent capital consists of shareholders’ equity, secured loans, unsecured loans, current liabilities and Reserves and surplus.
PROPRIETARY RATIO It is a variant of debt equity ratio. It relates the proprietors’ or shareholder’s funds to the total assets. It is calculated as follows: Proprietary Ratio = Proprietary Fund Total Assets Proprietary ratio reflects the general financial strength and the proportion of Shareholder’s funds in total assets employed in the business. A high proprietary ratio indicates a relatively low degree of risk to creditors. Conversely a low proprietary ratio indicates a greater degree of risk to creditors.
CAPITAL GEARING RATIO
This ratio helps in determining the future financial structure of the business. It is calculated as follows: Capital Gearing Ratio = Funds bearing fixed interest and fixed dividend Equity shareholder’s funds = Debentures + Term Loans + Preference Share Capital Equity Share Capital + Reserves – Fictitious Assets A company is said to be highly geared if it has a high capital gearing ratio, and lowly geared if the capital gearing ratio is low. The extent of gearing determines the future financial structure of the business. A company which is highly geared will have to raise funds by issuing fresh equity shares, where as a lowly geared company would find it attractive to raise, funds by way of term loans and debentures. In computing the Capital Gearing Ratio of SMS Pharmaceuticals Ltd., Funds bearing fixed interest is taken as secured and unsecured loans and Equity Shareholder’s funds consists of Equity Share Capital and Reserves and Surplus.
FIXED ASSETS RATIO
The ratio establishes the relationship between fixed assets and shareholder’s funds i.e., share capital plus reserves, surpluses and retained earnings. The ratio can be calculated as follows: Fixed Assets Ratio = Fixed Asset (After depreciation) Capital Employed Capital Employed = Equity Share Capital + Preference Share Capital + Reserves + Long-term liabilities – Fictitious Assets
This ratio indicates the mode of financing the fixed asset. A financially well managed Company will have its fixed assets financed by long-term funds. Therefore, the Fixed Assets Ratio should never be more than 1. A ratio of 0.67 is considered ideal.
ACTIVITY RATIOS
Activity Ratios are concerned with measuring the efficiency in assets management. Sometimes, these ratios are called efficiency ratios or asset utilisation ratios. Since the efficiency of a firm is reflected in the speed and volume of business, the activity ratios are calculated with reference to sales and expressed in number of times. A firm’s efficiency in utilising its assets is measured by comparing its sales with investment in various assets including inventories, bills receivables, fixed assets, etc. The greater the rate of turnover or rotation of assets, the more efficient will be utilisation or management of assets. Following are some of the more important and widely used activity ratios.
INVENTORY TURNOVER RATIO This ratio shows the number of times the investment in inventories is turned over or replaced during the year. It measures the relationship between goods sold and the inventory level. There are two approaches of measuring inventory turnover. First, it is calculated by dividing the cost of goods sold by the average inventories. According to this approach. Inventory Turnover Ratio = Cost of Goods sold Average inventories Opening Stock + Manufacturing Cost + Purchases – Closing Stock Opening Stock + Closing Stock 2
Cost of Goods sold Average Inventory
= =
The second approach of measuring inventory turnover is based on inventories at the end of the financial year as shown in balance sheet. It is calculated by dividing total sales by the closing inventory. Thus, Inventory turnover = Total sales Closing inventory
The inventory turnover shows how rapidly the inventory is turning into receivable through sales. Generally a high inventory turnover is indicative of good inventory management and a lower inventory turnover suggests an inefficient inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slowmoving or obsolete inventory. A high level of sluggish inventory amounts to unnecessary tie-up of funds, impairment of profit and increased costs. Thus, too high and too low inventory turnover ratios are not desirable. A very high inventory turnover may be the result of very low level of inventory, which results in frequent stock outs the turnover, will also be high if the firm replenishes its inventory in too many small lot sizes. The situations of frequent stock outs and too many small inventory replacements can prove costly for the firm.
DEBTORS TURNOVER RATIO AND COLLECTION PERIOD
A firm sells goods on credit and cash basis when the firm extends credits to its customers; book debts (debtors) are created in the firm’s accounts. Debtors are expected to be converted into cash over a short period and, therefore, are included in current assets. The liquidity position of the firm depends on the quality of debtors to a great extent. Financial analysts employ two ratios to judge the quality or liquidity of debtors. The debtors turnover ratio is found out by dividing sales by debtors. Debtors turnover ratio = Sales Average Debtors
The average collection period of debtors is calculated as: Average collection period for Debtors = Days in year/months in a year Debtors turnover ratio The debtors turnover ratio indicates the number of times on the average that debtors turnover each year. A high ratio is indicative of shorter time lag between credit sales and cash collection. A low ratio shows that debts are being collected rapidly. The average collection period ratio measures the quality of debtors since it indicates the rapidity or slowness of their collect ability . The shorter the collection period, the better the quality of debtors, as a short collection period implies the prompt payments by debtors. Too low a collection period is not necessarily favourable . Rather it indicates a very restrictive credit and collection policy.
CREDITORS TURNOVER RATIO
In the course of business operations, a firm has to make credit purchases and incur short-term liabilities. A supplier of goods, i.e., creditor, is naturally interested in finding out how much time the firm is, likely to take in repaying its trade creditors. The analysis for creditors turnover is basically the same as of debtors turnover ratio except that in place of trade debtors, the trade creditors are taken as one of the components of the ratio and in place of average daily sales, average daily purchases are taken as the other component of the ratio. The creditors turnover ratio is found out by dividing sales by debtors. Creditors turnover ratio = Purchases Average Creditors
The average collection period of creditors is calculated as: Average collection period for Creditors= Days in year/months in a year Creditors turnover ratio The creditors turnover ratio of 12 or more, implying a debt payment period of 30 or less number of days, indicates that the firm is not able to get the best terms of credit. However, very less creditors turnover ratio, or high debt payment period, may indicate the firm’s inability in meeting its obligations in time. The average collection period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. But a higher payment period also implies greater credit period enjoyed by the firm and consequently larger the benefit reaped from credit suppliers.
FIXED ASSETS TURNOVER RATIO
The fixed assets turnover ratio measures the efficiency with which the firm is utilizing its investments in fixed assets, such as land, buildings, plant and machinery, furniture, etc. It also indicates the adequacy of sales in relation to the investment in fixed assets. The fixed assets turnover ratio is sales divided by net fixed assets. Fixed Assets Turnover Ratio = Sales Net Fixed Assets Generally, a high ratio indicates efficient utilization of fixed assets in generating sales, while a low ratio indicates inefficient management and utilization of fixed assets. However, the analyst should be cautious in deriving conclusions form the fixed assets turnover ratio.
