1.

1 BACKGROUND OF STUDTY:

Financial Management is that managerial activity which is concerned with the planning

and controlling of the firm’s financial resources. Though it was a branch of economics till 1890

as a separate or discipline it is of recent origin.

Financial Management is concerned with the duties of the finance manager in a business

firm. He performs such varied tasks as budgeting, financial forecasting, cash management, credit

administration, investment analysis and funds procurement. The recent trend towards

globalization of business activity has created new demands and opportunities in managerial

finance.

Financial performance is a study of relationship among the various financial factors in a

business as disclosed by a single set of statements. It is a process of evaluating the relationship

between component parts of a financial statement to obtain a better understanding of a firm’s

position and performance.

Financial performance is an important aspect which influences the long term stability,

profitability and liquidity of an organization. Usually, financial ratios are said to be the

parameters of the financial performance

Financial statements are prepared and presented for the external users of accounting

information. As these statements are used by investors and financial analysts to examine the

firm’s performance in order to make investment decisions, they should be prepared very

carefully and contain as much investment decisions; they should be prepared very carefully and
contain as much information as possible. Preparation of the financial statement is the

responsibility of top management. The financial statements are generally prepared from the

accounting records maintained by the firm.

Measuring the results of a firm’s policies and operations in monetary terms. These results

are reflected in the firm’s return on investment, return on assets, value added, etc. Every

management aims to utilize its funds in a best possible and profitable way and it includes some

important steps like

 Financial planning

 Proper use & allocation of funds

 Taking sound financial decisions

 Improving profitability through financial controls

A commonly used tool of financial analysis is ratio analysis since it makes related

information comparable and, hence, more meaningful, relevant and useful. Ratio analysis in its

many forms is an essential toolkit for analytically oriented persons of any viewpoint, as they

evaluate the financial/economic performance and outlook of any business. In order to judge how

well a business firm has performed, it is imperative that its performance (as shown by the ratio

analysis) is compared. The objective of this analysis is to identify the strengths and weaknesses

of a firm. It is an important diagnostic tool to pinpoint the grey areas, which require corrective

action. There are three types of comparisons involved in the ratio analysis historical or trend ratio

comparison, external/inter-firm comparison (benchmarking) and comparison with firm’s own set

standards or plan

The reliability of ratios depends, to a great extent, upon the quality of data on which they
are based; the ratios are as good or as bad as the data itself and financial ratios should be used

with caution. Notwithstanding the limitations of ratio analysis, it is widely reckoned as a caution.

Notwithstanding the limitations of ratio analysis, it is widely reckoned as an important tool of

financial analysis.

1.2 Statement of the problem:

All the end users of the economic information and their decisions related to investment and

financing decision are completed based on the financial performance of the firm. As the financial

position of the firm is a base for investors and other stakeholders and financial performance acts

as an index for further analysis of the firm’s performance. The current study mainly focuses on

evaluating the financial performance of the firm by using financial statements and the study

report will sure as a base for analyzing the financial position of the firm.

1.3 OBJECTIVES OF THE STUDY

 To evaluate the financial performance of Hetero drugs

 To identify the key factors affecting the profitability

 To identify the financial strengths and weaknesses of the firm.

1.4 Significance of the study ::

Analysis of financial statements is an attempt to measure the enterprise liquidity,

profitability solvency and other indicators to. Assess its efficiency and performance. Analysis

of financial statements is linked with he objective and interest of the individual agency
 involved. Some of the agencies interested in the enterprise include investors, bankers,

lenders, suppliers, customers, employees, management and regulatory authorities like, tax

authorities, stock exchanges, Company Law Board. Many of these agencies have diverse and

conflicting interests.

1. Investor

2. Bankers and lenders:

3. Suppliers

4. Employees

5. Management:

1.5. LIMITATIONS OF THE STUDY:

1. Financial performance is done for a limited period of time of Hetero drugs – 2014 – 2018 (5
years) .
2. Ratios are only indicators and they cannot be measured by any means.
3. Some ratios are open for manipulation and need to be interpreted with care
4. It may lack some complete and accurate information due to some confidential matters of the
company.

1.6 ORGANIZATION OF THE STUDY:

CHAPETR – 2

2.1 Company Profile:

Today HETRO DRUGS LIMITED is a name, epitomizes hard work, experience and
success.
 A relatively young company that is making its presence felt and making rapid progress
nationally and internationally.

Involved in the manufacturing of active pharmaceutical ingredients and finished dosage

forms, Hetero is one of its kinds of the very few companies, which have been able to crave a
niche in the pharmaceutical industry, given the present scenario where it requires a right blend of
intellectual strength, core competencies and a precise foresight for the future.

Hetero has come a long way since its inception in the year 1993 to be recognized as a
strong player in the field of pharmaceutical, as a result of its combined strength in research,
manufacture and marking.

Established in the year 1993, with the motto to be the best in the API manufacturing,
Hetero today embodies the vision of a top notch player in developing and commercializing
products catering to a variety of therapeutic categories, Integrating into a leading finished dosage
manufacturer.

