ABSTRACT

Sara Impex Pvt Ltd., is a growing small scale pharmaceutical & Scientific Equipments company. It was founded
in the year 2005. The company wanted to improvise its Working Capital Management and re-engineer its
Financial Structure by comparing itself with other well established pharmaceutical companies. This project’s aim
is to broadly examine the working capital management and financial structure of the major players in the industry
with the help of some important ratios and few other critical financial determinants. And then make use of this
information to find out where Sara Impex stands with respect to these companies and identify areas where it is
necessary to improve.
A descriptive design of research has been adopted in the project, since the problem [i.e. to find ways to improve
existing structure] was clearly defined and data for the problem is available from secondary sources.
After the analysis, some intrinsic areas of weakness in the financial structure were identified and scope for further
improvement was found.
ACKNOWLEDGEMENTS
I would first like to thank Prof. Dr. L. Suganthi, Head of the Department of Management Studies, for her
enduring support and endearing guidance. I would also like to equally thank all the faculty and the non faculty
members of the DOMS, for their ever available support and encouragement.

I am very grateful to Mr. Sheik Abdullah, Managing Director, Sara Impex Pvt Ltd., for extending all the
support I required for the project and for his truthful and transparent guidance. A special thanks to Mr. Mohamed
Bilal for getting me this opportunity.
And I also thank my classmates for their valuable inputs.
TABLE OF CONTENTS

CHAPTER NO. TITLE PAGE NO.

ABSTRACT iii
LIST OF TABLES vii
LIST OF FIGURES viii
INTRODUCTION
1.1 OBJECTIVES
1.2 NEED FOR THE PROJECT
1.3 PROBLEM DEFINITION
1.4 SCOPE OF THE PROJECT
1.5 LIMITATIONS OF THE PROJECT
1.6 INDUSTRY PROFILE
1.7 COMPANY PROFILE

2 LITERATURE REVIEW
2.1 Working Capital Management by Hrishikes Bhattacharya
2.1.1 Liquidity Ratios
2.1.2 Leverage Ratios
2.1.3 Activity Ratios
2.1.4 Profitability Ratios
2.2 Factors specifically relating to Working Capital Management
2.3 Trend Analysis
RESEARCH METHODOLOGY
3.1 Research Problem
3.2 Research Design
3.3 Sample Size
3.4 Sources of Data
3.5 Software used
3.6 Sampling Method
3.7 Period of study
DATA ANALYSIS AND INTERPRETATION
4.1 RATIOS AND OTHER KEY DETERMENANTS
4.2 INTERNAL TREND ANALYSIS

INFERENCES
SUGGESTIONS AND RECOMMENDTIONS

BIBLIOGRAPHY

APPENDIX

LIST OF TABLES

TABLE TITLE PAGE NO.

8.1.1 Current Ratios 40
8.1.2 Acid Test Ratio 40
8.1.3 Debt-Total Assets Ratio 40
8.1.4 Fixed Assets Turnover Ratio 41
8.1.5 Inventory turnover ratio 41
8.1.6 Receivables Turnover Ratio 41
8.1.7 Total Assets Turnover Ratio 42
8.1.8 Gross Profit Ratio 42
8.1.9 Net Profit Margin Ratio 42
8.1.10 Return on investment 43
8.1.11 Net Working Capital / Total Assets 43
8.1.12 Receivables Collection Period 43

LIST OF FIGURES
FIGURE TITLE PAGE NO.

2.1.1 A Classification of Ratios 11

4.1.1 Comparison of Current Ratios 22
4.1.2 Comparison of Acid Test Ratio 23
4.1.3 Comparison of Debt-Total Assets Ratio 24
4.1.4 Comparison of Fixed Assets Turnover Ratio 25
4.1.5 Comparison of Inventory turnover ratio 26
4.1.6 Comparison of Receivables Turnover Ratio 27
4.1.7 Comparison of Total Assets Turnover Ratio 28
4.1.8 Comparison of Gross Profit Ratio 29
4.1.9 Comparison of Net Profit Margin Ratio 30
4.1.10 Comparison ofReturn on investment 31
4.1.11 Comparison of Net Working Capital / Total Assets 32
4.1.12 Comparison of Receivables Collection Period 33
4.2.1 Trend of Return on Investment 34
4.2.2 Trend of Acid Test Ratio 35
4.2.3 Trend of Capital Turnover Ratio 36
4.2.4 Trend of Collection Period 37

