Ratio Analysis

FM Assignment -

2

SUBMITTED BY: Iris Charu Gomes ( F11079) Neethu Thresa Jacob(F11096) Swarupa Rani Sahu(F11116) Divyanshi Gupta ( F11121)

Anu’s Laboratories Ltd and Divi’s

Laboratories Ltd.

INTRODUCTION

OVERVIEW OF INDIAN PHARMACEUTICAL INDUSTRY

The Indian pharmaceutical industry currently tops the chart amongst India's science-based

industries with wide ranging capabilities in the complex field of drug manufacture and technology. A

highly organized sector, the Indian pharmaceutical industry is estimated to be worth $ 4.5 billion,

growing at about 8 to 9% annually. It ranks very high amongst all the third world countries, in terms

of technology, quality and the vast range of medicines that are manufactured. It ranges from simple

headache pills to sophisticated antibiotics and complex cardiac compounds; almost every type of

medicine is now made in the Indian pharmaceutical industry. The Indian pharmaceutical sector is

highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two

decades. The pharmaceutical and chemical industry in India is an extremely fragmented market with

severe price competition and government price control. The pharmaceutical industry in India meets

around 70% of the

country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,

capsules, orals and injectibles. There are approximately 250 large units and about 8,000 Small Scale

Units, which form the core of the pharmaceutical industry in India (including 5 Public Sector

Units).

Financial ratio:

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values

taken from an enterprise's financial statements. Often used in accounting, there are many standard

ratios used to try to evaluate the overall financial condition of a corporation or other organization.

Financial ratios may be used by managers within a firm, by current and

potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial

ratios to compare the strengths and weaknesses in various companies. If shares in a company are

traded in a financial market, the market price of the shares is used in certain financial ratios.

Financial ratios quantify many aspects of a business and are an integral part of the financial

statement analysis. Financial ratios are categorized according to the financial aspect of the

business which the ratio measures. Liquidity ratios measure the availability of cash to pay

debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt

ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the firm's use

of its assets and control of its expenses to generate an acceptable rate of return. Market

ratios measure investor response to owning a company's stock and also the cost of issuing stock.

Financial ratios allow for comparisons

between companies

between industries

between different time periods for one company

between a single company and its industry average

Ratios generally hold no meaning unless they are benchmarked against something else, likpast

performance or another company. Thus, the ratios of firms in different industries, which

face different risks, capital requirements, and competition are usually hard to compare.

ANU’S LABORATORIES LIMITED

Anu’s Laboratories Limited is a US $ 50 million public listed company established in

1996,and managed by experienced professionals engaged in manufacturing of Active Pharmaceutical

ingredients and Drug intermediaries. Anu’s Laba is the market leader across the world with over 60%

market share for three of its products in their addressable markets.For eight other products,Anu’s Labs

has established itself as the preffered source.The company has two state-of-the-art manufacturing

facilities located in Hyderabad,India.

1. Current Ratio: Current assets

Current liabilities

The current ratio indicates the extent to which current liabilities are covered by those assets expected

to be converted to cash in the near future.

Year Calculation of Current Ratio Current ratio

2010-11 1596.47

804.46

1.98

2009-10 1434.68

759.52 1.89

2008-09 531.97

429.61

1.24

2007-08 529.11

267.29

1.98

Average

2.13

Interpretation:-

CURRENT RATIO (IN TIMES) FOR:

2010-11 Average Industry

1.98 2.13 1.50

The current ratio of Anu’s for the year 2010-11 is better than the industrial average of 1.50. But the

average of the current ratio for the previous three years was better than the present value. So the

current ratio has come down when compared to the previous years.

2.Acid Test Ratio = Current Assets - Inventory

Current Liabilities

The acid test ratio is the ratio between quick current assets and quick liabilities. It is also called as

quick ratio.

Year Calculation of Acid Test Ratio Acid Test Ratio

2010-11 1596.47-691.93

804.46

1.12

2009-10 1434.68-744.95

759.52

0.91

2008-09 531.97 – 142.6

429.61

0.91

2007-08 529.11 – 168.96

267.29

1.35

Average 1.09

Interpretation:-

ACID TEST RATIO FOR :


01.12 1.09 0.90

The quick ratio of the company is better than the industrial average as well as than the previous three

years average.

3.Cash Liquidity Ratio = (Cash and Bank Balances + Marketable Securities)

Current Liabilities

This ratio measures the relationship of a firm’s cash and other current assets to its current liabilities.

Year Calculation of Cash Liquidity Ratio Cash Liquidity Ratio

2010-11 67.97+284.57

804.46

0.44

.

2009-10 45.26+130.26

759.52 0.23

2008-09 7.52 + 3.06 - 20.22

429.61

-0.02

2007-08 12.76 + 3.06 - 62.13

267.29

-0.17

Average of 2008-09, = 0.28 - 0.02 - 0.17

2007-08 & 2006-07 3

0.03

Interpretation:-


0.41 0.03 0.20

The cash liquidity ratio is better than the industry average. It is also better than the previous three

years. This shows that the company has more liquid cash in its hands than the previous three years.

4.Average Collection Period = Accounts Receivable

Net Sales/ 365

This ratio measures the liquidity of the firm’s debtors and shows the time taken in days to convert the

debtors into cash.

Year Calculation of Average Collection Period Average Collection Period (in

days)

2010-11 433.28 x 365

2694.14

58.70

2009-10 644.47x 365

2038.21

115.41

2008-09 352.66 x 365

730.67

176.17

2007-08 324.86 x 365

668.93

177.26

Interpretation:-

AVERAGE COLLECTION PERIOD FOR:


144.92 174.07 141.00

Lower the debt collection period, the better it is. The debt collection period of Anu’s Laboratories Ltd.

has decreased as compared to average past performance. This is a positive aspect. The industry

average is less. The company takes a very long time to collect from the debtors. So the company has

to improve its average collection period.

5.Accounts Receivables Turnover Ratio = Net sales

Accounts Receivables

This ratio shows how quickly the receivables or debtors are converted into cash.