True to the statement, “ Where the Future Started Yesterday”, with a foresight on the
current trends in the pharmaceutical Market, Hetero has grown from strength to strength,
combining its Research strengths, Manufacturing capabilities, and Human Resources and well
established quality management system.

With full-fledged marketing capabilities, the company has been able to market its
products in over 80 countries in Asia, Middle East, Eastern Europe and Latin America. With its
compliance to the most stringent requirements, Hetero has today gained foothold to market
several of its APIs in the United States, Canada and Europe.

With all nine manufacturing facilities supported by excellent infrastructure and

compliance to the GMP requirements, Hetero has crossed numerous milestones in a
comparatively short period since its inception.
 HETERO GROUP

 HETERO DRUGS LIMETED

 HETERO LABS
 HETERO RESEARCH FOUNDATION
 SYMED LABS
 GENX PHARMA
 HETERO HELTH CARE

FOUNDER

The spirit and brain behind the story of hetero is its founder Dr. BPS Reddy, a scientist
who started the company drawing immense from the vast and rich experience he gained during
his stint laboratory where he was instrument in developing and commercializing processes of
several APIs.

The company was started by him with a vision to be recognized as an aggressive

company the combines its strength of R&D and manufacturing with definite advantages in terms
of cost and chemistry with a strong emphasis on quality of products.

The untiring efforts of the chairman saw hetero develop process for several products at
relatively low cost, thus making it possible for several life saving drugs to be available at
affordable prices meeting all the regulatory and quality norms.

With the organization having reached a point where it is identified among the widely
recognized companies the chairman is now focusing on given new dimensions to the company in
terms of exploring possibilities of further growth, exploring new horizons in the field of
pharmaceutical development and evolving strategies to take the company to greater heights.

MILESTONES/AWARDS
The company has been scaling New Heights on a conditional basis. These Achievements have
been the result of concerted efforts on the part of different functions with in the organization to
achieve the organizational goal of being a leader.

In its path to success. Hetero has seen many a milestone being crossed and achieved
many awards on various fronts. Awards for exemplary work in R&D and marketing are just a
few name.

A track of few events that saw hetero reaching its Zenith of glory are:

 National Award for best efforts in Research And Development from the department of
scientific and Industrial Research Ministry of Science and Technology Government of
India, in the year 1996.
 Highest Exporter award (for the year 1999) against stiff competition from internationally
recognized domestic competitors.
 Approval of the API facilities by USFDA for compliance to CGMP norms
Approval of the finished dosage facilities by WHO for the supply of Anti-retroviral
drugs.

VISION&VALUES

Hetero visualizes itself as an aggressive player in the global pharmaceutical scenario, supplying
generics developed, combining intellectual property, research strengths and strong human
resource input.

The company values the concept of having social responsibilities in the courser of its
assent to greater heights. It strongly believes in focusing on customer requirements and
delivering the products at the right pace.

Hetero considers its human resources as the core of all its capabilities and believes in
tapping and honing the talents of its members to reach the zenith of success.It believes in
continuous evaluation and improvement in all the factors that contribute in transforming the
organization into a global force to reckon with.
 Hetero takes due cognizance to the fact that the processes that it develops should be all
eco-friendly and should not result in and consequence that harms the ecological harmony.

MISSION

Hetero’s mission is to be a globally acclaimed pharmaceutical company, meeting the

requirements of healthcare imbibing the philosophy of both commercial and social concerns,
driven by research and manufacturing capabilities.

Hetero API Facilities are designed to meet the best of global standards for an API
Facility.

These states-of-the-art facilities cater to the growing demand of manufacturing a large

spectrum of APIS.

Hetero’s production muscle stems from its endeavors to install plant, equipment, systems
and personnel that portray the best in the Indian pharmaceutical industry. Professional teams
equipped with cutting-edge technology come together in developing, commercializing and
delivering latest intermediate and active pharmaceutical ingredients across the globe.

Hetero’s state-of-the-art plant, which conforms to stringent CGMP guidelines, facilitates

pilot and large-scale production. This has enabled it to deliver a wide range of APIs of
international standard and intermediate chemicals for diverse healthcare applications.
FINISHED DOSAGES

The finished dosage flagellates of Hetero are designed to match the best globally.

The facilities house the best of the equipment in terms of design and capacity. The
approval by several regulatory authorities and the approval by WHO, Geneva stands a testimony
of the fast that serious efforts are made to ensure that every activity being taken up in these
facilities are in compliance with the requirements in terms of quality and integrity of the products
being manufactured.

