SUMMER TRAINING PROJECT

ON
IDENTIFYING WEALTH OF AN ORGANIGATION BY ANALYSING
ACCOUNTING RATIOS

SUBMITTED FOR PARTIAL FULFILMENT OF THE DEGREE OF

MASTER IN BUSINESS ADMINISTRATION (MBA)
SESSION (2014-15)

Submitted To:

Submitted By:

Mr Sudhir Rana

Gaurav Saini

Asst. Professor

MBA 3rd Sem

MMIM

1213710

MAHARISHI MARKANDESHWAR INSTITUTE OF MANAGEMENT MAHARISHI MARKANDESHWAR

UNIVERSITY, MULLANA, AMBALA HARYANA, 133203
INDIA

ii

ABSTRACT
With the delicensing of pharmaceutical industry and complemented by scientific talent and research
capabilities and Intellectual Property Protection Regime, Indian pharmaceutical industry is ready to
take new challenges globally. Indian pharmaceutical industry is playing a key role in promoting and
sustaining development in the vital field of medicines. Financial analysts often assess firm's
production and productivity performance, profitability performance, liquidity performance, working
capital performance, fixed assets performance, fund flow performance and social performance. The
financial performance analysis identifies the financial strengths and weaknesses of the firm by
properly establishing relationships between the items of the balance sheet and profit and loss
account. Thus, the present study is of crucial importance to measure the firms liquidity,
profitability, and other indicators that the business is conducted in a rational and normal way;
ensuring enough returns to the shareholders to maintain at least its market value. In this context
project has undertaken an analysis of financial performance of pharmaceutical company to
understand how management of finance plays a crucial role in the growth.

iii

DECLARATION

I hereby declare that the Summer Training Project Report Entitled Application of Accounting
Ratios to know soundness of the Company is submitted by me in partial fulfilment of the
requirement for the degree of MBA to at MM Institute of Management affiliated, is my all the
contents of it are true to my personal knowledge and the same has not been submitted to any other
University/Institution for the award of any degree.

DATE .

Gaurav Saini

PLACE .

iv

PREFACE

As a part of MBA (Masters of Business administration) at MM Institute of Management, MM

University, Mullana, Ambala. This report is our first assignment. This report aims at the
identification of financial activities effecting the business organization.
The organization for the purpose of the study, chosen by me, was Ind-Swift Limited
Chandigarh. It includes the history, effects on Indian economy, and social responsibilities of the
firm. A special emphasis is given to the Financial & Accounting analysis.

ACKNOWLEDGMENT

"I Give Thanks & Our Heart Kneels to Pray:

God Keep Me & Guide Me & Go with Me Today"
First of all, I thank the "God", for giving me patience and strength to overcome the
difficulties which crossed our way in accomplishing of this Endeavour.
I am extremely thankful to my project supervisor Mr Praveen Sharma (HOD of COST &
MIS) Ind-Swift Limited Chandigarh; who has provided me great opportunity to work under this
project and given me his full-hearted support and guidance to clear our all doubts with patience.
I am grateful to humble and esteemed Mr Sudhir Rana (Assistant Professor MM Institute of
Management) & Mr Praveen Chaudhary (Accounts Manager) Ind-Swift Limited Chandigarh; for
his unmatched assistance by timely providing me at the time of my research work.
I wish my greatest gratitude and personally thankful to all my Ind-Swift Limited Staff
members and my friends & colleagues without whose friendly support and knowledge this project
would have not been completed.

Gaurav Saini

vi

Contents
Abstract
Declaration
Preface
Acknowledgement
1. Introduction

01

1.1. Overview of the project

01

1.2. Introduction of Pharmaceutical industry

02

1.2.1.

History

03

1.2.2.

Patient protection

04

1.2.3.

Product development

04

1.2.4.

Small, Medium enterprise

05

1.2.5.

Challenges

05

1.2.6.

Pharmaceuticals and biotechnology

07

1.2.7.

Overall scenario

07

1.3. Introduction to the company

09

1.3.1.

About the company

09

1.3.2.

Company profile

11

1.3.3.

Chronicles

11

1.3.4.

Business of strategies the company

13

1.3.5.

Awards/Achievements

14

1.3.6.

Ind Swift Ltd. today

14

2. Literature Review

16

3. Research Methodology

19

3.1.

Meaning of research

19

3.2.

Process of financial evaluation

19

3.3.

Objectives of the study

20

3.4.

Need for this study

20

3.5.

Problem Statement

20

3.6.

Research design

21

3.7.

Data Collection

21

3.8.

Data analysis

23

3.9.

Ratio Analysis

24

3.10. Ratio Chart

26

3.11. Types of Ratios

27
vii

4. Data Collection and Interpretation

4.1.

Current Ratio

29

4.2.

Quick Ratio

31

4.3.

Debt-equity Ratio

33

4.4.

Total-asset to debt ratio

35

4.5.

Proprietary Ratio

37

4.6.

Inventory Turnover Ratio

39

4.7.

Debtors Turnover Ratio

41

4.8.