Year Calculation of Accounts Receivables Turnover

Ratio

Accounts Receivables Turnover Ratio

(in times)

2010-11 2694.14

433.28

6.22

2009-10 2038.21

644.47 3.16

2008-09 730.67

352.66

2.07

2007-08 668.93

324.86

2.06

Average 2.12

Interpretation:-

ACCOUNTS RECEIVABLES TURNOVER RATIO (IN TIMES) FOR:


2.52 2.12 2.59

The higher the accounts receivables turnover ratio, the better it is. There has been a significant

increase in the receivables turnover ratio indicating a higher conversion of debts into cash in the year

2009-10 but the industry average is way too high. The company has to still improve its receivables

turnover ratio.

6. Inventory Turnover Ratio = Cost of goods sold

Inventories

This ratio indicates the number of times inventory is replaced during the year. It measures the

relationship between the cost of goods sold and the inventory level.

Year Calculation of Inventory Turnover Ratio Inventories Turnover Ratio (in

times)

2010-11 2260.99

691.93

3.03

2009-10 1636.69

744.95

2.06

2008-09 661.99

142.60

4.64

2007-08 616.72

168.96

3.65

Average 3.33

Interpretation:-

INVENTORIES TURNOVER RATIO (IN TIMES) FOR:


2.70 3.33 4.41

The inventory turnover ratio, an indicator of frequency of converting the present inventory into cash,

has decreased slightly from the previous three year’s average indicating low efficiency in selling of

inventories. The industry average is way too high and therefore they have to work towards moving the

inventories as fast as they can.

7.Fixed Assets Turnover Ratio = Net Sales

Fixed Assets

The fixed asset turnover measures how effectively the firm uses its plant and equipment.

Year Calculation of Fixed Assets Turnover

Ratio

Fixed Assets Turnover Ratio (in

times)

2010-11 2694.14

1158.0

2.33

2009-10 2038.21

812.14

2.51

2008-09 730.67

193.07

3.78

2007-08 668.93

126.74

5.28

Average 3.87

Interpretation:-

FIXED ASSETS TURNOVER RATIO (IN TIMES) FOR:


2.68 3.87 2.54

The higher the fixed asset turnover ratio the better it is. The company’s fixed asset turnover ratio is

better than the industry ratio showing that the company is using the fixed assets in an efficient way

but the ratio has gone down when compared with the previous three years.

8.Total Assets Turnover Ratio = Net sales

Total assets

This ratio measures the turnover of all the firm’s assets.

Year Calculation of Total Assets

Turnover Ratio

Total Assets Turnover Ratio

(in times)

2010-11

2694.14

2303.723

1.00

2009-10 2038.21

2472.984

0.82

2008-09 730.67

663.09

1.10

2007-08 668.93

488.33

1.37

Average 1.12

Interpretation:-


1.09 1.12 0.57

The total asset turnover indicates sales generated per rupee of asset employed in the company. The

ratio has gone down when compared to the previous years and it is lower than the industry average.

This is because of the low inventory turnover ratio. The company has to move its inventory in a faster

manner to improve the total asset turnover ratio.

9.Debt Ratio = Total Liabilities ( Current Liabilities + Loan Funds)

Total Assets

This ratio shows the percentage of funds provided by creditors.

Year Calculation of Debt Ratio Debt ratio

2010-11 804.46+494.71

2303.723

0.48

2009-10 759.52+397.32

2472.984

0.53

2008-09 426.36

663.09

0.64

2007-08 300.43

488.33

0.62

Average

0.65

Interpretation:-


0.63 0.65 0.49

The higher the debt ratio, the better it is. The debt ratio has gone down a little when compared to the

average of the previous three years. This is evident from the decrease in current assets like cash as

interpreted from the previous ratios like current ratio and cash liquidity ratio.

10.Long term debt to Total Capitalization Ratio = Long term debt

Long term debt + shareholder’s equity

This ratio measures the extent to which long term debt is used for financing

Year Calculation of Long term debt to Total

Capitalization Ratio

Long term debt to Total Capitalization

Ratio

(in times)

2010-11 494.71

494.71+1619.8

0.23

2009-10 397.32

397.32+1610.29

0.20

2008-09 63.81

63.81 + 236.73

0.21

2007-08 31.81

31.81 + 187.90

0.16

Average of 2008-09, = 0.34 + 0.21 + 0.16

2007-08 & 2006-07 3

0.24

Interpretation:-


0.33 0.24 NA

This ratio is good when it is high. The ratio has gone up when compared to the previous years which

show that the company has utilized the long term debts efficiently in the year 2009-10.

11.Debt Equity Ratio = Total liabilities

Shareholder’s equity

It measures debt relative to equity base in the capital structure.

Year Calculation of

Debt-Equity Ratio

Debt-Equity Ratio

(in times)

2010-11 1299.17

1619.8

0.80

2009-10 1156.84

1610.29

0.81

2008-09 426.36

236.73

1.80

2007-08 300.43

187.90

1.60

Average of 2008-09, = 2.27 + 1.80 + 1.60

2007-08 & 2006-07 3

1.89

Interpretation :-


1.72 1.89 0.50

The higher the ratio the better it is. The debt equity ratio has gone down when compared to the

previous years but it is better than the industry average.

12.Times interest earned = Operating profit

Interest Expense

It measures how many times interest expense is covered by operating earnings. It is a measure of the

firm’s ability to meet its annual interest payment.

Year Calculation of

Times Interest Earned


(in times)

2010-11 416.59

165.03

2.52

2009-10 365.57

105.87

3.45

2008-09 12.52

27.42

0.46

2007-08 9.71

19.36

0.50

Average 4.09

Interpretation:


2.52 4.09 7.20

Higher the ratio the better it is. The ratio is less than the previous three years and it is quite low when

compared to the industry average. The company’s TIE is less which shows that the company has

lower returns when compared to the interest paid.

13.Fixed Charge coverage = Operating profit + lease payments

Interest Expense + lease payments

It measures coverage capability more broadly than times interest earned by including lease payments

as a fixed expense.

Year Calculation of

Fixed Charge coverage


(in times)

2010-11 416.59+0

165.03+0

1.26

2009-10 365.57+0

105.87+0

1.73

2008-09 12.52 + 0.38

27.42 + 0.38

0.46

2007-08 9.71 + 0.09

19.36 + 0.09

0.50

Average 2.04

Interpretation:


1.26 2.04 144.02

Higher the ratio the better it is. In this case, the ratio has decreased when compared to the previous

years. But it is very less when compared to the industry average..