HETEROGROUP-HUMAN RESOURCES
Hetero attributes its success to the contribution of a dedicated team of Scientists,
Chemists, Analysts and Engineers, whose skills are honed through constant training. The
contribution of these professionals has helped Hetero soar newer heights.
The strength of Hetero in terms of its manpower is as follows
Scientists : 25
Research and Development Chemists : 60
Manufacturing Chemists and Engineers : 565
Quality Control/Assurance Professionals : 100
Marketing, Domestic and Global : 250
Total Strength : 1000
MANUFACTURING CAPABILITIES

Type of Reactors Glass, Glass-Lined and Stainless Steel

Reactors sizes 250-10,000 LTR Commercial Plant

 5-250 LTR Pilot Plant

Total Reactor Volume 1000 kilo liter

Temperature Range -800 c to 3000 c

Pressure Range Up to 50 KG/CM2

Analytical Strength of Hetero Group

1. HPLCs (with PDA facility)

2. GCs (with Head space facility)

3. Infer Red Spectrophotometers

4. Ultra violet Spectrophotometers

5. Particle size analyzer

6. Digital polar meters

7. Differential Scanning Calorimeters

8. P-XRD

9. NMR

10. GCMS

11. LCMSMS

QUALITY

The approval of hetero’s API facility by USFDA and finished dosage facility buy WHO
bear a testimony to this fact.
 All the activities at Hetero right from the receipt of raw materials to dispatch of the
finished products are carried out in accordance to a well-oiled quality management system. The
importance of having a strong quality based system has been recognized by the organization due
to which every individual in each department understands his/her responsibilities and carries
them out with utmost care avoiding any confusion, thus delivering the best results.

In addition, talking about quality of the product itself, the company has evolved the
systems to implement GMP’s in the manufacture of the product to protect the safety, quality and
integrity. The approval of Hetero’s API Facility by USFDS and Finished Dosage Facility by
WHO bear a testimony to this fact.

QUALITY ACCRTDITTONS
 Quality of products and organization as a whole.
 Quality Systems in every department-R&D to Marketing.
 ISO 9002 Certification for Manufacturing and Marketing of APIs.
 CGMP and WHO certification for the APIs.
 US FDA Approved Manufacturing Facility.
 Corporation Analytical Research Wing for establishing in house specifications.
RESEARCHES AND DEVELOPMENT

Hetero’s emphasis has always been on Research and Development. The emphasis was to
ensure that the processes being adopted for the products are cost effective, safe to handle and
with optimum advantage in terms of yield and quality.

Having laid solid foundation towards the end heteros R&D approach has also taken
cognizance of the present scenario where stringent patent regime is under implementation
hetero’s team of scientists has been and is involved in developing non-in fringing process for its
products. With its ability to explore new heights and achieve the best hetero has been able to file
patents for several of its processes.

From an organization, which was concentrating on developing processes for API’s Hetero,
now a full-fledged R&D facility for formulation development.

Hetero research capabilities have been proven with its ability to carry out a wide range of
reactions, which are difficult to carry out.

Given its research capabilities, Hetero has today initiated contract research. Towards the
end, the company has already evolved its strategies and is into discussions with renowned
companies for carrying out the contract research. Custom synthesis is one area where the
company has been concentrating on and is initiating work on several projects.

In addition to the above, the company is now on the threshold of commencing basic
research activities to develop and screen new chemical entities for different therapeutic
categories.

STTENGTHS:

 Strong emphasis on Research and Development

 Ability to develop processes for a large range of therapeutic categories.
 Ability to orient and adapt to the changing facets of industry, particularly in terms of
Regulations, Intellectual property and Manufacturing capabilities.
 Cohesive team of skilled professionals in all wings related to research, manufacture and
marketing.
  Strong customer base and market presence.
A strong commitment towards the society to provide timely support by providing life
saving drugs at relatively low costs, short span of time.

TECHNOLOGY ABSORPTION, ADAPTION AND INNOVATION:

Efforts in brief, made towards technology absorption, adoptions The company’s R&D
division is continuously engaged in the research of new products and improving the process of
existing products. Once the technology is developed the R&D team will hand over the same to
production team for the commercial production.

Benefits derived as a result of the above efforts e.g. process improvement, cost reduction,
product development, quality improvement, import substitution etc. the continuous up gradation
and adoption of technology, benefits the company in the form of good quality, better yields and
cost reduction.

SPECIFIC AREAS IN WHICH R&D CARRIED OUT BY THE COMPANY

During the year 2006-2015, research and development activity is carried out in respect of
the following products:

Product Therapeutic Use

Donepezil Hcl Anti-Alzhemers

Nitazoxanide Antiriarrheals

Tolterodine Tartrate Urinary incontinence

BENEFITS DERIVED AS A RESULT OF THE ABOVE R&D

Perceptible reduction in costs and increase in productivity in respect of the manufacture

of certain bulk drugs and intermediaries. The R&D efforts have facilitative the company to file
several DMF’s in regulatory markets like U.S.A, Europe Union.
FUTURE PLAN OF ACTION

The company proposes to upgrade the R&D facilities continuously in live with
international standard and put more accent on the development of pharma products which are
cost effective and prevailing patent legislation. The R&D activates are also proposed to diversity
in to imitation of new drugs discovery. Custom synthesis and contract research in the year to
come. The company stared R&D activity on development of finished dosages for regulatory
markets.

