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PROJECT REPORT
Submitted for the Degree of B.Com Honours in
Accounting & Finance under the University of Calcutta
Ratio Analysis
Submitted By,
AKASHDEEP CHAKRABORTY
C.U. Registration No. :
C.U. Roll No. :
Name of the College: Prafulla Chandra College
Supervised By,
Prof. A. Roy
2015-16
CONTENTS
SL
TOPICS PAGE NO.
NO.
Annexure I
Annexure II
1. Introduction
1.1 Background
1.2 Review of Literature
1.3 Objectives of the study
1.4 Database & Methodology
1.5 Limitations of the study
1.6 Chapter planning
2. Conceptual Framework-Elements of Financial Statements
2.1 Ratio Analysis
2.2 Importance of Financial Statement Analysis
2.3 Features of Financial Statement Analysis
2.4 Financial Statement Functions
3. Data Analysis & Interpretations
3.A Sun Pharmaceuticals Industries Limited
3.A.1 Company Profile
3.A.2 Data Analysis
3.B Cipla Pharmaceuticals Industries Limited
3.B.1 Company Profile
3.B.2 Data Analysis
3.C Data Comparisons & Interpretations
4. Conclusions & Recommendations
4.1 Conclusions
4.2 Recommendations
5. Bibliography
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Annexure - 1:
Supervisors Certificate
This is to certify that Mr. AKASHDEEP CHAKRABORTY a student of B. Com. Honours in
Accounting & Finance of PRAFULLA CHANDRA COLLEGE under the University of Calcutta
has prepared a Project Report with the title Ratio Analysis.
My Contribution however, was mainly in the form of general guidance and discussion.
Place: Signature:
Date: Name:
Designation:
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Annexure 2 :
Students declaration
I hereby declare that the Project Work with the title RATIO ANLYSIS submitted by me for
the partial fulfillment of the degree of B. Com. Honours in Accounting & Finance under the
University of Calcutta is my original work and has not been submitted earlier to any other
University or Institution for the fulfillment of the requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been incorporated in this
report from any earlier work done by others or by me. However, extracts of any literature which
has been used for this report has been duly acknowledged providing details of such literature in
the references.
Date:
Address:
C. U. Registration No.:
C. U. Roll No.:
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1. Introduction
1.1 Background of the study:
Abstracted report is based on the study of annual reports of Cipla Limited and Sun
Pharmaceutical Industries Limited for the five years from 2003-2004 to 2007-
2008.
The main objective of this study was to apply the concepts learned as a part of this
course and understand the business, financial health and the reporting practices
followed by these companies. As a part of this report we have tried to analyze the
current and past performance trends for the company and predict the future
performance and stock prices of the company. To achieve this we have analyzed
Revenue Trends, Profitability, Liquidity, Debts, Stocks, Cash Flows and provided
a summary at the end of the report.
The scope of the report is limited to our understanding of the Financial Statements
based on the current course. The report has to be seen in its completeness along
with the excel worksheet containing the past five years financial data of the two
firms and various ratios.
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1.2 Review of Literature:
Review of Literature refers to the collection of the results of the various researches
relating to the present study. It takes into consideration the research of the previous
researchers which are related to the present research in any way. Here are the
reviews of the previous researches related with the present study:
Bollen (1999)
Cooper (2000)
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Maria Zain ( 2008)
In this articles he discuss about the return on assets is an important percentage that
shows the companys ability to use its assets to generate income. He said that a
high percentage indicates that companys is doing a good utilizing the companys
assets to generate income. He notices that the following formula is one method of
calculating the return on assets percentage. Return on Assets = Net Profit/Total
Assets. The net profit figure that should be used is the amount of income after all
expenses, including taxes. He enounce that the low percentage could mean that the
company may have difficulties meeting its debt obligations. He also short explains
about the profit margin ratio Operating Performance .He pronounces that the
profit margin ratio is expressed as a percentage that shows the relationship between
sales and profits. It is sometimes called the operating performance ratio because
its a good indication of operating efficiencies. The following is the formula for
calculating the profit margin. Profit Margin = Net Profit/Net Sales.