14. Cash Flow Adequacy = Cash Flow From Operating Activities

Average Long Term Debt Maturities

It measures how many times average annual payments of long term are covered by operating debt

cash flows.

Year Calculation of

Cash Flow Adequacy

Cash Flow Adequacy

(in times)

2010-11 284.57

(62.51+99)/2

3.52

2009-10 130.26

(99+0)/2

2.63

2008-09 -

2007-08

-

-

Average 2.63

Interpretation:


3.52 2.63 0.76

Year Calculation of Net profit margin Net profit margin(%)

2010-11 172.98 X 100

2694.14

6.42%

2009-10 211.65 X 100

2038.21

10.38%

2008-09 67.20 X100

730.67

9%

2007-08 54.90 X 100

668.93

8%

Average 11%

Higher the ratio the better it is. The current value ratio is higher than the industry average as well as

the last three years’ average.

15.Net Profit Margin= Net Profit X 100

Net Sales

Interpretation:-


6.42% 11% 26%

The higher the net profit margin, the better it is. The net profit margin of the company is quite small

when compared to the industry and it has gone by a few notches when compared to the previous three

years.

16.Gross Profit Margin :- Gross Profit

Net sales

This is also known as gross margin. This ratio is the result of the relationship between prices, sales

volume and costs.

Year Calculation of Gross Profit Gross Profit Margin

2010-11 251.56

2694.14

0.09

2009-10 259.90

2038.21

0.13

2008-09 233.03

730.67

0.32

2007-08 265.48

668.93

0.40

Average 0.16

Interpretation:-


.09 0.16 0.31

Company gross profit ratio has shown a decrease in value when compared to the previous three years

and it is much lower than the industrial average. So the company’s performance is poor in this respect.

17. Operating Profit Ratio :- Operating Profit

Net sales

Year Calculation of Operating Profit Operating Profit %

2010-11 416.59* 100

2694.14

15%

2009-10 365.57 *100

2038.21

18%

2008-09 12.52*100

730.67

2 %

2007-08 9.71* 100

668.93

1 %

Average 21 %

Interpretation:-


15% 21 % 36%

The operating profit margin in the year 2010-11 has come down when compared to the previous three

years and it is less than even half of the industry average.

18. Cash Flow margin:- Cash flow from operating activities

Net sales

This ratio tells that how much cash profit has been earned by the company by selling the goods. This

ratio is very important to know the short run liquidity and solvency position of the company.

Year Calculation of Cash flow margin Cash flow margin %

2010-11 284.57*100

2694.14

10.56%

2009-10 130.26*100

2038.21

6.4%

2008-09 -20.22*100

730.67

-3%

2007-08 -62.13*100

668.93

-9%

Average -8.0%

Interpretation


10.56% -8.0% 8.0%

The cash flow margin has gone up when compared to the previous three years. This is because the

company has more liquid cash in the current year and this is evident from the cash liquidity ratio.Also

the ratio has a higher value when compared with the industry average which shows that the company

hs more of liquid cash with it.

19. Return on investment = Net earnings

Total assets

This profitability ratio tells the relationship between net profits and assets. The return on investment

may also be called profit-to-asset ratio. This ratio told that how much company is earning by investing

that much amount in assets.

Year Calculation of Return on investment Return on investment

2010-11 172.98*100

2703.723

6.40%

2009-10 211.65*100

2472.984

8.56%

2008-09 67.20*100

663.09

10%

2007-08 54.90*100

488.33

11%

Average 10%

Interpretation


6.4% 10% 15%

The return on investment has gone down when compared with the previous three years and it is also

lower than the industry average. This is evident from the increase in the total asset turnover ratio of

the company.

20. Return on Stockholder’s equity:- Net earnings

Stockholder equity

This ratio tells the profitability is measured by dividing the net profits after taxes by the shareholders

equity. This ratio reveals how profitably the owner’s funds have been utilized by the firm.

Year Calculation of Return on equity Return on equity

2010-11 172.98*100

1619.8

10.68%

2009-10 211.65*100

1610.29

13.14%

2008-09 67.20*100

236.73

28%

2007-08 54.90 *100

187.90

29%

Average 20%

Interpretation:-


10.68% 20% 29%

The return on equity has decreased when compared to the previous three years and also it is lower

than the industry average. So, there is relatively lower return on the shareholder’s investments.

21. Cash return on assets:- Cash flow from operating activities

Total assets

This ratio explains that how much company has cash profit by having that much amount of total

assets. This ratio is very important for long run because it shows the cash position of the company

which helps to interpret the solvency position in the long run.

Year Calculation of Cash Return on asset Cash Return on asset

2010-11 284.57

2703.723

0.10

2009-10 130.26

2472.984

0.06

2008-09 -20.22

663.09

-0.03

2007-08 -62.13

488.33

-0.13

Average -0.06

Interpretation:-


0.10 -0.06 4.26

The higher the cash return on assets, the better it is. The company’s cash return on assets has

increased when compared to the past three years and has become positive from a negative value

22. Earnings per share:- Amount available for equity share holders

Number of equity shares

This is a widely used ratio. This ratio measures the profit available to equity shareholders on a per

share basis, that is, the amount that they can get on every share held. It is calculated by dividing the

profits available to the equity shareholder by the number of outstanding shares.

Year Calculation of Earnings per share Earnings per

share(Rs)

2010-11 172980000

244459983

0.71

2009-10 211.65

241520000

0.876

2008-09 67.20

92861510

7.24

2007-08 54.90

30923650

17.75

Average 8.0

Interpretation:-

2010-11

Average Industry

0.71 8.0 16.15

Earnings per share are the ratio of profit available for equity share holder by the number of equity

shares. Company’s EPS has drastically gone down when compared with the previous three years and

is also very less when compared with the company average.

23. Price to earnings:- Market price of the share

EPS

This is closely related to the earnings yield/earnings ratio. It is actually the reciprocal of the latter.

This ratio reflects the price currently being paid by the market for each rupee of currently reported

EPS. In other words, the P/E ratio measures investors expectations and the market appraisal of the

performance of a firm. This ratio is popularly used by security analysts to assess a firm’s performance

as expected by the investors.