Working Capital Turnover Ratio

43

4.9.

Fixed Assets Turnover Ratio

45

4.10. Current Assets Turnover Ratio

47

4.11. Gross Profit Ratio

49

4.12. Operating Ratio

52

4.13. Net Profit Ratio

54

4.14. Return on Investment

56

4.15. Earning Per Share

58

4.16. Dividend Per Share

60

5. Findings

62

6. Suggestions

63

7. Conclusions

64

8. References

65

9. Annexure 1 Balance Sheet

66

10. Annexure 2 Profit & Loss A/C

67

11. Annexure 3 Cash Flow statement

68

viii

Chapter 1. Introduction
1.1. Overview of the Project
The financial health plays a significant role in the successful functioning of a firm. Poor financial
health threatens the very survival of the firm and leads to business failures. The recent financial
crisis and the ensuing economic downturn have had a significant impact on the corporate sector.
Corporate profitability has eroded sharply while debt burden has increased. Corporate failures are a
common problem of developing and developed economies. Failure is not an impulsive outcome and it
grows constantly in stages. There are unique characteristics of failure in firm's financial levels prior to
reaching the levels of total failures. A protective effort could be made effectively if the company is
foreseen to be proceeding in the direction of potential bankruptcy and this can help the company and
the stakeholders from facing the painful consequences of a complete failure.

In what way can financial data add depth to our understanding of why some firms cease growing,
discontinue, fail, or go into bankruptcy? Signs of potential corporate failure are evident months
before the actual bankruptcy materializes. But accurate prediction of declining business activity
that leads to bankruptcy allows time for managers and creditors to take corrective action.

The turbulent and the competitive scenario in the corporate sector have made it imperative for
the stakeholders to assess the financial health of the companies.

With the recent global financial crisis and the failure of many organizations in the U.S and the
European countries it has become all the more necessary that the stakeholders study the financial health
of their organization. For companies, being able to meet their financial obligations is an integral part of
maintaining operations and growing in the future. If the company is not in a good financial health it
may not be able to survive in the future. That's why it's essential for investors to know how to evaluate
the short-term as well as long term financial health of the organisation.
Performance evaluation of a company is usually related to how well a company can use it assets,
shareholder equity and liability, revenue and expenses. Financial ratio analysis is one of the best
tools of performance evaluation of any company. In order to determine the financial position of the
pharmaceutical company and to make a judgment of how well the pharmaceutical company
efficiency, its operation and management and how well the company has been able to utilize its
assets and earn profit.

We used ratio analysis for easily measurement of liquidity position, asset management condition,
profitability and market value and debt coverage situation of the pharmaceutical company for
performance evaluation. It analysis the company use of its assets and control of its expenses. It
determines the greater the coverage of liquid assets to short-term liabilities and it also compute
ability to pay pharmaceutical company monthly mortgage payments from the cash generate. It
measures the overall efficiency and performance. It determines of share market condition of that
company. It also used to analysis the pharmaceutical companys past financial performance and to
establish the future trend of financial position.

1.2. Overview of Pharmaceutical industry

The Pharmaceutical industry in India is the world's third-largest in terms of volume. According to
Department of Pharmaceuticals of the Indian Ministry of Chemicals and Fertilizers, the total
turnover of India's pharmaceuticals industry between 2008 and September 2009 was US$21.04
billion. While the domestic market was worth US$12.26 billion. The industry holds a market share
of $14 billion in the United States.
According to India Brand Equity Foundation, the Indian pharmaceutical market is likely to grow at
a compound annual growth rate (CAGR) of 14-17 per cent in between 2012-16. India is now among
the top five pharmaceutical emerging markets of the world.
Exports of pharmaceuticals products from India increased from US$6.23 billion in 200607 to
US$8.7 billion in 200809 a combined annual growth rate of 21.25%. According to
PricewaterhouseCoopers (PWC) in 2010, India joined among the league of top 10 global
pharmaceuticals markets in terms of sales by 2020 with value reaching US$50 billion.
The government started to encourage the growth of drug manufacturing by Indian companies in the
early 1960s, and with the Patents Act in 1970. However, economic liberalisation in 90s by the
former Prime Minister P.V. Narasimha Rao and the then Finance Minister, Dr. Manmohan Singh
enabled the industry to become what it is today. This patent act removed composition patents from
food and drugs, and though it kept process patents, these were shortened to a period of five to seven
years.
The lack of patent protection made the Indian market undesirable to the multinational companies
that had dominated the market, and while they streamed out. Indian companies carved a niche in
both the Indian and world markets with their expertise in reverse-engineering new processes for
manufacturing drugs at low costs. Although some of the larger companies have taken baby steps
2

towards drug innovation, the industry as a whole has been following this business model until the
present.
India's biopharmaceutical industry clocked a 17 percent growth with revenues of Rs. 137 billion ($3
billion) in the 200910 financial year over the previous fiscal. Bio-pharma was the biggest
contributor generating 60 percent of the industry's growth at Rs. 88.29 billion, followed by bioservices at Rs. 26.39 billion and bio-agri at Rs. 19.36 billion.
In 2013, there were 4,655 pharmaceutical manufacturing plants in all of India, employing over 345
thousand workers.