TOTAL ASSETS TURNOVER RATIO
This ratio indicates the sales generated per rupee of investment in total assets. Although fixed assets are directly concerned with the generation of sales, but other assets also contributes to the production and sales activities of the firm. The firm must manage its total assets efficiently and should generate maximum sales through their proper utilisation . The total assets turnover is calculated dividing sales by total assets of the firm: Total Assets Turnover Ratio = Sales Total Assets
The total assets turnover ratio is a significant ratio since it shows the firm’s ability of generating sales from all the financial resources committed to the firm. As this ratio increases, there is more revenue generated per rupee of total investment in assets. The firm’s ability to produce a large volume of sales on a small total asset base is an important part of the firm’s overall performance in terms of profits. Idle or improperly used assets increase the firm’s need for costly financing and the expenses for maintenance and upkeep. While calculating the total assets turnover ratio of SMS Pharmaceuticals Ltd., Total Assets are taken as total of fixed assets, current assets and investments, intangible assets are not included in total assets,.
WORKING CAPITAL TURNOVER RATIO This ratio indicates the velocity of the utilisation of net working capital. Working Capital of a concern is directly related to sales. The current assets like debtors, bills receivables, cash, stock, etc., change with the increase or decrease in sales. The working capital is taken as: Working Capital = Current Assets – Current Liabilities Working Capital turnover ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilisation of working capital and low ratio indicates inefficient utilisation of the firm’s funds. But a very high working capital turnover ratio is not a good situation for any firm and hence care must be taken while interpreting the ratio. This ratio can be calculated as: Working Capital Turnover Ratio = Cost of Sales Average Working Capital
CAPITAL EMPLOYED TURNOVER RATIO
Capital Employed may be defined as net fixed assets + Working Capital. Capital Employed turnover Ratio = Sales Capital Employed
The ratio indicates the firm’s ability of generating sales per rupee of long-term investment. The higher the ratio, the more efficient the utilisation of owners’ and long-term creditors’ funds. In computing the capital employed turnover ratio, capital employed taken as the total of net fixed assets and working capital.
PROFITABILITY RATIOS
A business is run primarily for profit. So its performance has been measured in terms of profit. Profitability ratios give some yardstick to measure profit in relative terms, either with reference to sales or assets or capital employed. The term ‘profit’ is also variously defined for this purpose. Profitability based on Sales or Revenue: The term sales should be used when the source of revenue of the business is sale of goods. The service sector enterprises charge rent, fees or interest. So instead of sales the term ‘revenue’ can be used.
GROSS PROFIT TO SALES RATIO This ratio reveals the result of trading operations of the business. There is no standard norm for gross profit ratio and it may vary from business to business but the gross profit should be adequate to cover the operating (administrative and office expenses, selling and distribution expenses) and to provide for fixed charges, dividends and accumulation of reserves. Gross Profit Ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus, it is calculated by dividing the gross profit by sales: Gross Profit Ratio = Gross Profit Net Sales Gross Profit Net Sales = Net Sales – Cost of Goods Sold = Total Sales – Sales Returns
Cost of Goods Sold = Opening Stock + Purchases + Manufacturing Expenses – Closing Stock There is no ideal or standard gross profit ratio. The higher the ratio, better will be the performance of the business. A low gross profit ratio, generally indicates high cost of goods sold due to unfavourable purchasing policies, lesser sales, lower selling prices, excessive competition, overinvestment in plant and machinery, etc.
NET PROFIT TO SALES RATIO
This ratio is the overall measure of the firm’s ability to turn each rupee of sales into net profit. If the net margin is inadequate, the firm will fail to achieve satisfactory return on owners’ equity. This ratio also indicates the firm’s capacity to withstand adverse economic conditions. A firm with a high net margin ratio would be in an advantageous position to survive in the face of falling sales prices, rising costs of production or declining demand for the product. It would really be difficult for a low net margin firm to withstand these adversities. Similarly, a firm with high net profit margin can make better use of favourable conditions, such as rising sales prices, falling costs of production or increasing demand for the product. Such a firm will be able to accelerate its profits at a faster rate than a firm with low net profit margin. The Net Profit Margin Ratio or Net Profit to Sales Ratio measured by dividing net profit after taxes by sales. Net Profit Margin = Net Profit After Taxes Sales
OPERATING RATIO
This ratio establishes the relationship between cost of goods sold and other operating expenses on the one hand and the sales on the other. In other words, it measures the cost of operations per rupee of sales. The ratio is calculated by dividing operating costs with the net sales and its generally represented as a percentage. Operating Ratio = Operating Cost Net Sales Operating Cost * 100
= Cost of Goods Sold + Operating Expenses
Operating Expenses consist of: (a) Administrative and office expenses like rent, salaries to staff, insurance, directors’ fees, etc. (b) Selling and distribution expenses like advertisement, salaries of salesmen, etc. Operating ratio indicates the percentage of net sales that is consumed by operating cost. Obviously, higher the operating ratio, the less favourable it is because, it would have a small margin (operating profit) to cover interest, income tax, dividend and reserves. A low operating ratio is an indication of operating efficiency of the business.
OPERATING PROFIT RATIO This ratio establishes the relationship between operating profit and sales. It is calculated by dividing operating profit by sales. Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of Goods Sold + Administrative and Office Expenses + Selling and Distributive Expenses) Operating Profit can also be calculated as: Operating Profit = Net Profit + Non-operating Expenses - Non-Operating Income So, Operating Profit Ratio = Operating Profit * 100 Sales This ratio can also be calculated as: Operating Profit Ratio = 100 – Operating Ratio The higher the ratio, the better it is.
PROFITABILITY BASED ON CAPITAL EMPLOYED RETURN ON CAPITAL EMPLOYED (R O C E)
The return on capital employed indicates how well management used the funds supplied by creditors and owners. This ratio is also called the earning power of the firm and represents the return on the funds. Higher the ratio, better it the position of the firm and more efficient is the management in utilising the funds, entrusted to it. Return on Capital Employed = Net Profit After Taxes Capital Employed
PROFITABILITY INDICATORS FOR SHAREHOLDERS RETURN ON SHAREHOLDERS’ EQUITY
This is probably the single most important ratio to judge whether the firm has earned a satisfactory return for its equity-holders or not. The rate of return on ordinary shareholders’ equity is of crucial significance in ratio analysis form the point of the owners of the firm. It is calculated by dividing the profit after taxes and preference dividend by the equity of the ordinary shareholders. Return on Shareholders’ Equity = Net Profit After Taxes Shareholders’ Equity / Net Worth
RETURN ON TOTAL ASSET RATIO
The return on total asset is a useful measure of the profitability of all financial resources invested in the firm’s assets. It evaluates the use of total funds without any regard to the sources of funds. This ratio is particularly useful to evaluate the performance of divisions in a multi-divisional firm. Generally, these divisions have the responsibility of using and controlling assets without any responsibility towards the raising and utilising funds. Higher the ratio, more effective is the firm in using the “pool” of funds. The Return on Assets or profit-to-assets ratio is net profit after taxes divided by total assets. Return on Total Assets = Net Profit After Taxes Total Assets In computing the Return on Total Assets Ratio of SMS Pharmaceuticals Ltd., the Total Assets are taken as the total of net fixed assets, current assets and investment.