Year Calculation of price to earning Price to earning

2010-11 3.10

0.71

4.37

2009-10 6.59

0.88

7.48

2008-09 185.65

7.24

25.65

2007-08 366.75

17.75

20.66

Average 5.95

Interpretation:-


4.37 5.95 30.72

Price earning ratio shows how much investors are willing to pay. It is the ratio of market price

by earning per share. The higher the ratio, the better it is. Here, there is a decrease in price earnings

ratio when compared to the previous years. And it is much below than the industry standard 0f 30.72

24. Dividend Pay-out ratio = Dividend per share X 100

EPS

It measures the relationship between the earnings belonging to the shareholder and dividend paid to

them. In other words, the D/P ratio shows what percentage share of the net profits after taxes and

preference dividend is paid out as dividend to equity shareholders.

Year Calculation of dividend pay-out ratio Dividend pay-out

ratio

2010-11 0 X 100

.71

-

2009-10 .10 X 100

1.08

11%

2008-09 1.5 X 100

7.24

21%

2007-08 1.5 X 100

17.75

8%

Average 8%

Interpretation:-


- 8% 22%

Dividend Payout Ratio shows, how much percentage the company is paying on the basis of its

earning. In our case the company did not give away any dividends in the year 2010-11 hence no

comparison with the industry average is possible but if we can compare the average of the last three

years with the industry average and we see that it is quite less than the industry average.

This can affect the loyalty of the shareholders towards the company.

25. Dividend yield ratio = Dividend per share X 100

Market value per share

This ratio is closely related to DPS. While the DPS are based on book value per share, the yield is

expressed in terms of market value per share.

Year Calculation of dividend yield ratio Dividend yield ratio

2010-11 0 X 100

3.10

-

2009-10 0.1 X 100

6.59

2.0%

2008-09 1.5 X 100

185.65

1%

2007-08 1.5 X 100

366.75

0%

Average 4%

Interpretation:-


- 4% 10%

Dividend Yield Ratio shows, how much percentage of dividend per share the company is paying in

comparison to its market price. The higher the percentage, better it is for the investors.In our case the

company did not give away any dividends in the year 2010-11 hence no comparison with the industry

average is possible but if we can compare the average of the last three years with the industry average

and we see that it is quite less than the industry average.

COMPARATIVE ANALYSIS

Comparison of current year ratios with Industrial averages.

Ratio 2011 Industry Average Score

Current Ratio 1.98 1.50 1

Acid test 1.12 0.90 1

Cash Flow Liquidity 0.44 0.20 1

Average Collection Period 58.7 141 1

Average Receivable turnover 6.22 2.59 -1

Fixed Assets turnover 2.33 2.54 -1

Total Assets Turnover 1.00 0.57 1

Debt Ratio 0.48 0.49 1

Long term Debt to total capitalization 0.23 0.53 -1

Debt to equity 0.80 0.50 1

Times interest earned 2.52 7.20 -1

Fixed charge changeover 1.26 144.02 -1

Cash flow adequacy 3.52 0.76 -1

Gross profit margin 0.09 0.31 -1

Operating profit margin 0.15 0.36 -1

Net profit margin 0.06 0.26 -1

Cash Flow Margin 0.11 0.08 1

Return on Investment 0.06 0.15 -1

Return on Equity 0.11 0.29 -1

Cash return on assets 0.11 4.26 -1

Earnings per share 0.71 16.15 -1

Price to earnings 4.38 30.72 -1

Dividend payout - 0.22 -

Dividend yield - 0.01 -

Inventory Turnover 3.03 4.41 -1

Net Score -7

Note: If the ratio shows a favourable change as compared to average performance of past three years,

the score of that particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

Comparison of current year ratios with the industry average

Ratio 2011 Industry Average Score

Current Ratio 1.98 1.50 -1

Acid test 1.12 0.90 1

Cash Flow Liquidity 0.44 0.20 1

Average Collection Period 58.7 141 1

Average Receivable turnover 6.22 2.59 1

Fixed Assets turnover 2.33 2.54 -1

Total Assets Turnover 1.00 0.57 1

Debt Ratio 0.48 0.49 1

Long term Debt to total capitalization 0.23 0.53 1

Debt to equity 0.80 0.50 -1

Times interest earned 2.52 7.20 -1

Fixed charge changeover 1.26 144.02 -1

Cash flow adequacy 3.52 0.76 1

Gross profit margin 0.09 0.31 -1

Operating profit margin 0.15 0.36 -1

Net profit margin 0.06 0.26 -1

Cash Flow Margin 0.11 0.08 1

Return on Investment 0.06 0.15 -1

Return on Equity 0.11 0.29 -1

Cash return on assets 0.11 4.26 1

Earnings per share 0.71 16.15 -1

Price to earnings 4.38 30.72 -1

Dividend payout - 0.22 -

Dividend yield - 0.01 -

Inventory Turnover 3.03 4.41 1

Net Score -2

Note: If the ratio shows a favourable change as compared to industry average, the score of that

particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

DIVI’S LABORATORIES

Established in the year 1990, with Research & Development as its prime fundamental, Divis

Laboratories focussed on developing new processes for the production of Active Pharma Ingredients

(APIs) & Intermediates. The company in a matter of short time expanded its breadth of operations to

provide complete turnkey solutions to the domestic Indian pharmaceutical industry.

With five years of experience, expertise and a proven track-record of helping many companies with

its turn-key and consulting strengths, Divis Laboratories established its first manufacturing facility in

1995.

RATIO ANALYSIS

1. Current Ratio: Current assets

Current liabilities

The current ratio indicates the extent to which current liabilities are covered by those assets expected

to be converted to cash in the near future

Year Calculation of Current Ratio Current ratio

2010-11 99621.76

40212.93

2.477356

2009-10 78625.04

25966.54 3.027937

2008-09 74500.08

21051.39

3.538963

2007-08 55532.91

19429.38

2.858192593

Average of previous 3 years = 2.858192593 + 3.538963 + 3.027937

3 3.141697275

Interpretation:-

CURRENT RATIO (IN TIMES) FOR:


2.477356 3.141697275 1.50

The current ratio of Divi’s Labs Ltd for the year 2010-11 is better than the industrial average of 1.50.

But the average of the current ratio for the previous three years was better than the present value. So

the current ratio has come down when compared to the previous years.