KEY MANAGEMNT PERSONNEL:

Dr. B. Parthasaradhi Reddy (Chairman & Managing Director)

B. Nagi Reddy (Director-Executive)

M. Pera Reddy (Director-Finance)

A.V. Narasa Reddy (Director-Corp.Tech)

J. Sambi Reddy (Director-Production)

C. Bhaskar Reddy (Director-Quality Conrtol)

M. Srinivas Reddy (Director)

COMPANY SECRETARY

S. Vasu Reddy

All directors have been considered as key management personnel as they are involved in
planning, directing and controlling the activities of the reporting enterprises
 2.2 INDUSTRY PROFILE

2.3 REVIEW OF LITERATURE

3.RESEARCH METHODOLOGY

3.1 RESERCH DESIGN :

The project evaluates the financial performance of the company with the help of most
appropriate tool of financial analysis like ratio analysis and comparative balance sheets. Hence it
is essentially fact finding study:

3.2 DATA COLLECTION:

Secondary Data:

Secondary Data studies whole company’s records and company’s balance sheets in which
the project work has been done. In addition, a number of reference books, journals and internet
were also used to formulate the theoretical model for study. The sources of secondary data are:

 Internal sources:
 Balance Sheets
 Financial Statements
 External sources:
 Financial Management Reference Books
 Internet

3.3 STATISTICAL TOOLS USED/ TECHNIQUES USED OF THE STUDY :

1. Liquidity ratios

2. Turnover ratios

3. Solvency or leverage ratios

4. Profitability ratios
1. LIQUIDITY RATIOS:
 Liquidity refers to the ability of a firm to meet its short-term financial obligations when
and as they fall due.
 The main concern of liquidity ratio is to measure the ability of the firms to meet their
short-term maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation.
1. a. Current Ratio:
The Current Ratio expresses the relationship between the firm’s current assets and its
current liabilities. Current assets normally include cash, marketable securities, accounts
receivable and inventories. Current liabilities consist of accounts payable, short term notes
payable, short-term loans, current maturities of long term debt, accrued income taxes and other
Accrued expenses (wages).

Current Ratio = Current Assets / Current Liabilities

The rule of thumb says that the current ratio should be at least 2 that are the current assets
should meet current liabilities at least twice.

1. b. Quick Ratio:
Measures assets that are quickly converted into cash and they are compared with current
liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.
inventories.

The quick ratio, also referred to as acid test ratio, examines the ability of the business to
cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick ratio
is calculated as follows

Quick Ratio = Quick Assets / Current Liabilities

 Clearly this ratio will be lower than the current ratio, but the difference between the two
(the gap) will indicate the extent to which current assets consist of stock.

2. TURNOVER RATIOS:

The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Another
way of examining the liquidity is to determine how quickly certain current assets are converted
into cash. The ratios to measure these are referred to as turnover ratios. In fact, liquidity ratios
are not independent of activity ratios. Poor debtor or inventory turnover ratios limit the
usefulness of the current and acid-test ratios. Both obsolete / unsalable inventory and
uncollectible debtors are unlikely to be sources of cash. Therefore, the liquidity ratios should be
examined in conjunction with relevant turnover ratios affecting liquidity.

2. a. Inventory Turnover Ratio:

It is computed by dividing the cost of goods sold by the average inventory. Thus,

Inventory Turnover Ratio = Cost of Goods sold / Average Inventory

 This ratio measures the stock in relation to turnover in order to determine how often the
stock turns over in the business.
 It indicates the efficiency of the firm in selling its product. It is calculated by dividing the
cost of goods sold by the average inventory.
 The ratio shows a relatively high stock turnover which would seem to suggest that the
business deals in fast moving consumer goods.
 The trend shows a marginal increase in days which indicates a slowdown of stock
turnover.
 The high stock turnover ratio would also tend to indicate that there was little chance of
the firm holding damaged or obsolete stock.

Inventory Turnover Days = 360 / Inventory Turnover Ratio

2. b. Debtors Turnover Ratio:

 It is determined by dividing the net credit sales by average debtors outstanding during the
year. Thus,

Debtors turnover ratio = Net credit sales / Average debtors

Net credit sales consist of gross credit sales minus returns, if any, from customers.
Average debtors are the simple average of debtors including bills receivable at the beginning and
at the end of the year. The analysis of the debtors’ turnover ratio supplements the information
regarding the liquidity of one item of current assets of the firm. The ratio measures how rapidly
receivables are collected. A high ratio is indicative of shorter time-lag between credit sales and
cash collection.

Debtor Collection Period = 365 / Debtors Turnover Ratio

2. c. Creditors Turnover Ratio:

It is a ratio between net credit purchases and the average amount of creditors outstanding
during the year. It is calculated as follows

Creditors Turnover Ratio = Net credit purchases / Average Creditors

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio
shows that accounts are to be settled rapidly. The creditor’s turnover ratio is an important tool of
analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit. The
extent to which trade creditors are willing to wait for payment can be approximated by the
creditors’ turnover ratio.