EARNINGS PER SHARE
The Earnings Per Share Ratio measures the profit available to the equity holders on a per share basis, i.e., the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by the number of the outstanding shares. The profits available to the ordinary shareholders are represented by net profits after taxes and preference dividend. Earnings Per Share = Net Profit Available to Equity holders Number of Ordinary Shares Outstanding
EPS is a widely used ratio. Its usefulness in analyzing the effect of a change in leverage on the net operating earnings to the ordinary shareholders and, given the requirement of maximising EPS. If EPS has increased over the years, it does not necessarily follow that the firm’s profitability has improved because the increased profits to the owners may be the effect of an enlarged equity capital as a result of profit retentions, though the number of ordinary shares outstanding still remains constant. Another limitation of EPS is that it does no reveal how much is paid to the owners as dividends or how much earnings are retained in the business. It only shows how much “theoretically” belongs to the ordinary shareholders.
BOOK VALUE
It is that fraction of the net worth of the business, as depicted in the Balance Sheet, which is attributable to one equity share of the business. It is calculated as: Equity Shareholders Funds No. of Equity Shares The higher the book value of a share, the more strong the business is assumed to be. The book value should not be below the paid up value of one share.
LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is a widely used technique to evaluate the financial position and performance of business. Yet it suffers from various limitations. a) It is difficult to decide on the proper basis for comparison. Ratios of a company have meaning only when they are compared with some standards. Usually, it is recommended that ratios should be compared with the industry averages. But the industry averages are not easily available. In India, no systematic and comprehensive industry ratios are compiled. b) In the case of inter-firm comparison no two firms are similar in age, size and product unit. Therefore, any comparison of ratios of two such firms must take these factors into account. c) Both the inter-period and inter-firm comparison is affected by price level changes. A change in price-level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trends in solvency and profitability of the company. Like wise, there may be two firms - one having purchased the assets at a lower price and another at a higher price. Return on investment calculated for such firms are bound to differ substantially. The firm, which has purchased the assets at a lower price, will have higher return than the firm, which has purchased the assets at a higher price. Therefore, inter-firm comparisons are also vitiated due to price-level changes. d) The differences in the definitions of items in the balance sheet and the income statements make the interpretation of ratios difficult. Diversity of view exists as to the meaning of certain terms like net worth, current assets, current liabilities, etc. Similarly, profit means different things to different people.
e) The ratios calculated at a point of time are less informative and defective as they suffer from short-term changes. The ratios do not have much use if they are not analysed over years. Although trend analysis is more useful, but, still the analysis is static to an extent. The balance sheets, prepared at different points of time, do not reveal the changes, which have taken, place between dates of two balance sheets. The statement of changes in financial position reveals this information, but these statements are not available to outside analysis. f) The basis to calculate ratios is historical financial statements. The financial analysis is more interested in what happened in the past. Management of the company has information about the company’s future plans and policies and, therefore, is able to predict future happening to a certain extent. But the outside analyst has to rely on the past ratios, which may not necessarily reflect the firm’s financial position and performance in the future. g) Ratios are simple to understand and easy to calculate. Therefore, there has been a tendency to over employ them. However, it should be clearly understood that ratios are only tools and the personal judgement of analyst is more important. Again, the analyst should not merely rely on a single ratio. He has to take several ratios (connected) into account before reaching a conclusion. h) Conclusions from analysis of statements are not sure indicators of bad or good management. They merely convey certain observations pointing to the probability of matters needing investigation. It is not wise to assume without further investigation that a condition particularly favourable or unfavourable is present.
PROFILE OF THE COMPANY
1.0 Executive Summary SMS Pharmaceuticals Ltd. (SMS) is a leading manufacturer and exporter of API (Active Pharmaceutical Ingredient) and Intermediates. SMS is also doing a major work in developing new molecules in its established R&D facility at Hyderabad. SMS is the largest manufacturer and exporter of Ranitidine and its Intermediates. SMS is sharing 70% of the domestic and 65% of the world’s non-regulatory market of Ranitidine. SMS is also a leading manufacturer and exporter of Sumatriptan Succinate and its intermediates. SMS is having the credit of producing a European pharmacopial grade product first time in India. SMS has filed for a patent for a non-infringing process and filed drug master file in US FDA and Canadian FDA. Apart from the Ranitidine and Sumatriptan, SMS is also producing Ramipril, Quinapril and Gemicitabine. One of the key features of SMS is close cooperation of IT experts, scientists and process specialists in cross-functional teams – they experts speak the same language as their customers and have intimate knowledge of industry needs. Another key feature of SMS is in-house development of R&D laboratory with the state of art technology equipped with latest precision equipments. SMS fortified its in-house R&D services by adding experienced scientists to cater to the needs of the organization in the fields of research, process development, development of new molecules and to create intellectual property. The company is already in the pursuit of arranging separate premises for the R&D activities. SMS R&D center is working on other anti cancer molecules Imatinib, Geftinib like Gemicitabine. SMS has already created a FDA facility (inspection due) for Sumatriptan at Unit II. Now SMS is going ahead to build another state of art FDA facility for Ranitidine to fulfill the US and other regulatory markets in Europe. SMS is also planning to create FDA facility for the other small volume and high volume drugs at unit II.
This business plan is part of our regular business planning process. We revise this plan semi-annually. Our keys to success and critical factors for the next year - in order of importance are: • Patenting all the processes to get a higher share of international market. • Test marketing and basic research to determine product acceptance. • Test marketing of multi-channel distribution. • Test marketing of media, PR, pricing, and product endorsement plans. • Goal of recouping production start-up costs and first year depreciation on initial three molds in year one. • Reaching all retail distribution outlets in the country and establishing the market. 1.1 Objectives The principal objectives of SMS Pharmaceuticals Limited are as follows: Rs. 400 Crore turnover by the year 2007. Upgrading the manufacturing facilities to meet the international regulatory approvals. Capitalize the gap occurred after patent expiry of the products in US and other regulatory markets. Developing Non-infringing methods of preparation for the products whose patents are expiring, and tapping the requirement of API for the 6 months exclusivity and further generic requirement. Patenting the methods. Concentrating on Research and development, for cost effective production of the existing molecules to the maximum extent for higher profit margins in growing competitive environment. Strategic alliance with MNC’s in research and development Development of new molecules.
Establishing in the Nutraceuticals market through selected product line.
1.2 Mission The mission of SMS Pharmaceuticals Limited, is
•
To develop patented cost effective process for API's, manufacture and market the API's in US and other regulatory markets. Manufacture and supply of API intermediates which are in demand, to patent holder of the API in the US and Europe. To do custom synthesis and contract research with MNC's To develop nutraceutical products and market them in India, US, Europe and Gulf countries. To develop tobacco cessation NRT products and launch in India and surrounding countries where there is a demand for them. To reach Rs.400 crore turnover from Rs.100 crore.