2.Acid Test Ratio = Current Assets - Inventory

Current Liabilities

The acid test ratio is the ratio between quick current assets and quick liabilities. It is also called as

quick ratio.

Year Calculation of Acid Test Ratio Acid Test Ratio

2010-11 99621.76 - 54306.55

40212.93

1.126882

2009-10 78625.04-47957.27

25966.54

1.18105

2008-09 74500.08-21051.39

39590.75

1.658291

2007-08 55532.91-27565.53

19429.38

1.439437594

Average of 2009-10, = 1.18105 + 1.658291 + 1.439437594

2008-09 & 2007-08 3

1.426259367

Interpretation:-

ACID TEST RATIO FOR :


1.126882 1.426259367 0.90

The quick ratio of the company is better than the industrial average. But, the quick ratio has come

down to some extent when compared to the previous three years.

3.Cash Liquidity Ratio = (Cash and Bank Balances + Marketable Securities)

Current Liabilities

This ratio measures the relationship of a firm’s cash and other current assets to its current liabilities.

Year Calculation of Cash Liquidity Ratio Cash Liquidity Ratio

2010-11 960.47+32595.79+0

40212.93

0.834464437

2009-10 979.87+36767.08+0

25966.54

1.453676539

2008-09 690.39+31551.47+0

21051.39

1.531579

2007-08

581.43+30210.8+0

19429.38

1.584828

Average of 2009-10, = 1.584828 + 1.531579 + 1.453676539

3

2008-09 & 2007-08

1.523361149

Interpretation:-


0.834464 1.523361149 0.20

The cash liquidity ratio is better than the industry average. But it has decreased than the previous three

years. This shows that the company has less liquid cash in its hands than the previous three years.

4.Average Collection Period = Accounts Receivable

Net Sales/ 365

This ratio measures the liquidity of the firm’s debtors and shows the time taken in days to convert the

debtors into cash.

Year Calculation of Average Collection Period Average Collection Period (in

days)

2010-11 39495.39 x 365

130543.86

110.4289191

2009-10

23444.15 x 365

92928.25 92.08302911

2008-09 28349.95 x 365

119056

86.91481

2007-08 21424.51 x 365

103318.5

75.68779

Interpretation:-

AVERAGE COLLECTION PERIOD FOR:


110.4289191 91.27863705 141.00

Lower the debt collection period, the better it is. The debt collection period of Divi’s Labs Ltd. has

increased as compared to average past performance. This is a negative aspect. The industry average is

more. The company takes a very less time to collect from the debtors. So the company has better

performance its average collection period compared to the industry.

5.Accounts Receivables Turnover Ratio = Net sales

Accounts Receivables

This ratio shows how quickly the receivables or debtors are converted into cash.

Year Calculation of Accounts Receivables Turnover

Ratio

Accounts Receivables Turnover Ratio

(in times)

2010-11 130543.86

39495.39

3.305293605

2009-10 92928.25

23444.15

3.963814001

2008-09 119056

28349.95

4.199514

2007-08 103318.5

21424.51

4.822442

Average of last 3 yrs. = 4.328590144

Interpretation:-

ACCOUNTS RECEIVABLES TURNOVER RATIO (IN TIMES) FOR:


3.305293605 4.328590144 2.59

The higher the accounts receivables turnover ratio, the better it is. There has been a significant

decrease in the receivables turnover ratio indicating a lower conversion of debts into cash in the year

2010-11 but the industry average is way too low. The company performs better in receivables

turnover ratio as compared to the industry.

6. Inventory Turnover Ratio = Sales

Inventories

This ratio indicates the number of times inventory is replaced during the year. It measures the

relationship between the cost of goods sold and the inventory level.

Year Calculation of Inventory Turnover Ratio Inventories Turnover Ratio (in

times)

2009-10

130543.86

54306.55 2.403833

2008-09 92928.25

47957.27

1.93773

2007-08 119056

39590.75

3.007168

2007-08 103318.5 3.748103519

27565.53


Interpretation:-

INVENTORIES TURNOVER RATIO (IN TIMES) FOR:


2.403833

2.897667098 4.41

The inventory turnover ratio, an indicator of frequency of converting the present inventory into cash,

has decreased slightly from the previous three year’s average indicating low efficiency in selling of

inventories. The industry average is way too high and therefore they have to work towards moving the

inventories as fast as they can.

7. Fixed Assets Turnover Ratio = Net Sales

Fixed Assets

The fixed asset turnover measures how effectively the firm uses its plant and equipment.

Year Calculation of Fixed Assets Turnover

Ratio

Fixed Assets Turnover Ratio (in

times)

2010-11 130543.86

58972.86

2.213626065

2009-10 92928.25

58967.18

1.57593173

2008-09 119056

58967.07

2.019026

2007-08 103318.5

49687.02

2.079385


Interpretation:-

FIXED ASSETS TURNOVER RATIO (IN TIMES) FOR:


2.213626065 1.891447528 2.54

The higher the fixed asset turnover ratio the better it is. The company’s fixed asset turnover ratio is

lower than the industry ratio showing that the company is not using the fixed assets in an efficient

way but the ratio has gone up when compared with the previous three years.

8. Total Assets Turnover Ratio = Net sales

Total assets

This ratio measures the turnover of all the firm’s assets.

Year Calculation of Total Assets

Turnover Ratio

Total Assets Turnover Ratio

(in times)

2010-11

130543.86

230813.24

0.565582

2009-10 92928.25

188649.44

0.492598

2008-09 119056

157350.7

0.756629

2007-08 103318.5

119565.8

0.864113602


Interpretation:-


0.565582 0.704446619 0.57

The total asset turnover indicates sales generated per rupee of asset employed in the company. The

ratio has gone down when compared to the previous years and it is lower than the industry average.

This is because of the low inventory turnover ratio. The company has to move its inventory in a faster

manner to improve the total asset turnover ratio.

9. Debt Ratio = Total Liabilities ( Current Liabilities + Loan Funds)

Total Assets

This ratio shows the percentage of funds provided by creditors.