1.2.1. History

The number of purely Indian pharma companies is fairly less. Indian pharma industry is mainly
operated as well as controlled by dominant foreign companies having subsidiaries in India due to
availability of cheap labor in India at lowest cost. In 2002, over 20,000 registered drug
manufacturers in India sold $9 billion worth of formulations and bulk drugs. 85% of these
formulations were sold in India while over 60% of the bulk drugs were exported, mostly to the
United States and Russia. Most of the players in the market are small-to-medium enterprises; 250 of
the largest companies control 70% of the Indian market. Thanks to the 1970 Patent Act,
multinationals represent only 35% of the market, down from 70% thirty years ago.
Most pharmaceutical companies operating in India, even the multinationals, employ Indians almost
exclusively from the lowest ranks to high level management. Home-grown pharmaceuticals, like
many other businesses in India, are often a mix of public and private enterprise.
In terms of the global market, India currently holds a modest 12% share, but it has been growing at
approximately 10% per year. India gained its foothold on the global scene with its innovatively
engineered generic drugs and active pharmaceutical ingredients (API), and it is now seeking to
become a major player in outsourced clinical research as well as contract manufacturing and
research. There are 74 US FDA-approved manufacturing facilities in India, more than in any other
country outside the U.S, and in 2005, almost 20% of all Abbreviated New Drug Applications
(ANDA) to the FDA are expected to be filed by Indian companies. Growth in other fields
notwithstanding, generics is still a large part of the picture. London research company Global
Insight estimates that Indias share of the global generics market will have risen from 4% to 33% by

2007. The Indian pharmaceutical industry has become the third largest producer in the world and is
poised to grow into an industry of $20 billion in 2015 from the current turnover of $12 billion.

1.2.2. Patent protection

As it expands its core business, the industry is being forced to adapt its business model to recent
changes in the operating environment. The first and most significant change was the 1 January 2005
enactment of an amendment to Indias patent law that reinstated product patents for the first time
since 1972. The legislation took effect on the deadline set by the WTOs Trade-Related Aspects of
Intellectual Property Rights (TRIPS) agreement, which mandated patent protection on both
products and processes for a period of 20 years. Under this new law, India will be forced to
recognise not only new patents but also any patents filed after 1 January 1995. Indian companies
achieved their status in the domestic market by breaking these product patents, and it is estimated
that within the next few years, they will lose $650 million of the local generics market to patentholders.
In the domestic market, this new patent legislation has resulted in fairly clear segmentation. The
multinationals narrowed their focus onto high-end patients who make up only 12% of the market,
taking advantage of their newly bestowed patent protection. Meanwhile, Indian firms have chosen
to take their existing product portfolios and target semi-urban and rural populations.

1.2.3. Product development

Indian companies are also starting to adapt their product development processes to the new
environment. For years, firms have made their ways into the global market by researching generic
competitors to patented drugs and following up with litigation to challenge the patent. This
approach remains untouched by the new patent regime and looks to increase in the future. However,
those that can afford it have set their sights on an even higher goal: new molecule discovery.
Although the initial investment is huge, companies are lured by the promise of hefty profit margins
and have a legitimate competitor in the global industry. Local firms have slowly been investing
more money into their R&D programs or have formed alliances to tap into these opportunities.

1.2.4. Small and medium enterprises

As promising as the future is for a whole, the outlook for small and medium enterprises (SME) is
not as bright. The excise structure changed so that companies now have to pay a 16% tax on the
maximum retail price (MRP) of their products, as opposed to on the ex-factory price. Consequently,
larger companies are cutting back on outsourcing and what business is left is shifting to companies
with facilities in the four tax-free states Himachal Pradesh, Jammu & Kashmir, Uttaranchal and
Jharkhand. Consequently a large number of pharmaceutical manufacturers shifted their plant to
these states, as it became almost impossible to continue operating in non-tax free zones. But in a
matter of a couple of years the excise duty was revised on two occasions, first it was reduced to 8%
and then to 4%. As a result the benefits of shifting to a tax free zone were negated. This resulted in,
factories in the tax free zones, to start up third party manufacturing. Under this these factories
produced goods under the brand names of other parties on job work basis.
As SMEs wrestled with the tax structure, they were also scrambling to meet the 1 July deadline for
compliance with the revised Schedule M Good Manufacturing Practices (GMP). While this should
be beneficial to consumers and the industry at large, SMEs have been finding it difficult to find the
funds to upgrade their manufacturing plants, resulting in the closure of many facilities. Others
invested the money to bring their facilities to compliance, but these operations were located in nontax-free states, making it difficult to compete in the wake of the new excise tax.