Creditors Payment Period = 365 / Creditors Turnover Ratio

2. d. Working Capital Turnover Ratio:

This ratio, should the number of times the working capital results in sales. In other words,
this ratio indicates the efficiency or otherwise in the utilization of short tern funds in making
sales. Working capital means the excess of current over the current liabilities. In fact, in the short
run, it is the current liabilities which play a major role. A careful handling of the short term
assets and funds will mean a reduction in the amount of capital employed, thereby improving
turnover. The following formula is used to measure this ratio:

Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

2. e. Fixed Assets Turnover Ratio:

As the organization employs capital on fixed assets for the purpose of equipping itself
with the required manufacturing facilities to produce goods and services which are saleable to
the customers to earn revenue, it is necessary to measure the degree of success achieved in this
bearing. This ratio expresses the relationship between cost of goods sold or sales and fixed
assets. The following is used for measurement of the ratio.

Fixed Assets Turnover Ratio = Net Sales / Fixed Assets

In computing fixed assets turnover ratio, fixed assets are generally taken at written down
value at the end of the year. However, there is no rigidity about it. It may be taken at the original
cost or at the present market value depending on the object of comparison. In fact, the ratio will
have automatic improvement if the written down value is used.

It would be better if the ratio is worked out on the basis of the original cost of fixed
assets. We will take fixed assets at cost less depreciation while working this ratio

2. f. Total Assets Turnover Ratio:

This ratio is used to find out how efficiently the firm is utilizing its total assets. If this ratio
is higher, it indicates that the firm is utilizing its assets more efficiently and if its lower then it
means inefficient utilization of the assets.

Total Assets Turnover Ratio = Net Sales / Total Assets

3. SOLVENCY OR LEVERAGE RATIOS:

The solvency or leverage ratios throws light on the long term solvency of a firm reflecting it’s
ability to assure the long term creditors with regard to periodic payment of interest during the
period and loan repayment of principal on maturity or in predetermined installments at due
dates. There are thus two aspects of the long-term solvency of a firm.
 Ability to repay the principal amount when due
 Regular payment of the interest.

The ratio is based on the relationship between borrowed funds and owner’s capital it is
computed from the balance sheet, the second type are calculated from the profit and loss a/c.
The various solvency ratios are

3. a. Debt Equity Ratio:

Debt equity ratio shows the relative claims of creditors (Outsiders) and owners
(Interest) against the assets of the firm. Thus this ratio indicates the relative proportions of
debt and equity in financing the firm’s assets. It can be calculated by dividing outsider funds
(Debt) by shareholder funds (Equity)

Debt equity ratio = Outsider Funds (total debts) / Shareholders Funds (equity)

The outsider fund includes long-term debts as well as current liabilities. The
shareholder funds include equity share capital, preference share capital, reserves and
surplus including accumulated profits. However fictitious assets like accumulated deferred
expenses etc should be deducted from the total of these items to shareholder funds. The
shareholder funds so calculated are known as net worth of the business.

3. b. Proprietary (Equity) Ratio:

 This ratio indicates the proportion of total assets financed by owners. It is calculated
by dividing proprietor (Shareholder) funds by total assets.

Proprietary (equity) ratio = Shareholder Funds / Total Assets

4. PROFITABILITY RATIOS:

The main object of a business concern is to earn profit. A company should earn profits to
survive and to grow over a long period. The operating efficiency of a business concern is
ultimately adjudged by the profits earned by it. Profitability should distinguish from profits.
Profits refer to the absolute quantum of profit, whereas profitability refers to the ability to earn
profits. In other words, an ability to earn the maximum from the maximum use of available
resources by the business concern is known as profitability. Profitability reflects the final result
of a business operation. Profitability ratios are employed by the management in order to assess
how efficiently they carry on business operations. Profitability is the main base for liquidity as
well as solvency. Creditors, banks and financial institutions are interest obligations and regular
and improved profits enhance the long term solvency position of the business.

4. a. Gross Profit Ratio:

The gross profit margin is also known as gross margin. It is calculated by dividing gross
profit by sales. Thus,

Gross Profit Margin = Gross Profit / Net Sales * 100

Gross profit is the result of the relationship between prices, sales volume and cost. A
change in the gross margin can be brought about by changes in any of these factors. The gross
margin represents the limit beyond which fall in sales price are outside the tolerance limit.
Further, the gross profit ratio/margin can also be used in determining the extent of loss caused by
theft, spoilage, damage, and so on in the case of those firms which follow the policy of fixed
gross profit margin in pricing their products.

A high ratio of gross profit to sales is a sign of good management as it implies that the
cost of production of the firm is relatively low. It may also be indicative of a higher sales price
without a corresponding increase in the cost of goods sold. It is also likely that cost of sales
might have declined without a corresponding decline in sales price. Nevertheless, a very high
and rising gross margin may also be the result of unsatisfactory basis of valuation of stock, that
is, overvaluation of closing stock and/or undervaluation of opening stock.