•
• •
•
•
The mission of SMS Pharmaceuticals Limited is to develop, process new molecular patents and to enable the life science companies to improve productivity through comprehensive process integration and decision support solutions across the research and development value chain. The objective is to bring new products to market faster and Capturing the global market. 1.3 Key to Success The key to success for SMS Pharmaceuticals Limited is as detailed below: Efficient and dedicated teamwork from all the team members towards the organizational goals Highly qualified and rich experienced technical personnel resources.
Highly sophisticated technology meeting international USFDA and cGMP Standards. Strategic marketing wing with qualitative forecasting abilities. 2.0 Company Summary SMS Pharmaceuticals Pvt. Ltd. was formed and started its operations in 1987; subsequently the unit had gone into red and declared sick. The existing management took over the sick unit in the year of 1990 and started producing bulk drugs. The company started their bulk drug business with the product called Ranitidine Hcl with a capacity of 6 MT per annum and the process consists of 12 major stages. The Ranitidine Hcl is an anti-ulcer product widely used all over the world. The Product is very sensitive molecule i.e. highly hygroscopic and oxidative. The company has upgraded its manufacturing capacity to 1440 MT per annum and also upgraded the technology to a three stage process which enabled it to stand as a competitive seller in the market. The company also acquired a second Unit at Miyapur as part of the expansion programme, and started producing Sumatriptan Succinate for which a non-infringing root of synthesis developed in the in-House R&D. the company has filed a patent for the root of synthesis. The company also filed DMF (drug master file) in US, Europe and Canada. The company also started producing ACE inhibitors Ramipril, Quinapril and Anti- cancer drug Gemcitabine. The company is now in the process of filing patents for non –infringing synthesis of the products.
The company was having 20 employees with a single manufacturing block in 1990 and single product. Now the company has expanded its operations to the level of 450 employees and a multi block manufacturing facilities in three different areas. The No. of products have also increased to 10. The company also expanded their R&D activities with five-experienced PhD’s supported by 20 senior chemists. The R&D center is mainly focusing on anti-cancer molecules, antimigraine molecules, antibacterial, anti-ulcer, important intermediates and natural plant extracts.
The company has started a nutraceutical and health care division as a part of diversification in the year 2003, by launching an OTC product called Fenudiet in consumer market. The product is a dietary food supplement for every adult and especially for Diabetics. The product is made from fenugreek seeds, which are known not only for diabetics but also for so many health reasons. Fenudiet was launched in the month of April 2003 in twin cities as a test market and after proving its potentiality, it was launched in the other areas of the state in August 2003. Fenudiet received an excellent response in the state from diabetics and hypercholestremics. The product is being promoted through ethical marketing strategies and through media.
2.1 Company Ownership SMS Pharmaceuticals Limited founding shareholders are: SHARE HOLDING COMPANY S no Particulars Directors Relatives Friends Relatives Body corporate Employees Others and and PATTERN No shares OF THE
% Holding
1063801 51.89% 157799 561500 145900 121000 2050000 7.70% 27.39% 7.12% 5.90%
3.0 Future Products
3.1 API’s The focus for the next five years will be to develop processes for the following molecules 1 Imatinib Anticancer 1 Es-Citalopram Antidepressant 2
2 3 4 5 6 7 8 9 10 11
Geftinib Bicalutamid e Irenotecan Tamsulosin Rizatriptan Naratriptan Eletriptan Rosilglitazo ne Pioglitazone Repaginide
Anticancer Antineoplastic Anticancer Venigen prostatic hyperplasia Antimigraine Antimigraine Antimigraine Antidiabetetic Antidiabetetic Antidiabetetic
1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2
Clopidogrel Venlafaxine Roxindole Reboxatine Perindopril Trandopril Fosinopril Benazapril Abaperidone
Anticoagulants Antidepressant
Anti depressant ACE inhibitor ACE inhibitor ACE inhibitor ACE inhibitor Antipsychotic
3.2 Nutraceuticals The Nutraceuticals is having the following products in its second phase of product line: 1. Nicotine Replacement Therapy (NRT) Products SMS Pharmaceuticals Limited is all set to launch different Nicotine Replacement Therapy Products for those who want to quit their smoking habit. The nicotine replacement therapy product is aimed at people who want to kick the gutkha and cigarette smoking habit, is an over-the-counter (OTC) product. The other brands that are available in the Indian market are either prescription based such as Glaxo's Zyban or drugs that contain some amount of tobacco in them. SMS products contain only pharmaceutical ingredients. The Indian tobacco market is estimated around Rs. 50,000 Crore, of which cigarettes contribute about Rs.20,000 Crore and gutkha & others contributing the balance. The
government had banned gutkha in certain parts of the country but the product is still sold illegally. Other companies involved in the manufacturing of NRT products are Pfizer, GSK and Novartis. These products, however, are strictly under prescription while our products are OTC products. a. Chewing gum The product is designed primarily as a NRT Product and in a proprietary mint flavor ethnic and Indian Gutkha flavor Each gum contains 2 mg of Nicotine in the form of NPR b. Chewetts The product is designed as an alternative and NRT product for tobacco (gutkha) chewers, jarada pan eaters The product has the look, feel and flavor of gutkha and will be the first of its kind. Available in sachets containing 2 gms of chewetts which contains 2mg of nicotine in the form of NPR 2. Night master
An aphrodisiac Product, designed specially for men sexual performance.
3. Health Drink for cancer patients 4. High calcium diet 5. High Iron syrup 6. Cardio protective Nutraceuticals dietary supplement 7. PLN Pregnant lactating Nourishing Supplement 8. HIV-AIDS Nutritional supplement 9. A Tube feeding nutrition supplement 4.1 Sales Strategy API’s The sales strategy of the company in APIs is to provide Quality products to the end formulators at a competitive price. • Quality products to the customer • Economical pricing
• Effective service • Better understanding These are the few traits that made SMS to have a largest number of satisfied customers in its journey.
4.2 Milestones ? Continues profit making company form last 13 years. ? Free reserves stood at Rs.4230.25 Lakhs and paid up share capital Rs.205 Lakhs as at 31st, March 2003. ? Regular 20% Dividend paying company over the 14 years. ? Company filed Non-infringement Process Patent for Sumatriptan Succinate. ? World largest producer of Ranitidine. ? Managed by Technical promoters having 22 years experience in core industry. ? Three Manufacturing facilities and ISO9002 Certified and located in Andhra Pradesh only. ? Having 400 work force. ? High technical background backed up by corporate level Research and Development center. ? Large and strong clientele base like Ranbaxy, Cadila and Torrent in indigenous market and world vide in Exports. ? Having export House status and winner of “Pandit Jawaharlal Nehru Silver Rolling Trophy “for Best Industrial Productivity Efforts in the State”. ? First company that is, producing Nutraceuticals for alternative to medicines for various health related problems. Process for FDA Approval for Unit-II to manufacture Sumatriptan has been in an advanced stage i.e. USFDA inspection is completed in Nov 3rd week 2003 and we are expecting the approval communication is awaited.