CHAPTER 1

INTRODUCTION
1.1 OBJECTIVES:

1.1.1. Primary objective

• To analyze the working capital and financial structure of Sara Impex for the past three years (which is
also the first three years since the inception of the company) and compare it with the industry standard
by analyzing other well established National and Multi-National pharmaceutical companies.
• To give critical suggestion to improve the financial structure of Sara Impex Pvt Ltd.,

1.1.2. Secondary Objectives

• To understand the financial structure of the pharmaceutical industry

• To find the rate at which the pharmaceutical industry is growing
1.2 NEED FOR THE PROJECT:

An Analysis of key financial determinants of the company, will give a broad insight of the financial status of the
company to the managers and equip them to make better knowledge enabled decisions. This will give an
indication as to how the company can modify its financial structure to make it suit better with its operational
structure.

Further, an analysis of other companies help the managers to understand areas of financial strength and
weakness compared to other companies.
Further financial analysis helps to assess:
• Profitability: Ability to earn profits, sustain both short term and long term goals
• Stability: Company ability to remain in business and grow
• Growth and future prospects
• Operational efficiency of the project
1.3 PROBLEM DEFINITION:
Sara Impex is a fledgling pharmaceutical company which is growing at a rapid pace. Its operational and financial
structure is dynamically changing to suit its growth. It wanted to re-engineer its financial position in terms of key
factors.

Therefore the company wanted to analyze its working capital management structure and some key financial
determinants to know its internal strengths and weaknesses.

An external analysis is also to be done with the help of crucial financial ratios and other relevant factors, to
compare Sara with other established players to know what are the changes it can in its structure to become more
competitive.

The company wanted to improvise its Working Capital Management and re-engineer its Financial Structure by
comparing itself with other well established pharmaceutical companies. This project’s aim is to broadly examine
the working capital management and financial structure of the major players in the industry with the help of some
important ratios and few other critical financial determinants. And then make use of this information to find out
where Sara Impex stands with respect to these companies and identify areas where it is necessary to improve.
1.4 SCOPE OF THE PROJECT:
• Financial Analysis done in the project facilitates the comparison of firms which differ in size and
compares a firm's financial performance with industry averages.
• In addition, these calculations can be used for trend analysis to identify areas where performance has
improved or deteriorated over time.
• It gives a frank financial account into the current state of the business, regarding stock turnover and the
ability to meet short and long term debts.
• Moreover the data which are provided by financial statements, are readily available.
• This analysis is also an effective and quick way to know where a firm stands.
• It also shows the influence of external and internal factors on the firm’s performance.
• Complex secondary data is converted into comprehensible and comparable quantities from which
valuable conclusions can be arrived at.
1.5 LIMITATIONS OF THE PROJECT:
• Different Accounting Policies
The choices of accounting policies may distort inter company comparisons. The business may opt not to
revalue its asset because by doing so the depreciation charge is going to be high and will result in lower
profit.
• Creative accounting
The businesses apply creative accounting in trying to show the better financial performance or position
which can be misleading to the users of financial accounting.
• Ratios are not definitive measures
Ratios need to be interpreted carefully. They can provide clues to the company’s performance or
financial situation. But on their own, they cannot show whether performance is good or bad.
• The ratios that are based on the summarized year end information which may not be a true reflection of
the overall year’s results.
• Interpretation of the ratio
It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’.
 • Price changes
Inflation renders comparisons of results over time misleading as financial figures will not be within the
same levels of purchasing power.
• Changes in Accounting policy
Changes in accounting policy may affect the comparison of results between different accounting years.
• Results differ with different financial and business risk profiles.
• Window dressing
These are techniques applied by an entity in order to show a strong financial position.
1.6 INDUSTRY PROFILE:
The Indian Pharmaceutical Industry today is in the front rank of India’s science-based industries with wide
ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the
Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks
very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple
headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is
now made indigenously.

International companies associated with this sector have stimulated, assisted and spearheaded this dynamic
development in the past 53 years and helped to put India on the pharmaceutical map of the world.

There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical
industry in India(including 5 Central Public Sector Units). These units produce the complete range of
pharmaceutical formulations.