1.2.5. Challenges

.Even after the increased investment, market leaders such as Ranbaxy and Dr. Reddys Laboratories
spent only 510% of their revenues on R&D, lagging behind Western pharmaceuticals like Pfizer,
whose research budget last year was greater than the combined revenues of the entire Indian
pharmaceutical industry. This disparity is too great to be explained by cost differentials, and it
comes when advances in genomics have made research equipment more expensive than ever. The
drug discovery process is further hindered by a dearth of qualified molecular biologists. Due to the
disconnection between curriculum and industry, pharma in India also lack the academic
collaboration that is crucial to drug development in the West and so far.
The pharmaceutical industry is undergoing a period of intense transformation. Increased scrutiny of
operational and research practices together with difficult questions over the safety of marketed
drugs have created uncertainty in what has traditionally been considered a stable and highly
5

profitable business. Many analysts suggest that the industry is moving from the era of 'blockbuster'
drugs to a new model of drug development known as 'personalised medicine'.
Key issues affecting companies in the pharmaceutical sector include:

1.2.5.1.
Successfully developing innovative drugs and enhancing R&D
productivity

Companies need to move new products into existing and new markets quickly to obtain sufficient
benefit from a limited patent life and to compensate for development costs which can exceed $800
million per drug. However, the issues involved in effectively carrying out research and development
are complex and transcend science. The regulatory environment is also a key component that affects
every stage of the process.

1.2.5.2.

Pricing pressures and shrinking margins

Contrary to public perception, drugs form only a small proportion of overall healthcare costs.
However, the high profitability of pharmaceuticals companies makes them a relatively easy target
for healthcare providers trying to reduce costs. One of the solutions for the companies is to have an
efficient control over operating costs.

1.2.5.3.

Reputation management

A number of recent product recalls, despite quality assurance processes and regulatory
requirements, have led many consumers to believe that pharmaceutical manufacturers have lost
sight of their original vision of improving human health and are more interested in increasing
profits. In the absence of trust, the public may demand an alternative business model which may
impose unacceptable controls and operating restrictions.

1.2.5.4.

Managing regulatory compliance

The pharmaceutical industry is experiencing a period of heightened regulatory scrutiny in a number

of areas. Therefore, the industry will be challenged to move beyond the current crisis management

approach to regulatory compliance and implement a comprehensive strategic approach that builds
compliance into the way companies do business.

1.2.6. Pharmaceuticals and biotechnology

Unlike in other countries, the difference between biotechnology and pharmaceuticals remains fairly
defined in India. Bio-tech there still plays the role of pharmas little sister, but many outsiders have
high expectations for the future. India accounted for 2% of the $41 billion global biotech market
and in 2003 was ranked 3rd in the Asia-Pacific region and 11th in the world in number of biotech.
In 2004-5, the Indian biotech industry saw its revenues grow 37% to $1.1 billion. The Indian
biotech market is dominated by bio pharmaceuticals; 75% of 20045 revenues came from biopharmaceuticals, which saw 30% growth last year. Of the revenues from bio-pharmaceuticals,
vaccines led the way, comprising 47% of sales. Biologics and large-molecule drugs tend to be more
expensive than small-molecule drugs, and India hopes to sweep the market in bio-generics and
contract manufacturing as drugs go off patent and Indian companies upgrade their manufacturing
capabilities.
Most companies in the biotech sector are extremely small, with only two firms breaking 100 million
dollars in revenues. At last count there were 265 firms registered in India, over 75% of which were
incorporated in the last five years. The newness of the companies explains the industrys high
consolidation in both physical and financial terms. Almost 50% of all biotech are in or around
Bangalore, and the top ten companies capture 47% of the market. The top five companies were
home-grown; Indian firms account for 62% of the bio-pharma sector and 52% of the industry as a
whole. The Association of Biotechnology-Led Enterprises (ABLE) is aiming to grow the industry
to $5 billion in revenues generated by 1 million employees by 2009, and data from the
Confederation of Indian Industry (CII) seem to suggest that it is possible.

1.2.7. Overall scenario

The Indian pharma industry has been growing at a compounded annual growth rate (CAGR) of
more than 15 per cent over the last five years and has significant growth opportunities. India is now
among the top five pharmaceutical emerging markets in the world. According to a report of
McKinsey & Companys , the Indian pharmaceuticals market will grow to US$55 billion in 2020;
7

and if aggressive growth strategies are implemented, it has further potential to reach US$70 billion
by 2020. The industry, particularly, has been the front runner in a wide range of specialties
involving complex drugs' manufacture, development, and technology. With the advantage of being
a highly organized sector, the number of pharmaceutical companies is increasing their operations in
India. The pharmaceutical industry in India is an extremely fragmented market with severe price
competition and government price control. The industry meets around 70 per cent of the country's
demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals, and injectable's. The domestic pharmaceutical market is expected to register a
strong double-digit growth of 13-14 per cent in 2013 on back of increasing sales of generic
medicines, continued growth in chronic therapies and a greater penetration in rural markets.
Generics will continue to dominate the market while patent-protected products are likely to
constitute 10 per cent of the pie till 2015, according to McKinsey report.