5.0 Management Summary The management has rich experience in all the aspects for the prosperity of the organization. 5.1 Managing Directors S.L. No 1 Name Age Academic Qualificati on MSc Organic Chemistry Designatio Experien n& ce Responsib ility in Managing 20 Director Corporate Finance, R&D and Business Strategy
P.Rames 44 h Babu
No of Previou years sly with employ SMS ed 12 Globe organics Limited
2
T.V.V.S. N. Murthy A.P. Rao
42
3
60
B.Sc in Managing 20 Chemistry Director Production and Technology MBA and Director C.A (corporate advise) Image Building, policies, growth plans
12
Chemino r Drugs Limited Dr. Reddy’s
09
5.2 Management Team S.L No Name Ag e Academic Qualificati on Designatio n& Responsib ility Exp erie nce No Previou of sly year employ s ed with
SMS 1 Dr. 56 Hariharakrish nan Ph. D. General Manager R&D Responsible for new drug developme nt M.Com SBU head Unit II Production, Purchases, Marketing and Finance B.A and SBU head Diploma in Unit I Internation Production, al Purchases, Marketing Marketing and Finance B.A General Manager HRD& Commerci al Logistics for Exports and central Excise MSc. SBU head Chemistry Unit III & General Manager (Corporat e Purchases ) Nutraceutic als and 26 IDPL
2
P. Kumar
Ravi
20
09
Chemino r Drugs
3
Y Ravi Kumar
18
09
Chemino r Drugs
4
Mr. A. Babu
Hari
17
5
Mr. Kishore
Hari 45
20
12
6
T.V. Srihari
42
corporate purchases B.E. General 22 Chemical Manager Engineering (Technical ) Process designing, scale up for new projects and new products.
Natco Pharma
BOARD OF DIRECTORS OF THE COMPANY
1) 2) 3) 4)
D RADHA KRISHNA RAO A P RAO P RAMESH BABU T V V S N MURTHY
DIRECTOR DIRECTOR CMD VC JMD
THE PERIOD OF STUDY
OBJECT OF THE STUDY
The object of the present study is to obtain a true insight into the financial position of the SMS Pharmaceuticals Ltd. It seeks to study the changes that have taken place therein over a given period of time, and to judge profitability, liquidity, stability and turnover (with the help of comparison of the firms’ present ratios with past ratios). The performance of SMS Pharmaceuticals Ltd., will be measured for the last 6 years and conclusions will be drawn which will provide guidelines to management. METHODOLOGY OF THE STUDY The date relating to the financial statements of SMS Pharmaceuticals Ltd., have been collected from the published Annual Reports for the years 1998 to 2003 which were obtained from the Administrative office of the SMS Pharmaceuticals Ltd. LIMITATIONS OF THE STUDY The Present Study is subjected to the following limitations: 1) The study is based on financial data provided by the company’s financial statements are equally applicable to the study. 2) The limitations of the financial ratio analysis are also implied.
CURRENT RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Current Assets Current Liabilities Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 19,83,82,962 30,53,24,249 32,31,84,382 33,72,20,844 41,15,08,538 36,69,10,352 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 1.59 1.56 1.65 (15 Months) 1.95 1.87 2.23 (9 Months)
-----------------------------------------------------------------------------------------As a conventional rule a current ratio of 2 to 1 or more is considered satisfactory. The ratio is not constant. There has been an increase in the current ratio from 1.65 to 1.95. The SMS Pharmaceuticals Ltd., has a current ratio of 2.23. Therefore, it may be interpreted to be sufficiently liquid. The current ratio represents a margin of safety for creditors. In 2003 the current liabilities decreased by 34% and current assets also decreased by 12%. Due to decrease in current assets and current liabilities the ratio has gone up by 16%. The year 2000 and 2003 consists of 15 and 9 months respectively. The rest of the years consist of 12 months.
QUICK RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Quick Assets Current Liabilities Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 10,14,33,770 16,96,11,528 22,10,22,655 20,98,12,920 25,20,93,267 20,27,35,529 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 0.81 0.87 1.13 1.21 1.14 1.23
-----------------------------------------------------------------------------------------The table indicates that Quick Ratio has been 1.23 during 2003, an all time high and 0.81 during 1998, an all time low. There has been an increase in the quick ratio form 0.87 to 1.13. A quick ratio of less than 1 is indicative of inadequate liquidity of the business. Generally a quick ratio of 1 to 1 is considered to represent a satisfactory current financial position. The ratio during 2000 and 2002 is nearest to 1, so, it can be called as satisfactory ratio.
ABSOLUTE CASH RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Cash Reservoir Current Liabilities Ratio (in percentage)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 1,83,66,613 3,36,53,648 2,88,79,996 5,73,05,673 6,06,17,146 5,11,19,578 12,45,53,354 19,45,11,481 19,53,97,650 17,24,47,596 21,98,40,008 16,40,42,286 0.14 0.17 0.14 0.33 0.27 0.31
-----------------------------------------------------------------------------------------The Cash Ratio in 1998 was 0.14, In 1999 it was increased to 0.17, In 2000 it was again decreased to 0.14, In 2001 it was increased to 0.33 and in 2002 it was decreased to 0.27 and in 2003 it was increased to 0.31. The purpose of this ratio is to show how far cash reservoir is sufficient to meet current liabilities.
CASH POSITION TO TOTAL ASSETS RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 ------------------------------------------------------------------------------------------
Year
Cash Reservoir
Total Assets
Ratio (in percentage)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 1,83,66,613 3,36,53,648 2,88,79,996 5,73,05,673 6,06,17,146 5,11,19,578 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 0.04 0.05 0.04 0.06 0.06 0.05
------------------------------------------------------------------------------------------
In 1998, Cash position to total assets ratio was 0.04; In 1999 it was increased to 0.05; In 2000 it was again declined to 0.04; In 2001 and 2002 it was slightly increased to 0.06 and was stable; In 2003 it was declined to 0.05. Too high a cash reserve is not good because this may reduce the level of resource development for other assets. On the other hand maintaining too low a ratio is also not good, that may create cash crisis for day-to-day operations of the business.
DEBT-EQUITY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Debt Equity Pure Ratio -----------------------------------------------------------------------------------------1998 13,45,43,741 15,84,52,394 0.84
1999 2000 2001 2002 2003
21,44,60,243 21,47,46,332 32,67,19,886 32,29,54,977 39,15,69,572
18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,090
1.13 0.71 0.96 0.82 0.90
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In 1998, debt-equity ratio was 0.84:1 and in 2000 the ratio was 0.71:1 and in 2002 the ratio was 0.82:1. The main reason for fall of debt-equity ratio is due to repayment of loans from SMS in view of sound financial position and surplus cash. The debt-equity ratio was 1.13:1 in 1999 and in 2001 the ratio was 0.96:1 and in 2003 the ratio was 0.90:1. From the point of view of creditors, it represents a satisfactory capital structure of the business, since a high proportion of equity provides a larger margin of safety for them. From the shareholder’s point of view, there was an advantage during the period as the firm employs maximum amount of debt in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders.