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and
pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved
by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India
has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and
an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research
capabilities, supported by Intellectual Property Protection regime is well set to take on the international market.

ADVANTAGE INDIA

• Competent workforce
• Cost-effective chemical synthesis
• Legal & Financial Framework
• Information & Technology
• Globalization
• Consolidation

THE GROWTH SCENARIO:

India's US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per year. It is one of the
largest and most advanced among the developing countries.

The domestic pharmaceuticals industry output is expected to exceed Rs260 billion in the financial year 2002,
which accounts for merely 1.3% of the global pharmaceutical sector. The Indian Pharmaceutical sector is highly
fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The
leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the
market share. It is an extremely fragmented market with severe price competition and government price control.

1.7 COMPANY PROFILE:

Sara Impex was founded in the year 2005 to provide high-tech products and services to public and private sector
hospitals, Medical centres, Clinics, Diagnostic Centres, Educational and Research Centres etc. The company
also support the growing need for hospital consumables, surgical Instruments, laboratory and analytical supplies
and enjoy strategic partnerships with prominent scientific equipment manufacturers. The Medical & Scientific
wing is also the exclusive authorized dealer of a host of Inland & International companies with excellent
reputation in their respective fields.
With a new office at Singapore, Sara presently has 24 employees and will be increased according to the
business requirements and is led by a well qualified dynamic and expert management team.
Fuelled by innovative ideas and newer products, Ssara continue to grow and expand at a very fast pace
expanding and diversifying our product base.
CHAPTER 2
LITERATURE REVIEW
2.1 ‘Working Capital Management – Strategies and Techniques’ by Hrishikes Bhattacharya was referred to
determine the key ratios that are required to analyze the financial statements of the companies.
2.1.1 Liquidity Ratios:
Ratios that measure a firm’s ability to meet short term obligations. This gives the ability of an asset to be
converted into cash without a significant price concession.
2.1.1.1 Current Ratio:
This ratio is calculated as,
Current Assets (2.1.1.1)
Current Liabilities
It shows the firm’s ability to cover current liabilities with its current assets. This is a liquidity ratio.
2.1.1.2 Acid Test Ratio:
It is also called quick ratio. It is calculated as,
Current Assets – Inventories (2.1.1.2)
Current Liabilities
It is a stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities
without selling inventory.

2.1.2 Leverage Ratios:

Indicates level of debt in a company’s capital structure.
2.1.2.1 Debt - Total Assets Ratio:
It shows the relative extent to which the firm is using borrowed money. It is calculated as,
Total debt (2.1.2.1)
Total assets
It is the extent to which the firm is financed by debt.
2.1.2.2 Total Debt – Equity Ratio:
This is calculated as,
Total Outside Liability (2.1.2.2)
Net Worth
This ratio captures the long term financial risk of a business. It measures the efficiency of a firm in striking a
balance between risk and profitability in its capital structure.

2.1.3 Activity Ratios:

These are ratios which measure how effectively the firm is making use of its assets.
2.1.3.1 Fixed Assets Turnover Ratio:
This ratio is calculated as,
Net Sales (2.1.3.1)
Operating Fixed Assets
This is also called velocity of fixed assets, meaning, the times the fixed assets have turned over during a period
in generating sales.

2.1.3.2 Inventory Turnover Ratio:

This ratio is also called velocity of goods inventory. It is calculated as,
Cost of Goods Sold (2.1.3.2)
Inventory

It measures the efficiency of the manufacturing function in scheduling the production and the efficiency of the
marketing function in disposal of outputs of an enterprise by constantly feeding the distribution channel.

2.1.3.3 Receivables Turnover Ratio:

This ratio is calculated as,
Net Credit Sales (2.1.3.3)
Account Receivables
This ratio measures the number of times, the account receivables are turned over in one year. This is a measure
of the credit period extended by the company.

2.1.3.4 Capital Turnover Ratio:

This ratio is calculated as,
Net Sales (2.1.3.4)
Capital Employed
This ratio is also known as Total Assets Turnover ratio. It measures the ability of the assets to generate sales
and how efficiently the assets are employed in business.
2.1.4 Profitability Ratios:
2.1.4.1Gross Profit Ratio:
This ratio is calculated as,
Gross Profit (2.1.4.1)
It measures the efficiency of the manufacturing function in scheduling the production and the efficiency of the
marketing function in disposal of outputs of an enterprise by constantly feeding the distribution channel.