1.3. Introduction to the Company

1.3.1. About the Company
Ind-Swift Limited was incorporated as a public limited company on June 6, 1986 under the
Companies Act 1956. It is the flagship company of India based Ind Swift Group. Ind-Swift Limited
is a north India based pharmaceutical company.
Ind Swift Group is a legendary forename in the world Class Pharmaceutical Industry who has
broaden its horizons by plucking profound & sparkling footprints on multifarious diversified fronts,
whilst going steadily and surely, scripting a success story filled with enviable milestones and
pioneering breakthroughs and has subsequently emergent as a group with an annual turnover of
1000 Crore.
Manufacturing of Pharmaceutical finished dosage are carried out at 7 state-of-the art manufacturing
facilities which are second to the none are duly certified and approved by WHO GMP, spread over
an area of 12, 00, 000 sq. ft. with manufacturing capacities confirming to stringent TGA/MHRA
approvals; possessing an installed capacities of 3 billion units comprising tablets, capsules,
ointments, injectable, liquids & dry syrup (all latest formulations with a marketing network.
Ind-Swift Ltd is an India-based pharmaceutical company. The company is engaged in the
manufacturing and marketing of pharmaceutical finished dosage. The products manufactured by the
company include cephalosporin, quinolones, aminoglycosides, macrolides, chloramphenicol,
tetracycline, and sulphonamides, antianaerobics and anti-fungal's. The company manufactures
various dosage forms, including oral solutions and suspensions; dry syrups and hard gelatine
capsules; tablets; dermatological comprising creams, ointments, and gels; eye and ear drops; and
injectable. The company, through their different divisions, markets formulations focusing on the
needs of various therapeutic segments, such as diabetology, cardiovascular, anaesthesiology,
oncology, ophthalmology, neuropsychiatry, gynaecology, paediatric, ENT, surgery, internal
medicine, dermatology, urology, cardiology, and dental specialty. Ind-Swift Ltd was incorporated
in the year 1986. In the year 1991, the company set up a manufacturing facility for injectable and
eye/ear drops. In the year 1995, they incorporated Ind-Swift Laboratories Ltd for initiating a
backward integration into the manufacturing of apes and advanced intermediates. In the year 1997,
the company commissioned a multipurpose plant with five independent blocks erected as per US
FDA standards, designed by Quara, Switzerland. In addition, they launched a Marketing Division
with the name Ind-Swift Health Care. In the year 2000, the company launched Super Specialty
Division, which is focusing on Cardiology and Diabetology segments. In the year 2001, they
9

launched Pioglitazone and Candesartan, in which the company is the second to launch this product
in India. In addition, they launched Institution/Hospital Division. In the year 2003, the company
launched another division by the name Ind-Swift Biosciences. They entered into formulations
export to six countries and filed patent in US for Clarithromycin. In the year 2004, the company
launched Mukur Division with focus on ophthalmology, neuropsychiatry and ENT. They launched
Nitazoxanide, an antidiarrheal drug, first time in India after successful clinical trials. In addition,
they launched another division by the name Resurgence catering to the Anesthesiology and
Oncology segments. The company opened first overseas office in New Jersey, USA During the year
2004-05, the company launched combination of Nitazoxanide and Ofloxacin, with the brand name
Netazox-OF, first time in Asia. They commenced commercial production in their new formulation
facility at Jammu, J&K. During the year 2005-06, the company introduced various new product
ranges in the domestic market through their nine marketing divisions. The new product launches
included the launch of a unique combination of the Quinolone derivative, anti-diarrheal and antibacterial drug that was launched for the first time in India after completion of the successful clinical
trials. They also launched the new marketing division namely Institutions & Hospitals division to
look after the institutional sales. During the year, the company commissioned three new state of the
art finished dosages facility at; Samba in Jammu & Kashmir; 100% EOU at Jawaharpur and an
internationally benchmarked plant at Baddi in Himachal Pradesh. During the year 2006-07, the
company developed and launched 65 new products and line extension. They launched their product
in Kenya and Senegal. They also launched three new marketing divisions to focus on marketing of
products for personal healthcare, veterinary and manufacturing and marketing of products for
international companies. During the year, the company entered into licensing agreements with
number of international Pharma companies for out licensing the technology of their patented
products, Clarithromycin. They received approval of the Drug Authorities of Uganda and Tanzania,
which will pave the way for the supply of their drugs in these countries. During the year 2007-08,
the company's manufacturing unit at Parwanoo was upgraded as per WHO standards. The
company's Global Business unit at Derabassi got MHRA & TGA approval. The manufacturing unit
at Baddi received WHO GMP certification for tablet/SVP/Liquid manufacturing. In August 2007,
the company commissioned a manufacturing facility at the same tax exempted zone and green
plains of Baddi. This facility is for soft Gelatin Encapsulation with an annual capacity of 36 crore.
In December 2007, they launched their new division 'Diagnosis' dealing in medical equipments &
devices. The company also launched animal health care, which is absolutely a new concept with
outsourced marketing.