In this article he barfly express about the liquidity ratio. He Pronounce that it is
analysis of the financial statements is used to measure company performance. It
also analyses of the income statement and balance sheet. Investors and lending
institutions will often use ratio analyses of the financial statements to determine a
11 companys profitability and liquidity. If the ratios indicate poor performance,
investors may be reluctant to invest. Therefore, the current ratio or working capital
ratio, measures current assets against current liabilities. The current ratio measures
the companys ability to pay back its short-term debt obligations with its current
assets. He thinks a higher ratio indicates the company is better equipped to pay off
short-term debt with current assets. Wherefore, the acid test ratio or quick ratio,
measures quick assets against current liabilities. Quick assets are considered assets
that can be quickly converted into cash. Generally they are current assets less
inventory.
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Gopinathan Thachappilly (2009),
In this articles he discuss about the Financial Ratio Analysis for Performance
evaluation. It analysis is typically done to make sense of the massive amount of
numbers presented in company financial statements. It helps evaluate the
performance of a company, so that investors can decide whether to invest in that
company. Here we are looking at the different ratio categories in separate articles
on different aspects of performance such as profitability ratios, liquidity ratios,
debt ratios, performance ratios, investment evaluation ratios.
In this study howfar the capital markets in India were competitive. Their study
examined the decisions about internal and external finance as interrelated and
consequent upon a choice of the structure of current and fixed assets. Secondly,
they analyzed the earnings pattern of different types of funds to see if the
competitiveness hypothesis can sustain. They concluded that a firms ability to
borrow was constrained by the rise associated with the proportion of debt in the
capital structure. If the ratio was high then internal funds improved the firms
ability to borrow. Similarly if the financial leverage (Debt or equity ratio) was
lower than the institutionally determined leverage. The borrowing was facilitated.
But if the leverage was the institutionally determined maximum then borrowing
was inhibited.
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Vasanthamani (1982)
Rajeswary (1990)
Parvathi (1990)
In her Financial Performance Analysis Hindustan Photos Films Ooty for the year
1990-1996, concluded that the gross profit has shown as increasing trends, long
term solvency of the company, debt equity ratio was not satisfactory.
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1.3 Objective of the study:
The specific objectives of the study are as follows:
To understand the concept of financial statement analysis.
To understand the theoritical aspect of liquidity and profitibility.
To analyze the liquidity of the medical companies.
To analyze the profitibility of the medical companies.
To disclose to the extent possible other information related to the financial
statements users
Financial statement analysis shows the current position of the firm in terms of
the types of assets owned by a business firm and the different liabilities due
against the enterprise.
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Assessment of the operational efficiency
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Methodology
The research methodology for the secondary research undertaken has been
provided as using qualitative as well as quantitative approaches.
The analysis and findings selection highlights the result of the secondary study
while a discussion and the conclusion section provides a comprehensive analysis of
the literature review for the purpose of the project. Conclusively the
recommendation for proper development in the Pharmaceutical Industry had been
provided along with the limitation of the current research can be undertaken to the
research mode comprehensive.
Here we use the annual reports of the Pharmaceutical Industry for the collection,
classification and comparison of relevant data. On this study, different chart, ratio
analysis are performed .It is to be noted that Microsoft Office 2007 is used to
complete the entire database.
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Not useful for planning
Qualitative aspects
Wrong judgment
The skills used in the analysis without adequate knowledge of the subject
matter may lead to negative direction. Similarly, biased attitude of the analyst may
also lead to wrong judgment and conclusion.
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2. Conceptual Framework-Elements of Financial Statements
2.1 Ratio Analysis
A ratio analysis is a quantitative analysis of information contained in a
companys financial statements. Ratio analysis is based on line items in
financial statements like the balance sheet, income statement and cash flow
statement; the ratios of one item or a combination of items - to another item
or combination are then calculated. Ratio analysis is used to evaluate various
aspects of a companys operating and financial performance such as its
efficiency, liquidity, profitability and solvency. The trend of these ratios over
time is studied to check whether they are improving or deteriorating. Ratios
are also compared across different companies in the same sector to see how
they stack up, and to get an idea of comparative valuations. Ratio analysis is a
cornerstone of fundamental analysis.
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2.2 Importance of financial statement analysis:
Liquidity
The balance sheet provides liquidity rations that show how much monetary worth
the company has on a given day, which helps determine if the firms financial
reliability. The current ratio shows the 'working capital' relationship of current
assets available to meet the company's current obligations, reports Credit Guru.