DEBT TO CAPITAL RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Total Debt Capital Employed Ratio (in No.of times)
-----------------------------------------------------------------------------------------1998 25,15,80,183 41,00,32,577 0.61
1999 2000 2001 2002 2003
39,96,63,130 39,42,34,362 48,15,25,566 52,29,39,237 52,83,03,487
58,92,75,490 69,46,61,841 81,97,54,451 91,52,75,932 96,11,34,577
0.67 0.56 0.58 0.57 0.54
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In 1998, the ratio was 0.61; In 1999 the ratio was increased to 0.67; In 2000 it was decreased to 0.56; In 2001 it was increased to 0.58; In 2002 it was decreased to 0.57; In 2003 it was still decreased to 0.54. This ratio shows the relationship between outside liabilities and total capital. This ratio is not having any standard norm prescribed, but conventionally a ratio of 1:2 is considered as satisfactory. The Debt to Total Capital ratio of the company for the year 2003 is less than 1:2, which reveals that the company debt to total assets is desirable for the creditors as there is sufficient margin of safety available to them.
PROPRIETARY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Proprietary Fund Total Assets Ratio (in percentage)
------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089
41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948
0.37 0.31 0.42 0.40 0.41 0.43
------------------------------------------------------------------------------------------
In 1998, the proprietary ratio was 0.37 and in 1999 it was decreased to 0.31 and in 2000 it was increased to 0.42. In 2001 t was decreased to 0.40 and then increased to 0.41 in 2002. In 2003, it was still increased to 0.43. As proprietary ratio shows what portion of total assets are financed by the owner’s capital. A high proprietary ratio indicates a relatively low degree of risk to the creditors; conversely, a low proprietary ratio indicates a greater degree of risk to the creditors. Proprietary ratio of SMS Pharmaceuticals Ltd., was high in 2003 and low in 1999.
CAPITAL GEARING RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Funds bearing Equity Shareholder’s Ratio (in percentage) fixed interest funds -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 13,45,43,741 21,44,60,243 21,47,46,332 32,67,19,886 32,29,54,977 39,15,69,572 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,090 0.84 1.13 0.71 0.96 0.82 0.90 Year
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In 1998, the Capital Gearing ratio was 0.84; In 1999 it was increased to 1.13; In 2000 it was decreased to 0.71; In 2001 it was increased to 0.96; In 2002 it was decreased to 0.82. In 2003 it was increased to 0.90. A company is said to be highly geared if it has a high capital-gearing ratio and low geared if the capital-gearing ratio is low. Capital Gearing ratio of SMS Pharmaceuticals Ltd., was high in 1999 and low in 2000. The current Capital Gearing ratio is 0.90.
FIXED ASSETS RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Fixed Assets Capital Employed Ratio (in percentage) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 14,14,81,141 20,36,67,635 29,42,54,604 40,51,84,213 44,33,53,460 50,55,49,795 29,29,96,135 40,40,72,603 51,51,73,811 66,49,48,771 71,52,91,672 82,44,00,662 0.48 0.50 0.57 0.60 0.61 0.61
------------------------------------------------------------------------------------------
In 1998, the fixed assets ratio was 0.48; In 1999 it was increased to 0.50; In 2000 it was again increased to 0.57; In 2001 it was still increased to 0.60; In 2002 and 2003 it was constant i.e. it is 0.61. As fixed assets ratio indicates the mode of financing the fixed assets. A financially well-managed company will have its fixed assets financed by longterm funds. Therefore, the fixed assets ratio should never be more than 1. A ratio of 0.67 is considered ideal. Fixed Assets ratio of SMS Pharmaceuticals Ltd., was satisfactory in 2002 and 2003.
INVENTORY TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Cost of Goods Sold Average Inventory Ratio (in No. of times) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 41,56,71,470 47,67,55,308 74,91,93,145 38,29,45,641 49,47,66,997 30,10,64,623 8,90,08,870 9,60,09,664 10,33,38,868 11,00,04,917 14,03,60,900 15,88,53,926 4.67 4.96 7.24 3.48 3.52 1.89
-----------------------------------------------------------------------------------------In 1998, the ratio was 4.67 times and in 1999 the inventory turnover ratio was increased to 4.96. In 2000 it was still increased to 7.24. Since the inventory turnover ratio measures how quickly inventory is sold. As the ratio in 2001 was 3.48 and it was increased to 3.52 in 2002. It may be interpreted that the sales has increased from the years 1999 to 2000 and has been fluctuated from 2001 to 2003 and the very high inventory turnover may be the result of very low level of inventory which results in frequent stockouts the turnover will also be high if the firm replenishes its inventory in too many small lot sizes. The situations of frequent stock-outs and too many small inventory replacements can prove costly for the firm.
DEBTORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Ratio Collection period of Net Debtors (in No.of times) debtors in months -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 8,30,67,157 10,95,12,519 16,40,50,269 17,23,24,953 17,19,91,684 17,15,46,036 6.56 5.70 6.68 3.27 4.13 2.71 1.82 2.10 2.24 3.66 2.90 3.32 Year Sales
-----------------------------------------------------------------------------------------The Debtors Turnover ratio indicates the number of times on the average the debtors turnover each year. In 1998, the ratio was 6.56 times; In 1999 it was 5.70; In 2000 it was 6.68 times; In 2001 it was 3.27 times; In 2002 it was 4.13 times and in 2003 it was 2.71. The high debtor turnover ratio is mainly due to advances are recovered from customers. The average collection period ratio measures the quality of debtors since it indicates the rapidity or slowness of their collect ability . The shorter the collection period, the better the quality of debtors, as a short collection period implies the prompt payments by debtors. Too low a collection period is not necessarily favourable . Rather it indicates a very restrictive credit and collection policy.
CREDITORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Ratio Payment period of Creditors (in No.of times) creditors in months -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 30,29,07,127 38,70,24,915 50,16,60,874 27,63,86,029 37,06,33,852 20,09,50,292 10,98,09,585 14,41,61,097 17,24,30,796 15,44,97,544 16,55,09,674 15,77,47,256 2.75 2.68 2.90 1.78 2.23 1.27 4.36 4.47 5.17 6.74 5.38 7.08 Year Net Purchases
-----------------------------------------------------------------------------------------The Creditors Turnover ratio indicates the velocity with which the creditors are turned over in relation to purchases. In 1998, the ratio was 2.75 times; In 1999 it was 2.68 times; In 2000 it was 2.90; In 2001 it was 1.78 times; In 2002 it was 2.23 times and in 2003 it was 1.27. The higher the creditor’s velocity better it is or otherwise lower the creditor’s velocity, less favourable are the results. The average payment period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. But a higher payment period also implies greater credit period enjoyed by the firm and consequently larger the benefit reaped from credit suppliers. But one has to be careful in interpreting this ratio, as a higher ratio may also imply lesser discount facilities availed or higher prices paid for the goods purchased on credit.