A relatively low gross margin is definitely a danger signal, warranting a careful and
detailed analysis of the factors responsible for it. The important contributory factors may be (i) a
high cost of production reflecting acquisition of raw materials and other inputs on unfavorable
terms, inefficient utilization of current as well as fixed assets, and so on; and (ii) a low selling
price resulting from severe competition, inferior quality of the product, lack o f demand, and so
on. A through investigation of the factors having a bearing on the low gross margin is called for.
A firm should have a reasonable gross margin to ensure adequate coverage for operating
expenses of the firm and sufficient return to the owners of the business, which is reflected in the
net profit margin.

4. b. Net Profit Ratio:

It is also known as net margin. This measures the relationship between net profits
and sales of a firm.

Net Profit Ratio = Net Profit / Net Sales * 100

A high net profit margin would ensure adequate return to the owners as well as enable a firm to
withstand adverse economic conditions when selling price is declining, cost of production is
rising and demand for the product is falling.

A low net profit margin has the opposite implications. However, a firm with low profit margin
can earn a high rate of return on investment if it has a higher turnover. This aspect is covered in
detail in the subsequent discussion. The profit margin should, therefore, be evaluated in relation
to the turnover ratio. In other words, the overall rate of return is the product of the net profit
margin and the investment turnover ratio. Similarly, the gross profit margin and the net profit
margin should be jointly evaluated.

4. c. Operating Ratio:
 It establishes the relationship between total operating expenses and net sales. It is
calculated by dividing operating expenses by the net sales.
Operating profit margin or ratio = Operating Expenses / Net Sales * 100

Operating expenses includes cost of goods produced/sold, general and administrative

expenses, selling and distributive expenses.
4. d. Operating Profit Ratio:
Operating profit margin or ratio establishes the relationship between operating profit and
net sales. It is calculated by dividing operating profit by sales.

Operating profit margin or ratio = Operating Profit / Net Sales * 100

Operating profit is the difference between net sales and total operating expenses. (Operating
profit = Net sales – cost of goods sold – administrative expenses – selling and distribution
expenses.)

4. e. Return on Total Assets:

This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship
between net profits and assets. As these two terms have conceptual differences, the ratio may be
calculated taking the meaning of the terms according to the purpose and intent of analysis.
Usually, the following formula is used to determine the return on total assets ratio.
Return on Assets = Net profit before Tax / Total Assets * 100

*Note: On all Profitability ratios trend analysis is done

 CHAPTER -4

DATA ANALYSIS AND INTERPRETATION

Table: Current Ratio

Year Current Assets (Rs. In Current Liabilities (Rs. In Ratio

Crores) Crores)

2013-14 1.82 1.92 0.945

2014-15 2.10 2.18 0.966

2015-16 2.35 2.76 0.850

2016-17 2.77 3.17 0.872

2017-18 2.43 2.64 0.920

RATIO
3

2.5

1.5
RATIO

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:
The current ratio represents margin of safety for creditors. It can be seen from the above table
that the current ratio for all years is less than 1. This signifies that Hetero drugs has short term
liabilities greater than the short term assets. It implies that the company would have problems in
managing its short term liabilities and liquidity requirements. Ratio in 2014 & 2015 is 0.945 &
0.966 respectively and it reduced in 2016 & 2017 and again increased to 0.920 in 2011.

Table 5.2: Quick Ratio

Year Quick Assets (Rs. In Current Liabilities (Rs. In Ratio
Lakhs) Crores)

2013-14 53.57 1.92 0.277

2014-15 90.51 2.18 0.414

2015-16 97.69 2.76 0.353

2016-17 86.96 3.17 0.273

2017-18 57.08 2.64 0.216

QUICK RATIO
0.45

0.4

0.35

0.3

0.25

0.2 QUICK RATIO

0.15

0.1

0.05

0
2013-14 2014-15 2015-16 2016-17 2017-18
 Interpretation:

Generally the quick ratio of 1:1 represents satisfactory current financial position. But
we have seen in the above table that not even a single year has achieved that ratio. In all five
years the ratios are less than 1. It indicates that the firm has found difficult to meet its obligations
because its quick assets are lesser than current liabilities. Similarly the ratio is increased from
0.277 to 0.414 in 2015 and again there is gradual decrease in the ratio till 2011. This continuous
decrease in the ratio may lead the company into financial difficulty in future.