10

1.3.2. Company Profile

Ind-swift group is Chandigarh based prospering group of over 500 crores, an ISO9001-2000
certified company poised to take up a major share of the pharmaceutical industry. The group has
established a strong reputation as innovators in the Indian pharmaceutical industry. IMS &
EXPRESS PHARMA PULSE ranked it as over of the most promising pharmaceutical group in
India.
This group has two companies under its banner:
ISL listed on BSE & NSE, is the flagship company of the Ind-swift group.
ISLL (Ind-swift lab ltd.) is listed at BSE & NSE
It had two unlisted companies Mukur Pharma Pvt. Ltd. & Swift Formulation Pvt. Ltd. Under it, but
they got merged with ISL on June 10th 2004. This will lead to better transparency and good
corporate governance which the market is bound to take notice.

1.3.3. Chronicles

1983 The birth of todays Ind-swift was by the name of Mukur. It dealt with liquid & capsules in
small volume.
1984 Swift Formulation was formed with two more sections viz. tablets and ointments.
1986 Birth of Ind swift Limited/
1986 Introduce for the first time in India Sustained Released tablet Isoxsuprine HCl.
1991 A sterile plant for injectibles, eye/ear drops, was set up cater to the growing market needs.
1994 Ind-swift went public with issues oversubscribed 52 times
1996 Ind-swift Laboratories Limited (ISSL) as born for the manufacture of APIs (Active
Pharmaceutical Ingredient)
1997 A 30 multipurpose plant commissioned with five independent blocs erected as per USFDA
standard, designed by Quara, Switzerland. Another marketing Division launched with the name IndSwift Health Care.

11

2000 Super specialty division (SSD) was launched Cardio & Endo Segment. Launch of Atorva /
Fexafenadine.
2001 Launch of Institution / Hospital Division. 2ND Company to launch Pioglitazone /
Candesartan in India.
2002 Bagged ISO 9001-2000 Certification. Attained recognition in the world over as Indias
largest manufacturer of Clarithromycin Granules. Export to almost 40 countries in the world & set
up eleven representative offices worldwide.
2003 The Ind-swift group achieved a turnover of INR 300 crore and launched another division by
the name of Ind Swift BioscienInd Swift enters into formulation export to 6 countries. Filed Patent
in USFDA for Clarithromycin.
2004 Another division launched by the name Resurgence Group achieves a sale of 375 crores.
Got DGQA registration. Opened first overseas office at New Jersey, USA.
2006-07- .Filled Dossiers for registration in about 20 countries .ISL launched new division AGILE
in joint venture with a Dubai based pharma company focusing on paid management & antiinfectives.
2007-08- Achieved 35th rank among top 300 pharma industries. ISL generics emerged as a 2nd
rank pharma generic company.
2009-10-ISL Received U.S. and E.U. patent for extended release dosage form of Clarithromycin.
Received European patents for the taste masked formulations of Fexofenadine for pediatrics.
Developed the Nitazoxanide an Anti-Diarrheal drug for the first time in India after successful
clinical trial and bioequivalence studies.
2010-11- Restructure of 3 divisions GENERIC, MEGASWIFT, GYNOSWIFT and launched three
new divisions ONCRIT, Q-DEN and CARDIA SWIFT. Ranked 97th largest Pharma company in
the global market by Plimsoll Global Analysis.
2011-12- Ind-Swift in collaboration with Wockhardt UK launches Atorvastatin tablets in UK
ROCHE DIAGNOSTICS partners with ISL to expand TROP T Rapid assay in India Troponin-T is
used to measure damage to the heart muscle and to differentiate between non- cardiac chest pains
and heart attacks.

12

1.3.4. Businesses Strategies of the company

Ind-Swift manufactures and markets finished dosage forms, through its different divisions, focusing
on the needs of various therapeutic segments. The divisions include the following: Super Specialty,
Animal Division, Diagnosis, Institutions, Agile, Bio Sciences, Ethical, Health Care, Max Care,
Mega care, Neuro and Resurgence
The company is also in health Publications- With the maiden issue in September, 2002; Ind-Swifts
Health Publication TRENDZ brings the latest in medical field to the medical fraternity. Routinely
published four times a year, each issue of TRENDZ is devoted to important contemporary
healthcare issues and medical issues of a particular specialty.
Ind Swift is known for its reverse engineering ability with highly focused R & D capabilities (duly
approved by Department of Science & Technology, Govt. of India) and is equipped with state-ofthe-art equipment, facilities and talented pool of scientists and researchers.

A well accepted expertise in NDDS, in India and the world over.

A US patent for Claire OD, with a market size of $300 million.

Another patent for Fexofenadine ODT with a market size of $2.5 billion.

Development of 10 new molecules with a market size of $6 billion.

Ind Swifts efforts and achievements in taste masking of macrolides was India's first and remains
the only feat of its kind in the country. The R &D department is also involved in creating
international opportunities and alliances for CRAMS business, contributing significantly to the
company's profitability. It also offers complete support to international partners for preparing and
filing dossiers for finished dosages. By taking giant strides on roads less traveled, Ind-Swift has
become one of India's fastest growing pharmaceutical companies.
Ind Swift has radiance up in infrastructures business in the name and style of Ind Swift
Infrastructures and developers Ltd, and has come up with a multi crore project named Regalia
Towers, of course a society with 2 bedroom /3 bedroom flats and penthouses owing a mystique
which is exemplary in itself which not only reflects a diversified transformative spell to
infrastructures front but a unique state of art with the best of specifications also. In infrastructures,
Ind Swift plans to be emergent with motels & Resorts project in the upcoming phases.