WORKING CAPITAL TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Average Working Ratio (in No.of times) Capital -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 7,38,29,608 9,23,21,188 11,92,99,750 14,62,79,990 17,82,20,889 19,72,68,298 7.38 6.76 9.18 3.86 3.99 2.35 Year Sales
-----------------------------------------------------------------------------------------In 1998, the ratio was 7.38; In 1999 it was 6.76. The ratio in 2000 was 9.18; In 2001 it was 3.86; In 2002 it was 3.99 and in 2003 it has decreased to 2.35. Working Capital Turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. The reciprocal of the ratio of 2003 i.e. 2.35 is 0.23. Thus, it is indicated that for one rupee of sales, the company needs Re.0.23 of working capital.
NET FIXED ASSETS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Net Sales Net Fixed Assets Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 14,14,81,141 20,36,67,635 29,42,54,604 40,51,84,213 44,33,53,460 50,55,49,795 3.85 3.06 3.72 1.39 1.60 0.92
-----------------------------------------------------------------------------------------In 1998, the Fixed Assets Turnover ratio was 3.85 percent; In 1999 it was 3.06; In 2000 it was 3.72; In 2001 it was 1.39; In 2002 it was 1.60 and in 2003 it was 0.92. Generally, a high ratio indicates efficient utilisation of fixed assets in generating sales, while a low ratio indicates inefficient management and utilisation of fixed assets. Since in 2003 as the ratio is low i.e. 0.92, the interpretation is that it indicates inefficient utilisation of fixed assets as the sales has been decreased.
TOTAL ASSETS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Sales Total Assets Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 1.30 1.04 1.54 0.67 0.75 0.47
-----------------------------------------------------------------------------------------In 1998, the ratio was 1.30; In 1999 it was 1.04; In 2000 it was 1.54; In 2001 it was 0.67; In 2002 it was 0.75. The Total Assets Turnover ratio in 2003 was 0.47 implies that SMS Pharmaceuticals Ltd., generates a sale of Re.0.47 for one rupee investment in fixed and current assets together. As the ratio decreases, there is less revenue generated per rupee of total investment in assets.
CAPITAL EMPLOYED TURNOVER RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Sales Capital Employed Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 21,53,10,749 31,44,80,403 42,20,41,336 56,99,57,461 63,50,21,990 70,84,17,861 2.53 1.98 2.59 0.99 1.11 0.65
-----------------------------------------------------------------------------------------In 1998, the Capital Employed Turnover ratio was 2.53; In 1999 it was 1.98; In 2000 it was 2.59; In 2001 it was 0.99; In 2002 it was 1.11 and in 2003 it was decreased to 0.65. This ratio indicates the firm’s ability of generating sales per rupee of long-term investment. The higher the ratio, the more efficient the utilisation of owner’s and long-term creditor’s funds or otherwise the lower the ratio, the less efficient the utilisation of owner’s and long-term creditor’s funds.
NET PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Net Profit (After taxes) Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.04 0.05 0.10 0.07 0.08 0.09
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The Net Profit Margin in 1998 was 0.04 percent; In 1999 it was increased to 0.05; In 2000 it was still increased to 0.10; In 2000 to 2001, the ratio was slightly up and down. The net profit margin from 2002 to 2003 has been increasing. This ratio indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. It also indicates the firm’s capacity to face adverse economic conditions such as price competition, low demand, etc.
GROSS PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Gross Profit Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 12,93,98,503 14,78,84,872 34,70,51,634 18,19,55,852 21,64,18,709 16,43,13,875 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.23 0.23 0.31 0.32 0.30 0.35
-----------------------------------------------------------------------------------------In 1998 and 1999 the Gross Profit Margin was constant i.e. 0.23 percent. In 2000 it was increased to 0.31 percent; In 2001 it was still increased to 0.32; In 2002 it was slightly decreased to 0.30 and in 2003 it was increased to 0.35. The Gross Profit ratio indicates the extent to which selling prices of goods per unit may decline without resulting in losses on operations of a firm. It reflects the efficiency with which a firm produces its products.
OPERATING RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Operating Cost Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 47,70,72,198 54,70,36,625 91,20,08,264 45,84,09,059 59,00,22,675 37,92,53,591 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.87 0.87 0.83 0.81 0.82 0.81
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In 1998 and 1999 the Operating ratio was constant i.e. it was 0.87 percent; In 2000 it has decreased to 0.83 percent; In 2001 it has still decreased to 0.81; In 2002 it was increased to 0.82 and in 2003 it has slightly decreased. This ratio indicates the percentage of net sales that is consumed by operating cost. Higher the Operating ratio, the less favourable it is, because, it would have a small margin (Operating Profit) to cover interest, income tax, dividend and reserves.
OPERATING PROFIT RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Year Operating Profit Net Sales Ratio (in percent)
-----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 6,79,97,775 7,76,03,555 18,42,36,515 10,64,92,434 12,11,63,031 8,61,24,907 54,50,69,973 62,46,40,180 1,09,62,44,779 56,49,01,493 71,11,85,706 46,53,78,498 0.12 0.12 0.16 0.18 0.17 0.18
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The Operating Profit ratio in 1998 and 1999 was constant i.e. 0.12 percent; In 2000 it has increased to 0.16; In 2001 it has still increased to 0.18 and then fluctuated in the years 2002 and 2003 by 0.17 and 0.18. The Operating Profit ratio of SMS Pharmaceuticals Ltd., is high in the current year 2003 i.e. 0.18. The higher the ratio, the better it is.
RETURN ON CAPITAL EMPLOYED RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Capital Ratio (in percent) (After taxes) Employed -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 29,29,96,135 40,40,72,603 51,51,73,811 66,49,48,771 71,52,91,672 82,44,00,662 0.08 0.08 0.22 0.06 0.08 0.05 Year
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In 1998 and 1999, the Return on Capital Employed ratio was constant i.e. 0.08; In 2000 it was increased to 0.22; In 2001 it was decreased to 0.06; In 2002 it was increased to 0.08 and in 2003 it was decreased to 0.05. Higher, the ratio, better is the position of the firm ad more efficient is the management in utilising the funds, entrusted to it. So, the Return on Capital Employed of SMS Pharmaceuticals Ltd., was more satisfactory in the year 2000.
RETURN ON SHAREHOLDER’S EQUITY RATIO OF SMS PHARMACEUTICALS LTD., DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Shareholder’s Equity Ratio (in percent) (After taxes) /Net Worth -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089 0.16 0.18 0.38 0.12 0.14 0.10 Year
-----------------------------------------------------------------------------------------In 1998, the Return on Shareholder’s Equity ratio was 0.16; In 1999 it was increased to 0.18; In 2000 it was still increased to 0.38; In 2001 it was decreased to 0.12 and then fluctuated in the years 2002 and 2003 by 0.14 and 0.10 percent. The Return on Shareholder’s Equity ratio is high in 2000, the higher the ratio, the better it s for the shareholders.