Year Calculation of Debt Ratio Debt ratio

2010-11

48008.69

230813.24 0.207998

2009-10

34441.93

188649.44 0.182571

2008-09 31171.89

157350.7

0.198105

2007-08 32167.2

119565.8

0.269033385

Average of 3 yrs. =

0.21656969

Interpretation:-


0.207998 0.21656969 0.49

The higher the debt ratio, the better it is. The debt ratio has gone down a little when compared to the

average of the previous three years. This is evident from the decrease in current assets like cash as

interpreted from the previous ratios like current ratio and cash liquidity ratio.

10. Long term debt to Total Capitalization Ratio = Long term debt

Long term debt + shareholder’s equity

This ratio measures the extent to which long term debt is used for financing

Year Calculation of Long term debt to Total

Capitalization Ratio

Long term debt to Total Capitalization

Ratio

(in times)

2010-11

7795.76

7795.76 +2651.91

0.746172

2009-10

8475.39

8475.39+2642.88 0.762294

2008-09

10120.5

10120.5+1295.16 0.886545

2007-08

12737.82

12737.82+1291.14 0.907966093


Interpretation:-


0.746172

0.852268457 0.53

This ratio is good when it is high. The ratio has gone down when compared to the previous years

which show that the company has not utilized the long term debts efficiently in the year 2010-11.

11. Debt Equity Ratio = Total liabilities

Shareholder’s equity

It measures debt relative to equity base in the capital structure.

Year Calculation of

Debt-Equity Ratio

Debt-Equity Ratio

(in times)

2010-11

48008.69

182804.55 0.262623

2009-10 34441.93

154207.51

0.223348

2008-09 31171.89

126178.8

0.247045

2007-08 32167.2

87398.63

0.368051536


Interpretation :-


0.262623 0.279481646 0.50

The higher the ratio the better it is. The debt equity ratio has gone down when compared to the

previous years but it is lower than the industry average.

12.Times interest earned = Operating profit

Interest Expense

It measures how many times interest expense is covered by operating earnings. It is a measure of the

firm’s ability to meet its annual interest payment.

Year Calculation of



(in times)

2010-11 50735.73

134.65

376.7971036

2009-10 40970.03

246.89

165.9444692

2008-09 55230.3

817.7

67.54348

2007-08 44424.7

794.53

55.91318

Average of 2009-10, 2008-09 & 2007-08 96.46704206

Interpretation:


376.7971036 96.46704206 7.20

Higher the ratio the better it is. The ratio is better than the previous three years as well as the industry

average. This shows that the company has higher returns when compared to the interest paid.

13.Fixed Charge coverage = Operating profit + lease payments

Interest Expense + lease payments

It measures coverage capability more broadly than times interest earned by including lease payments

as a fixed expense.

Year Calculation of



2010-11 50789.73

188.65

269.2272992

2009-10 41021.46

298.32

137.5082462

2008-09 55271.66

859.06

64.3397

2007-08 44455.49

825.42

53.85814

Average of 2009-10, 2008-09 & 2007-08 85.23536267

Interpretation:


0.58 269.2272992 144.02

Higher the ratio the better it is. In this case, the ratio has increased when compared to the previous

years as well as the industry average.

14. Cash Flow Adequacy = Cash Flow From Operating Activities

Average Long Term Debt Maturities

It measures how many times average annual payments of long term are covered by operating debt

cash flows.

Year Calculation of

Cash Flow Adequacy

Cash Flow Adequacy

(in times)

2010-11 32595.79

2037.92

15.99463669

2009-10 36767.08

1996.81

18.41290859

2008-09 31551.47

2067.45

15.26106

2007-08 30210.8

1365.84

22.11884

Average of 2009-10, 2008-09 & 2007-08 18.59760237

Interpretation:


15.99463669 18.59760237 0.76

Higher the ratio the better it is. The current value ratio is much higher than industry average & higher

than the last three years’ average

15.Gross Profit Margin :- Gross Profit

Net sales

This is also known as gross margin. This ratio is the result of the relationship between prices, sales

volume and costs.

Year Calculation of Gross Profit Gross Profit Margin

2010-11 51558.25

130543.86

0.394949636

2009-10 41712.86

92928.25

0.448871683

2008-09 56118.73

119056

0.471364

2007-08 45248.96

103318.5

0.437956

Average of 2009-10, 2008-09 & 2007-08 0.45273065

Interpretation:-


0.394949636 0.45273065 0.31

Company gross profit ratio has decreased when compared to the previous three years. So the company

has not performed very well this year. But comparing with the industry average company’

16. Operating Profit Ratio :- Operating Profit

Net sales

It measures the profit generated after consideration of cost of products sold.

Year Calculation of Operating Profit Operating Profit %

2010-11 50735.73

130543.86

0.388646

2009-10 40970.03

92928.25

0.440878

2008-09 55230.3

119056

0.463902

2007-08 44424.75

103318.5

0.429979

Average of 2009-10, 2008-09 & 2007-08 0.444919568

Interpretation:-


0.388646 0.444919568 0.36

The operating profit margin in the year 2010-11 has gone down when compared to the previous three

years but it is quite high when compared with the industry average.

17.Net Profit Margin= Net Profit X 100

Net Sales

It measures profit generated after consideration of all expenses and revenues.

Year Calculation of Net Profit Margin Net Profit Margin

2010-11 43556.61 X 100 33.3654%

130543.86

2009-10 34420.46 X 100

92928.25

37.0398%

2008-09 42445.57 X100

119056

35.6518%

2007-08 35355.52 X 100

103318.5

34.219%

Average of 2009-10, 2008-09 & 2007-08 35.6371%

Interpretation:-


33.3654% 35.6371% 26%

The higher the net profit margin, the better it is. The net profit margin of the company is higher than

the industry but it has gone down a little when compared to the previous three years.

18. Cash Flow margin:- Cash flow from operating activities

Net sales

This ratio tells that how much cash profit has been earned by the company by selling the goods. This

ratio is very important to know the short run liquidity and solvency position of the company.

Year Calculation of Cash flow margin Cash flow margin %

2010-11 32595.79 *100

130543.86

24.96922%

2009-10 36767.08*100

92928.25

39.56501%

2008-09 31551.47*100

119056

26.5014%

2007-08 30210.8*100

103318.5

29.2405%

Average of 2009-10,2008-09 & 2007-08 31.76895%

Interpretation


24.96922% 31.76895% 8%

The cash flow margin has gone down when compared to the previous three years. This is because the

company has less liquid cash in the current year and this is evident from the cash liquidity ratio.