13

1.3.5. Awards/ Achievements

Ranked as one of the most promising pharmaceutical group in India by Express Pharma Pulse.

All India achievers award as legend in Business house category.

An ISO 9001, 2000 company.

Achieved Pharma Pulse award for three consecutive years for fastest growing & most promising
pharmaceutical company.

1.3.6. Ind Swift Ltd Today

Swift is the fastest flying bird on earth. It is the philosophy behind the genesis of the name Ind
Swift ltd incepted in 1986 when three visionaries the Mehta's, the Munjal's and the Jains, all 1st
generation entrepreneurs visualized the business. Even with limited resources, the vision was to
develop a Pharma enterprise with its body spread internationally and soul rooted in ethics. It is
indeed a proud moment for us today, starting as a small domestic company in 1986 we have
transformed into a truly global organization with its operations and product range in more than 50
countries .Ind Swift today is 2000 crore group, moving forward and still growing to new
dimensions and spheres every day.
Ind Swift Ltd. is the flagship company of the Ind Swift group at Chandigarh.
Ind Swift Ltd is listed at three stock exchanges-Mumbai stock Exchange, Ludhiana stock exchange
& National stock exchange. It has a string prescribing Doctor base of, over 2.5 lacs doctors from
Gynaecology, Paediatrics, Cardiology/ Diabetes, Dermatology, ENT, Dentistry, Neuropsychiatry,
Gastrology, Urology speciality.
Over 225 offices in India
Portfolio of over 750 products with presence in high growth therapeutic segments of Cardiology,
Diabetology, anti-depressant, anti-allergic, anti-infective, Neurology and Oncology.
A nation-wide distribution network of over 1000 marketing professionals.
R&D facility by DSIR, Govt. of India. At present a team of 50 scientists to be augmented to 100
scientists.
The company is poised to grab a large share of the burgeoning pharmaceutical market with:
Strong and Supportive Top Management headed by Sh. S. R. Mehta, Chairman
Stage of R&D
Promising Quality products

14

 Innovative Marketing Strategies

7 District Marketing Divisions
Dedicated & Hardworking Field Force
The current turnover of all divisions combined of ISL is 39946 crore.

15

Chapter 2. Literature Review

A lot of research has gone into studying and analysing the financial health of company by
accountants and researches all over the world. Accounting ratios have been widely used in
development of models for the prediction of financial health and financial distress of company.
Researchers have been trying to find a ratio that would serve as the sole predictor of corporate
health and bankruptcy for a long time. They have also tried to build up models that would help in
predicting the financial health of company.
This chapter will present some definitions of accounting ratios. By understanding financial ratios or
accounting ratios can help the investors know what kind and how much of accounting ratios level
they need to make efficient decisions in investment.
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.
James Clausen (2009), He state that the Profitability Ratio Analysis of Income Statement and
Balance Sheet Ratio analysis of the income statement and balance sheet are used to measure
company profit performance. He said the learn ratio analyses of the income statement and balance
sheet. The income statement and balance sheet are two important reports that show the profit and
net worth of the company. It analyses shows how the well the company is doing in terms of profits
compared to sales. He also shows how well the assets are performing in terms of generating
revenue. He defines the income statement shows the net profit of the company by subtracting
expenses from gross profit (sales cost of goods sold). Furthermore, the balance sheet lists the
value of the assets, as well as liabilities. In simple terms, the main function of the balance sheet is to
show the companys net worth by subtracting liabilities from assets. He said that the balance sheet
does not report profits, theres an important relationship between assets and profit. The business
owner normally has a lot of investment in the companys assets.
Gopinathan Thachappilly (2009), He discuss about the Profitability Ratios Measure Margins and
Returns such as gross, Operating, Pretax and Net Profits, ROA ratio, ROE ratio, ROCE ratio.
However, he determines the Gross profit is the surplus generated by sales over cost of goods sold.
He discussion about the Gross Profit Margin = Gross Profit/Net Sales or Revenue. Moreover,
Operating profits are arrived at by deducting marketing, administration and depreciation and R&D

16

costs from the gross margin. Nonetheless, He explains about the operating profit margin. Operating
Profit Margin = Operating Profit/Net Sales or Revenue. Nevertheless, pretax profits are computed
by deducting non-operational expenses from operating profits and by adding non-operational
revenues to it. Pretax Profit Margin = Pretax Profit/Net Sales or Revenue .Nonetheless, he also
analysis about the net profit margin.Net Profit Margin = Net Profit/Net Sales or Revenue. He also
explains that the returns on resources use dividend into three categories such as ROA, ROE,
and ROCE: At first the Return on Assets = Net Profit/ (Total Assets at beginning of the period +
Total Assets at the close of the period)/2) - The denominator is the average total assets employed
during the year. Return on Equity = Net Profit/ (Shareholders' Equity at the beginning of the year +
Shareholders' Equity at the close of the year)/2).ROCE ratio: Return on Capital Employed = Net
Profit/ (Average Shareholders' Equity + Average Debt Liabilities) - Debt Liabilities.
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.