RETURN ON ASSETS RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit Total Assets Ratio (in percent) (After taxes) -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 41,75,49,489 59,85,84,084 71,05,71,461 83,73,96,367 93,61,31,680 98,84,42,948 0.06 0.05 0.16 0.05 0.06 0.04 Year
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The Return on Assets ratio in 1998 was 0.06; In 1999 it was decreased to 0.05; In 2000 it was increased to 0.16; In 2001 it was decreased to 0.05 and then fluctuated in the years 2002 and 2003 by 0.06 and 0.04 percent The Return on Assets ratio of SMS Pharmaceuticals is high in 2000, the higher the ratio, the better it is.
EARNINGS PER SHARE RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Net Profit No. of Ordinary Ratio (in percent) (After taxes) Shares Outstanding -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 2,57,99,471 3,56,69,966 11,66,16,619 4,23,19,606 5,82,07,810 4,50,12,595 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 12.58 17.39 56.88 20.64 28.39 21.95 Year
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In 1998, Earnings Per Share is 12.58; In 1999 it was increased to 17.39; In 2000 it was still increased to 56.88; In 2001 it was decreased to 20.64; In 2002 it was increased to 28.39 and in 2003 it has been decreased to 21.95. Earnings Per Share shows profitability of the firm on a per-share basis. It does not reflect how much is paid as dividend and how much is retained in business. Earnings Per Share of SMS Pharmaceuticals Ltd., is high in 2000, the higher the Earnings Per Share, the better is the performance of the company.
BOOK VALUE OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003 -----------------------------------------------------------------------------------------Equity Shareholder’s No. of Ratio (in percent) Funds Equity Shares -----------------------------------------------------------------------------------------1998 1999 2000 2001 2002 2003 15,84,52,394 18,96,12,360 30,04,27,479 33,82,28,885 39,23,36,695 43,28,31,089 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 20,50,000 77.29 92.49 146.54 164.98 191.38 211.13 Year
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The Book Value in 1998 was 77.29; In 1999 it was increased to92.49; In 2000 it was again increased to 146.54; In 2001 it was still increased to 164.98; In 2002 it was again increased to 191.38. From 1998 to 2003 the Book Value is being increasing. The Book Value of SMS Pharmaceuticals Ltd., is high in 2003 i.e. 211.13, the higher the book value of a share, the more strong the business is assumed to be.
OBSERVATIONS
The basic objective of financial statement is to provide information useful for making economic decisions. The published financial statements are properly oriented towards the long-term investor, who is mainly interested in long-term earning power. Short-term creditors such as major suppliers of banks are usually more interested in the short run ability of the corporation to satisfy its obligations as they mature. Financial analysts usually use a company’s annual report as the springboard for their review. The primary use of financial statements consists of evaluating past performance and predicting future performance. Both of these uses can be facilitated by comparison. The ultimate effect of analysis of financial statement is usually to make some financial decisions. After comparing financial statements with past statements with those of similar companies or in the industry averages, the analyst will predict how the organization will fare. The analyst then will decide to buy, sell or hold the common stock. The current ratio is a widely used statistic. Other things being equal, the higher the ratio the more assurance the creditors have about being paid in full and on time. Annexure-I, SMS Pharmaceuticals Ltd., has increased their current ratio from 1.87 to 2.23 in 2003. The next two ratios’ the inventory turnover and the average collection period are closely watched signals. For example, a decreased in inventory turnover may suggest slower moving merchandise or working co-ordination of the buying and selling functions. An increase in the average collection period of receivables may indicate increase acceptance of poor credit risks of less energetic collection efforts.
Ratios of debt to equity will be watched by the shareholders to judge the degree of risk of insolvency and of stability of profits. SMS’s Debt-equity ratio’s reflecting average stability of profits and risk or uncertainty concerning the company’s ability to pay its debts on time. The profitability ratio’s studies the ratios of net profit to sales and gross profit to sales as indicators of operating success. To owners however the ultimate measure of overall accomplishment is the rate of return on their invested capital. To summarise the observations, the current ratio is impressive and its debt management ratios are average. Its profit ratios are outstanding.
SUGGESTIONS AND RECOMMENDATIONS
Relevance and reliability are the two major qualities that make accounting useful for decision-making. Relevance is defined as the capability of information to make a difference to the decision maker. To be relevant, information must be timely and understandable. Reliability is defined as the quality of information that allows users to depend on it to represent the conditions or events that it purports to represent. Comparable information prepared consistently over time enhances both reliability and relevance. Research in finance and accounting during the past twenty years has reinforced the idea that financial ratios and other data provide such as reputed earning provide inputs to prediction of such economic phenomenon as financial failure or earnings growth. Further more many ratios are used simultaneously rather the one at a time for same predictions. The income statement is the sole service of information about a company. Lenders and shareholders invent in a company because of its reputed earnings per share the higher the stock price and the easier it to raise capital. Financial ratios aid the intelligent analysis of statements they are used as a basis of evaluation, comparison and prediction. The rate of return on invested capital is a very popular means of comparing performance. Financial statements are only one source of information about a company. Market efficiency implies that accounting regulates should focus on issues of disclosure, not format. The ratios contain good news and bad news. The good news is that the company would appear to be slightly more liquid. The bad news is that the inventory turnover, the average collection period and the rate of return on stockholders equity are less attractive.
For example, a high inventory turnover generally considered to be indication of operating efficiency may be temporarily achieved by unwarranted price reductions, failure to maintain stock in hand or other unsound policies. Similarly, a higher current ratio although index of strong current position, may result form unreasonable accumulation of liquid resources. Even when the ratios are worked out correctly, it should be remembered that they can at best be used like a doctor uses symptoms indications that something is wrong somewhere.
CONCLUDING REMARKS
As a tool of financial management the ratio analysis is a crucial significance. Ratio analysis, a relevant in assessing to performance of a firm in respect of the liquidity position, long-term solvency, operating efficiency, over all profitability, inter firm comparison and trend analysis. Reliance and reliability of the information are very important. Reliance as a single ratio for a particular purpose may not be a conclusive indicator. Ratios are only a postmortem of what has happened between two balance sheets. In order to have meaningful derivations ratio analysis as well as common size statements should be compared both over time (trend ratios) and across companies (inter firm comparison) with in the industry. In view of its limitations, ratio analysis should be considered only as a tool for analysis rather than an end in itself. The reliability and significance attached to ratios will largely depend on the quality of data on which they are based.
BIBLIOGRAPHY
NAME OF THE TEXT BOOK
AUTHOR
1. Financial Management 2. Financial Management 3. Financial Management 4. Financial Management theory and practice
My. Khan & P .K. Jain I.M. Pandey Kuchahal Prasanna Chandra
doc_575885811.doc