19. Return on investment = Net earnings

Total assets

This profitability ratio tells the relationship between net profits and assets. The return on investment

may also be called profit-to-asset ratio. This ratio told that how much company is earning by investing

that much amount in assets.

Year Calculation of Return on investment Return on

investment

2010-11 43556.61*100

230813.24

24.9692%

2009-10 34420.46*100

188649.44

39.565%

2008-09 42445.57*100

157350.7

26.5014%

2007-08 35355.52*100

119565.8

29.5699%

Average of 2009-10, 2008-09 & 2007-08 24.9302%

Interpretation


24.9692% 24.9302% 15%

The return on investment has gone up slightly when compared with the previous three years and it is

also higher than the industry average.

20. Return on Stockholder’s equity:- Net earnings

Stockholder equity

This ratio tells the profitability is measured by dividing the net profits after taxes by the shareholders

equity. This ratio reveals how profitably the owner’s funds have been utilized by the firm.

Year Calculation of Return on equity Return on equity

2010-11 43556.61*100

48008.69

23.8269%

2009-10 34420.46*100

34441.93

22.3209%

2008-09 42445.57*100

31171.89

33.639%

2007-08 35355.52*100

32167.2

40.45317%

Average of 2009-10, 2008-09 & 2007-08 32.1377%

Interpretation:-


23.8269% 32.1377% 29%

The return on equity has decreased when compared to the previous three years and it is also lower

than the industry average. There is low return on the shareholder’s investments.

21. Cash return on assets:- Cash flow from operating activities

Total assets

This ratio explains that how much company has cash profit by having that much amount of total

assets. This ratio is very important for long run because it shows the cash position of the company

which helps to interpret the solvency position in the long run.

Year Calculation of Cash Return on asset Cash Return on asset

2010-11 32595.79

230818.24

0.141221491

2009-10 36767.08

188649.44

0.194896311

2008-09 31551.47

157530.7

0.200517

2007-08 30210.8

119565.8

0.252671

Average of 2007-08,2008-09 & 2009-10 0.216028

Interpretation:-


0.141221491 0.216028 4.26

The higher the cash return on assets, the better it is. The company’s cash return on assets has

decreased when compared to the past three years.

22. Earnings per share:- Amount available for equity share holders

Number of equity shares

This is a widely used ratio. This ratio measures the profit available to equity shareholders on a per

share basis, that is, the amount that they can get on every share held. It is calculated by dividing the

profits available to the equity shareholder by the number of outstanding shares.

Year Calculation of Earnings per share Earnings per

share(Rs)

2010-11 43556.61*100000

132595110

32.84933358

2009-10 34420.56*100000

132144145

26.04766182

2008-09 42445.57*100000

65000000

65.30088

2007-08 35355.52*100000

65000000

54.39311

Average of 2009-10, 2008-09 & 2007-078 48.58054881

Interpretation:-


32.84933358 48.58054881 16.15

Earnings per share are the ratio of profit available for equity share holder by the number of equity

shares. Company’s EPS has gone down when compared with the previous three years and is high

compared to the company average.

23. Price to earnings:- Market price of the share

EPS

This is closely related to the earnings yield/earnings ratio. It is actually the reciprocal of the latter.

This ratio reflects the price currently being paid by the market for each rupee of currently reported

EPS. In other words, the P/E ratio measures investors’ expectations and the market appraisal of the

performance of a firm. This ratio is popularly used by security analysts to assess a firm’s performance

as expected by the investors.

Year Calculation of price to earning Price to earning

2010-11 675.9

32.8493

20.575

2009-10 662.45 25.4322

26.047

2008-09 476.8

65.3008

7.30158

2007-08 634.5

54.393

11.66508

Average of 2009-10, 2007-08 & 2008-09 14.799

Interpretation:-


20.575 14.799 30.72

Price earning ratio shows how much investors are willing to pay. It is the ratio of market price

by earning per share. The higher the ratio, the better it is. Here, there is a increase in price earnings

ratio when compared to the previous years. But compared to the industry average it is low.

24. Dividend Pay-out ratio = Dividend per share X 100

EPS

It measures the relationship between the earnings belonging to the shareholder and dividend paid to

them. In other words, the D/P ratio shows what percentage share of the net profits after taxes and

preference dividend is paid out as dividend to equity shareholders.

Year Calculation of dividend pay-out ratio Dividend pay-out

ratio

2010-11 10 X 100

32.8493

30.442%

2009-10 6 X 100

26.047 23.03%

2008-09 6 X 100

65.3008

9.18%

2007-08 4 X 100

54.39311

7.35%

Average of 2008-09,2009-10 & 2007-08 13.19%

Interpretation:-


30.442% 13.19% 22%

Dividend Payout Ratio shows, how much percentage the company is paying on the basis of its

earning. The dividend payout ratio of the company is very high when compared with the industry

average and is also better than the past three years. This will lead to the better loyalty of the

shareholders but the company has to consider using these funds for the reinvestments

.

25. Dividend yield ratio = Dividend per share X 100

Market value per share

This ratio is closely related to DPS. While the DPS are based on book value per share, the yield is

expressed in terms of market value per share.

Year Calculation of dividend yield ratio Dividend yield ratio

2010-11 10 X 100

675.9

1.479%

2009-10 6 X 100

662.45

0.9057%

2008-09 6 X 100

476.8

1.258%

2007-08 4 X 100

634.5

0.6304%

Average of 2009-10, 2008-09 & 2007-08 0.9315%

Interpretation:-


1.479% 0.9315% 1%

Dividend Yield Ratio shows, how much percentage of dividend per share the company is paying in

comparison to its market price. The higher the percentage, better it is for the investors. The percentage

has increased compared to the average of the previous three years. Also it is quite high with respect to

the industry.