2.1.3.3 Receivables Turnover Ratio:

This ratio is calculated as,
Net Credit Sales (2.1.3.3)
Account Receivables
This ratio measures the number of times, the account receivables are turned over in one year. This is a measure
of the credit period extended by the company.
2.1.3.4 Capital Turnover Ratio:
This ratio is calculated as,
Net Sales (2.1.3.4)
Capital Employed
This ratio is also known as Total Assets Turnover ratio. It measures the ability of the assets to generate sales
and how efficiently the assets are employed in business.
2.1.4 Profitability Ratios:
2.1.4.1Gross Profit Ratio:
This ratio is calculated as,
Gross Profit (2.1.4.1)

Net Sales
This ratio measures the viability of a manufacturing function. It tells a lot about the strength or weakness of the
manufacturing structure of a business.

2.1.4.2 Net profit margin ratio:

It is calculated as,
Total debt (2.1.4.2)
Total assets
It measures the profitability with respect to sales generated. It gives the net income per rupee of sales.

2.1.4.3 Return on Investments (ROI):

This is also called as Return on Assets,
Calculated as,
Operating Profit X Sales X Operating Profit (2.1.4.3)
Sales Total Oprtng. Assets Total Operating Assets

This shows that the ultimate strength of the business lies not only on a consistently good margin on sales, but
also on sales generation capacity of the assets of a firm.
2.2 Factors that specifically relate to Working Capital Management:

These were taken from ‘Financial Management’ by I. M. Pandey and ‘Cost and Management Accounting’ by T. S.
Reddy and Y. S. Hari Prasad Reddy.
2.2.1 Net Working Capital:
It is equal to,
Current Assets – Current Liabilities (2.2.1)
A measure of both a company's efficiency and its short-term financial health. Positive working capital means that
the company is able to pay off its short-term liabilities. Negative working capital means that a company currently
is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).
2.2.2 Net Working Capital per unit of Sales:
It is equal to
Net working capital (2.2.2)
Net sales
This gives the performance of the working capital and how efficiently it is used in generating sales.

2.2.3 Receivables Collection Period:

 It is calculated as,
360 days (2.2.3)
Receivables turnover
This is the average number of days receivables are outstanding before being collected.

2.3 Trend Analysis

The term "trend analysis" refers to the concept of collecting information and attempting to spot a pattern,
or trend, in the information..
It is a mathematical technique that uses historical results to predict future outcome. This is achieved by tracking
variances in cost and schedule performance. In this context, it can be used as a quality control tool.
CHAPTER 3
RESEARCH METHODOLOGY
3.1 Research Problem
The financial statements of Sara Impex for 3 years are analyzed, compared and contrasted with an analysis of
financial statements of 4 other well established companies to find out Sara’s strengths and weaknesses.
3.2 Research Design
A Descriptive Design is used in the research, since the study is structured with clearly stated questions. The
problem is clearly defined and data for the study is available from secondary sources such as the financial
statement and only an analysis is required.
3.3 Sample Size

The sample consists of four companies, two of which are major multinational companies and the other two
are companies of Indian origin.

3.4 Sources of Data

Financial statements of Sara Impex was directly got from the company. The other financial statements were got
from the websites of the respective companies.

3.5 Software used

Microsoft Excel XP has been used to do the technical analysis.

3.6 Sampling Method

Purposive sampling has been used in the study. Purposive sampling is a non-probability sampling that conforms
to a certain criteria.
In Purposive Sampling, Quota Sampling has been used, to improve the representativeness. Two different types
of companies were taken,
i) Multinational Companies of foreign origin: Pfizer, AstraZeneca
ii) Companies based in India: Cipla, Divi
3.7 Period of study
The financial statements of 3 years from 2006 to 2008 of each of the companies selected have analyzed.
CHAPTER 4
DATA ANALYSIS AND INTERPRETATION
The following techniques have been used for analysis of the data,
i) Ratio Analysis
ii) Trend Analysis
Important note:
The values that have been used in the analysis are mean values of the factors that have been determined for the
financial statements of the respective companies across 3 years