Table 5.3: Inventory Turnover Ratio

Year Cost of goods sold (Rs. In Average Inventory (Rs. In Ratio

Crores) Crores)

2013-14 3.54 1.07 3.299

2014-15 3.86 1.24 3.097

2015-16 5.05 1.28 3.922

2016-17 2.54 1.63 1.550

2017-18 4.20 1.88 2.235

 Inventory turnover ratio
4.5

3.5

2.5

2 Inventory turnover ratio

1.5

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

In the year 2014, the ratio is 3.299 and it is stable and slight increase in the ratio till 2016 i.e.
3.922 and this indicates the firm is selling off its stocks efficiently and in 2017, the ratio is 1.550
which is decreased from the previous years which shows the firm is not in a position to clear off
the stock in time and in 2011, it has increased a bit i.e. 2.235 again it is a good sign for the firm.
2. Inventory turnover days:
Inventory turnover days = 360 / Inventory turnover ratio
Table 5.4: Inventory Turnover Days

Year Inventory turnover ratio Year (360) Ratio

2013-14 3.299 360 109

2014-15 3.097 360 116

2015-16 3.922 360 92

2016-17 1.550 360 232

2017-18 2.235 360 161

Inventory Turnover Days

250

200

150

Inventory Turnover Days

100

50

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:
 The inventory turnover days has many variations from 2014 to 2011 its increasing suddenly
to more number of days and decreasing. This shows that the firm’s turnover days are not
satisfactory. They should have some inventory management policies.

3. Debtor’s Turnover Ratio:

Debtors Turnover Ratio = Net credit sales / Average debtors

Table 5.5: Debtor’s Turnover Ratio

Year Sales (Rs. In Crores) Avg. Debtors (Rs. In Lakhs) Ratio

2013-14 3.43 3.87 8.86

2014-15 6.56 9.71 6.76

2015-16 5.96 6.87 8.68

2016-17 3.37 7.00 4.82

 2017-18 5 5.48 9.12

debtors turnover ratio

10
9
8
7
6
5
debtors turnover ratio
4
3
2
1
0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

The ratio measures how rapidly debts are collected. A higher ratio indicates shorter time lag
between credit sales and cash sales. As we can see in the above tale, in 2014 ratio is 8.86 and it
decreased by 6.76 in 2015, again increased to 8.68 in 2016. This indicates the firm is efficient in
collecting its debts. In year 2017, the ratio decreased to 4.82 which shows the inefficiency of the
firm in collecting its debts and in 2011, its ratio is 9.12 which indicates the firm is collecting
debts rapidly

4. Debtor’s collection period:

Table 5.6: Debtor’s Collection Period

Year Debtor turnover ratio 365 Ratio

 2013-14 8.86 365 41

2014-15 6.76 365 54

2015-16 8.68 365 42

2016-17 4.82 365 76

2017-18 9.12 365 40

debtors turnover ratio

80

70

60

50

40
debtors turnover ratio
30

20

10

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

In the above table, we can see for year 2014 it is 41days and increased by 54 days in 2015, again
decreased to 42 days in the year 2016. In 2017, it has increased to 76 days and later in 2011 came
down by 40 days. This shows the needs to control the receivables management.

5. Creditors Turnover Ratio:

 Table 5.7: Creditor’s Turnover Ratio

Year Purchases (Rs. In Crores) Creditors (Rs. In Lakhs) Ratio

2013-14 3.35 68.57 4.89

2014-15 3.26 84.82 3.84

2015-16 4.81 112.82 4.26

2016-17 2.62 107.48 2.44

2017-18 3.70 80.56 4.59

creditors turnover ratio

6

3
creditors turnover ratio

0
2013-14 2014-15 2015-16 2016-17 2017-2018

Interpretation:

In the above table we can see that in year 2014, the ratio is 4.89 and it has decreased by 3.84 in
2015 it shows that the firm is unable to pay the money on time then it is difficult for company to
get credit from suppliers. The ratio is increased to 4.26 in 2016 and again decreased by 2.44 in
2017 and finally it is 4.59 in 2011. This shows that the company is in safe zone by paying money
on time

6. Creditor’s Payment Period:

Creditors Payment Period = 365 / Creditors turnover ratio
Table 5.8: Creditor’s Payment Period

Year Creditor turnover ratio 365 Ratio

2013-07 4.89 365 74.5

2014-08 3.84 365 95

2015-09 4.26 365 85.5

2016-10 2.44 365 149

2017-11 4.59 365 79

creditors payment period

160

140

120

100

80
creditors payment period
60

40

20

0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation:

The above table shows company has paid its creditor after 74.5 days in 2014 after this it has been
increased gradually i.e. 95 days in 2015, 149 days in 2017. This shows that suppliers has given
more credit period to company. Longer payment period shows the liberal credit terms granted by
suppliers. It will reduce requirements of current assets by relying on supplier’s credit. Finally it
has decreased by 74 days in 2011 and this shows that the company is paying in short span of
time.