COMPARATIVE ANALYSIS

Comparison of current year ratios with average performance of previous three years

Ratio 2011 Average of last 3 years Score

CURRENT RATIO 2.477356 3.141697275 -1

QUICK RATIO 1.126882 1.426259367 1

CASH FLOW LIQUIDITY 0.834464 1.523361149 -1

AVERAGE COLLECTION PERIOD 110.4289 84.8952116 -1

ACCOUNTS RECIEVABLE

TURNOVER 3.305294 4.328590144 -1

INVENTORY TURNOVER 2.403833 2.897667098 -1

FIXED ASSET TURNOVER 2.213626 1.891447528 1

TOTAL ASSETS TURNOVER RATIO 0.565582 0.704446619 -1

DEBT RATIO 0.207998 0.21656969 1

LONG TERM DEBT TO TOTAL

CAPITALIZATION 0.746172 0.852268457 1

DEBT TO EQUITY 0.262623 0.279481646 1

TIMES INTEREST EARNED 376.7971 96.46704206 1

FIXED CHARGE COVERAGE 269.2273 85.23536267 1

CASH FLOW ADEQUACY 15.99464 18.59760237 -1

GROSS PROFIT MARGIN 0.39495 0.45273065 -1

OPERATING PROFIT MARGIN 0.388649 0.444919568 -1

NET PROFIT MARGIN 0.333655 0.356371772 -1

CASH FLOW MARGIN 0.249692 0.317689502 1

ROI 0.188709 0.249302645 -1

ROE 0.238269 0.321377603 -1

CASH RETURN ON ASSETS 0.141221 0.216028032 -1

EARNINGS PER COMMON SHARE 32.84933 48.58054881 -1

PRICE TO EARNINGS 20.57576 14.79963083 1

DIVIDEND PAYOUT 0.30442 0.131922693 1

DIVIDEND YIELD 0.014795 0.009315119 1

Net score -3

Note: If the ratio shows a favorable change as compared to average performance of past three years,

the score of that particular ratio is +1. If the change is unfavorable, the ratio gets a -1.

Comparison of current year ratios with the industry average

Ratio 2011 Industry average Score

CURRENT RATIO 2.477356 1.50 1

QUICK RATIO 1.126882 0.90 1

CASH FLOW LIQUIDITY 0.834464 0.20 1

AVERAGE COLLECTION PERIOD 110.4289 141.00 1

ACCOUNTS RECIEVABLE

TURNOVER 3.305294 2.59 1

INVENTORY TURNOVER 2.403833 4.41 -1

FIXED ASSET TURNOVER 2.213626 2.54 -1

TOTAL ASSETS TURNOVER RATIO 0.565582 0.57 -1

DEBT RATIO 0.207998 0.49 1

LONG TERM DEBT TO TOTAL

CAPITALIZATION 0.746172 0.53 -1

DEBT TO EQUITY 0.262623 0.50 -1

TIMES INTEREST EARNED 376.7971 7.20 1

FIXED CHARGE COVERAGE 269.2273 144.02 1

CASH FLOW ADEQUACY 15.99464 0.76 1

GROSS PROFIT MARGIN 0.39495 0.31 1

OPERATING PROFIT MARGIN 0.388649 0.36 1

NET PROFIT MARGIN 0.333655 0.26 1

CASH FLOW MARGIN 0.249692 0.08 1

ROI 0.188709 0.15 1

ROE 0.238269 0.29 -1

CASH RETURN ON ASSETS 0.141221 4.26 -1

EARNINGS PER COMMON SHARE 32.84933 16.15 1

PRICE TO EARNINGS 20.57576 30.72 1

DIVIDEND PAYOUT 0.30442 0.22 1

DIVIDEND YIELD 0.014795 0.01 1

Net score 9

Note: If the ratio shows a favourable change as compared to industry average, the score of that

particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

IF SOMEBODY HAS TO INVEST, WHICH COMPANY AND WHY?

Results of comparison with industry averages

Divi’s

laboratories

Anu’s

laboratories

Return on Investment 1 -1

Return on Equity -1 -1

Dividend payout Ratio 1 -

Earnings per common share 1 -1

We infer from the above table that Divi’s laboratories is performing well compared to Anu’s

laboratories hence it would be advisable to invest only in Divi’s laboratories. Although the return on

equity is low compared to the industry average, as seen the company is performing well regard to

other ratios we can expect that the company’s return on equity may improve in future. As shown

clearly the performance of Anu’s laboratories is poor in all ratios it is not advisable to invest in the

company

IF SOMEBODY HAS TO LEND, WHICH COMPANY WOULD HE LEND AND WHY?

Results of comparison with previous years’

Divi’s

laboratories

Anu’s

laboratories

Debt to Equity 1 1

Times interest earned 1 -1

Fixed charge coverage 1 -1

Cash flow adequacy -1 -1

The debt-equity ratio is favorable in both the companies but when comparing the ratios Divi’s

laboratories has better performance when compared to Anu’s laboratories, it would influence the

lender to lend the loan to Divi’s laboratories, rather than Anu’s laboratories.

ANALYSIS OF GOC AND NOC

Divi’s laboratories

YEARS 2010-11 2009-10 2008-09 2007-08

GOC(in days) 40.44462 27.63752 24.76941 14.58577

NOC(in days) 35.83315 23.05418 21.6295 11.2373

The GOC and NOC values are continuously increasing over the year indicating that the

company requires more time to convert its sales to cash. The debt conversion cycle is consequently

increasing. This is an indication of poor performance of the company in terms of credit management

as well as inventory management

Anu’s laboratories

YEARS 2010-11 2009-10 2008-09 2007-08

GOC(in days) 7.994412 11.72771 15.11399 9.966986

NOC(in days) 7.174945 9.441557 12.69496 8.281791

The GOC and NOC of the Anus’s laboratories is low compared to the previous years. This depicts

improvement in the company’s debt conversion cycle. The sales are getting converted into cash

comparatively at a faster rate.

Conclusion

The entire analysis has been performed on both the companies and the required ratios have been

calculated with regard to the last 3 years average and all the industry average. A score of +1 has been

awarded for the ratios that have met the criteria and a score of -1 for the ratios that has failed to meet

the criteria. Based on the analysis it has been recommended to the investor to invest in Divi’s

laboratories. Also the company is considered safe to lend money compared to Anu’s laboratories. But

the GOC and NOC of Anu’s laboratories is decreasing by year showing better debt conversion cycle.

Whereas for Divi’s laboratories it is continuously increasing which is not advisory.

Date post:	15-Jan-2015
Category:	Economy & Finance
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Ratio Analysis

Economy & Finance