The quick ratio is similar, calculating those assets easily convertible into cash,
determining the immediate working capital relationship. The debt to equity ratio
establishes who owns more of the company, creditors or shareholders.
Efficiency
Efficiency ratios measure how efficiently the company turns inventory into
revenue. The day sales outstanding ratio focuses on the time required to turn
inventory into cash and the age of your accounts receivable. The inventory
turnover ratio indicated the rapidity with which the company is able to move its
merchandise, reports Credit Guru. Accounts payable to sales shows the
percentage of sales funded with supplier's money.
Profitability
Profitability ratios reveal a firm's success at generating profits. The profit margin
of a company determines its ability to withstand competition and adverse
conditions, reports Credit Guru. Return on assets, reveals the profits earned for
each dollar of assets and measures the company's efficiency at creating profit
returns on assets. Net worth focuses on financial returns generated by the owner's
invested capital.
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Limits
It is important to know that financial statement analysis has limits; simply
manipulating numbers hides the actual state of the company. Different accounting
methods will look different on paper, and the method a particular firm uses can
change the visible health and profit levels for either better or worse. Quantitative
financial analysis is an art, and different analysts may get slightly different results
from the same information, or may return different data about the same business.
Financial statements should reveal all things and should not leave out
anything which materially affects the decision of the person who is reading
that financial statements and then taking decision regarding the company.
For example prospective shareholders will look financial statements before
investing into the company.
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2.4 Financial Statement Functions:
A financial statement summarizes key information about the financial health,
success, and profitability about a particular company. The financial figures in a
financial statement also provide a measure of the success or failure of its current
management and business strategies. Financial statements are generally divided
into four distinct parts: a balance sheet, income statement, statement of stockholder
equity, and statement of cash flows.
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3. Data Analysis and Interpretations
A. Sun Pharmaceutical Industries Limited
3.A.1 Company Profile:
Sun Pharmaceutical Industries Limited is an India-based generic and
pharmaceutical company. The Company's business segments include US Business,
which includes Western Europe, Canada, Australia, New Zealand and Other
Markets; Indian Branded Generics Business, including Global Consumer
Healthcare Business, and Emerging Markets, which include Active Pharmaceutical
Ingredients (APIs). The Company's manufacturing operations are focused on
producing generics, branded generics, specialty products, over-the-counter
products, anti-retroviral and active pharmaceutical ingredients (APIs). The
Company caters various therapy areas, such as dermatology, psychiatry, neurology,
cardiology, nephrology, gastroenterology, orthopedics and ophthalmology. It also
produces a range of dosage forms, including tablets, capsules, injectable,
ointments, creams and liquids. The Company also manufactures various specialty
APIs, including controlled substances, steroids, peptides and anti-cancer products.
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3.A.2 Data Analysis:
Operating Profit Ratio: The profit earned from a firms normal core business
operations. This value does not include any profit earned from the firms
investments (such as earnings from firms in which the company has partrial
interest) and the effects of interest and taxes.
Particulars 31st March 2013 31st March 2014 31st March 2015
Operating Profit
19.86 -91.72 -11.85
Ratio
Gross Profit Ratio: Gross profit is a companys residual profit after selling a
Product or service and deducting the cost associated with its production and Sale.
Gross Profit Ratio= (Gross Profit/Net Sales) x100
(Amount in Rs. Millions)
Particulars 31st March 2013 31st March 2014 31st March 2015
Gross Profit
22.33 2.48 (18.94)
Ratio
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Net Profit: Net Profit ratio is a popular profitability ratio that shows relationship
between net profit after tax and net sales. It is computed by dividing the net profit
(after tax) by net sales.
Net Profit Ratio = (Net Profit/Sales) x 100
Particulars 31st March 2013 31st March 2014 31st March 2015
Net Profit
17.40 (94.07) (17.91)
Ratio
Debt Equity Ratio: It is the ratio between long term debt and shareholders fund.
Long term debt include debentures, loan from financial institutions etc.
shareholders fund include equity and preference share capital + reserve and
surplus-fictitious asset (debit balance of profit and loss account or discount on
issue of shares)
Debt Equity Ratio= Debt/Shareholder Fund
Particulars 31st March 2013 31st March 2014 31st March 2015
Debt-Equity
4.48 2.24 565.04
Ratio
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