7. Fixed Assets Turnover Ratio:

Table 5.9: Fixed Assets Turnover Ratio

Year Net Sales (Rs. In Crores) Fixed Assets (Rs. In Lakhs) Ratio

2013-14 3.43 2.30 14.8

2014-15 4.16 2.21 18.7

2015-16 5.96 6.44 9.25

2016-17 3.37 6.41 5.26

2017-18 5 5.31 9.40

 fixed assets turnover ratio
20
18
16
14
12
10
fixed assets turnover ratio
8
6
4
2
0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

Generally high fixed assets turnover ratios are preferred since they indicate a better efficiency in
fixed assets utilization. In the table, we can see in the year 2014, the ratio is 14.8 and it is
increased to 18.7 in 2015, it shows that the company is using its assets efficiently. In 2016, again
it has reduced to 9.25 and to 5.26 in 2017; this indicates the company has not utilized its fixed
assets at fullest capacity. In 2011, it has slightly increased and now it is 9.40

Gross profit ratio:

Table 5.13: Gross Profit Ratio

Year Gross Profit (Rs. In Net Sales (Rs. In Ratio

Lakhs) Crores)

2013-14 46.93 3.43 13.672

2014-15 48.69 4.16 11.7

2015-16 91.37 5.96 15.305

 2016-17 83.85 3.37 24.81

2017-18 79.37 5 15.87

Chart 5.1: Trend Analysis of Gross Profit Ratio of Hetero drugs:

30

25

20

gross profit ratio

15
Series 2
Series 3
10

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

The gross profit ratio reflects efficiency with which management produces each unit of
the product. This ratio indicates the average spread between cost of goods sold and the sales
revenue. Ratio in the year 2014 is 13.672 and it is increased to 15.305 in 2016 this shows a good
profit earning capacity of business with reference to its sales. It again increased to 24.81 in 2017,
here it shows selling prices may be increased without any change in the cost price. Finally in
2011 it is decreased to 15.87 which may be due to increase in cost of production or due to sales
at lesser price.
2. Net Profit Ratio:

This is a widely used measure of performance and is comparable across companies in similar
industries. It is calculated as follows:-

Net Profit Ratio = Net Profit / Net Sales * 100

Table 5.14: Net Profit Ratio

Year Net Profit (Rs. In Net Sales (Rs. In Ratio

Lakhs) Crores)

2013-14 2.74 3.43 0.798

2014-15 2.42 4.16 0.582

2015-16 5.06 5.96 0.847

2016-17 4.37 3.37 1.296

2017-18 18.67 5 3.735

net profit ratio

4

3.5

2.5

2
net profit ratio
1.5

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation:

This ratio indicates the firm’s capacity to face adverse economic conditions such as price
competition, low demand, etc. Obviously higher the ratio better is the profitability. In the year
2014, the ratio was 0.798 and it was decreased to 0.582 in 2015 which may be due to selling and
distribution expenses. But thereafter for the succeeding years it has been increasing continuously
which indicates a better performance of the company. Thus an increase in the ratio over the
previous periods indicates improvement in the operational efficiency of the business.

CHAPTER-V

FINDINGS:

6.1. Findings of Hetero drugs:

 Evaluation of financial performance of Hetero drugs:

1. Short term liabilities are greater than the short term assets, firm is depending partially for
financing its short term liquidity through long term sources of finance.
2. Profitability has increased continuously from 2014 to 2011, this is observed by the Net Profit
Ratio i.e ratio in 2014 is 0.798 and it increased to 3.735 in 2011.
3. Firm is not in a position to pay current liability to its creditors on time, as the creditor’s payment
period is more.
4. Return on assets has increased continuously and the ratio has increased from 1.3 in 2014 to 6.3
in 2011.
5. Company is not making optimum utilization of fixed assets as its fixed assets turnover ratio is
continuously decreasing i.e. 18.7 in 2015 and 9.40 in 2017.
6. The firm’s credit policy is not good that is the reason the liabilities are not being paid within the
stipulated time period.
SUGGESTIONS:

1. Hetero drugs is lacking in maintaining current assets than current liabilities which has to be
viewed seriously and necessary actions to be taken to achieve optimum utilization.
2. Overall performance & efficiency of the companies are not satisfactory due to ineffective
working capital management. Therefore this company should concentrate on working capital
management and it should be managed effectively and reviewed periodically and thereby
optimum utilization of fixed assets can be made possible.
3. Companies have to collect its debts in time for that it needs to control receivables management
and allow discounts to the customers.
4. Firm should maintain a credit policy.
CONCLUSION:

 The current study concludes that Increase in Gross Profit Ratio, Net Profit Ratio and Return on
Assets shows profitability and growth in the performance of the business. Credit policy is not up
to the mark. Hetero Drugs is not making optimum utilization of fixed assets. Investments in
current assets have not been utilized. The financial performance of the company for the 5 years
is analyzed and it is proved that the company is financially satisfactory.
 BIBLIOGRAPHY
REFERENCES:

BOOKS:

 M Y KHAN and P K JAIN: Financial Management, Tata McGraw-Hill Publishing Company Limited,
New Delhi.

 Dr.S.N.MAHESHWARI & Dr.S.K.MAHESHWARI: Financial Accounting, Vikas, 2016.

WEBSITES:

 http://www.google.co.in/
 http://www.wikipedia.org/
 http://www.indiamarkets.com/imo/industry/engineering/fabrication/fabrication.asp
 http://en.wikipedia.org/wiki/Financial_statement
 http://www.desaifabricators.com/
 http://en.wikipedia.org/wiki/Financial_ratio
 http://www.creditguru.com/ratios/ratiopg1.htm