James Clausen (2009), 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 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.

17

Gopinathan Thachappilly(2009),he also state that the Liquidity Ratios help Good Financial
.He know that a business has high profitability, it can face short-term financial problems and

its

funds are locked up in inventories and receivables not realizable for months. Any failure to meet
these can damage its reputation and creditworthiness and in extreme cases even lead to bankruptcy.
In addition to, liquidity ratios are work with cash and near-cash assets of a business on one side, and
the immediate payment obligations (current liabilities) on the other side. The near-cash assets
mainly include receivables from customers and inventories of finished goods and raw materials.
Coupled with, current ratio works with all the items that go into a business' working capital, and
give a quick look at its short-term financial position. Current assets include Cash, Cash equivalents,
Marketable securities, Receivables and Inventories. Current liabilities include Payables, Notes
payable, accrued expenses and taxes, and Accrued installments of term debt). Current Ratio =
Current Assets / Current Liabilities. Similarly, Quick ratio excludes the illiquid items from current
assets and gives a better view of the business' ability to meet its maturing liabilities. Quick Ratio =
Current Assets minus (Inventories + Prepaid expenses + Deferred income taxes + other illiquid
items) / Current Liabilities. In the final ratio under this article is cash ratio .Cash ratio excludes even
receivables that can take a long time to be converted into cash. Cash Ratio = (Cash + Cash
equivalents + Marketable Securities) / Current Liabilities.
James Clausen (2009), He denotes that about the total asset ratio. The calculation uses two factors,
total revenue and average assets to determine the turnover ratio. When calculating for a particular
year, the total revenue for that year is used. Instead of using the year ending asset total from the
balance sheet, a more accurate picture would be to use the total average assets for the year. Once the
average assets are determined for the same time period that revenue is compared, the formula for
calculating the asset turnover ratio is. Total Revenue / Average Assets = Asset Turnover Ratio.
Gopinathan Thachappilly (2009), he shows that the EPS is computed by dividing the company's
earnings for the period by the average number of shares outstanding during the period. He discuss
that Stock analysts regularly estimate future EPS for listed companies and this estimate is one major
factor that determines the share's price. Price/Earnings (PE) Ratio = Stock Price per Share /
Earnings per Share (EPS).Hence, many investors prefer the Price/Sales ratio because the sales value
is less prone to manipulation. Price/Sales (PS) Ratio = Stock Price per Share / Net Sales per Share.
The Dividend Yield, The dividend yield ratio annualizes the latest quarterly dividend declared by
the company Dividend Yield = Annualized Dividend per Share / Stock Price per Share.

18

Chapter 3. Research Methodology

3.1. Meaning of research

Research is defined as a scientific & systematic search for pertinent information on a
specific topic. Research is an art of scientific investigation. Research is a systemized effort
to gain new knowledge. The search for knowledge through objective and systematic
method of finding solution to a problem is a research.

3.2. Process of financial evaluation

Model Of Performance
Evaluation

Selection of Financial
Report
Liquidity Ratio
Identification of
balance sheet, income
statement and cash
flow statement
Solvency Ratio
Ratio analysis
Activity Ratio

Profitability Ratio

Graphical
representation

Mathematical
calculation

Research is a systematic and continuous method of defining a problem, collecting the facts and
analysing them, reaching conclusion forming generalizations.
Research methodology is a way to systematically solve the problem. It may be understood as a
science of studying how research is done scientifically. In it we study the various steps that are
19

generally adopted by a researcher in studying his research problem along with the logic behind
them.

3.3. Objectives of the study:1. Assessment of current financial position of the company
2. Comparison of the firms past, present financial position.
3. It is done to find firms financial strengths and weaknesses.
4. To compare present performance with past performance.
5. To study the level of risk of operations.
6. To connect the academic study with industry exposure.

3.4. Need for this Study:

The major reason behind doing this project was to see the Financial status of the company .How
much company has eased their funds by issuing their securities and with some other factors. To get
aware about the all financial Performa and the structure by which the company update their sources.
Besides this, the study was aimed at finding out the effort of the Finance System on1. The employees
2. On the owners (shareholders)
3. Debtors and creditors.
4. Stakeholders (Banks and the Financial Institute)

3.5. Problem Statement

The research problems, in general refers to some difficulty with a researcher experience in the
contest of either a particular a theoretical situation and want to obtain a salutation for same. The
present project has been undertaken to do the Analysis of Financial Statements at IND SWIFT
PHARMACEUTICAL LTD.

20

3.6. Research Design:

A research design is a systematic plan to study a scientific problem. The design of a study defines
the study type, data collection methods and a statistical analysis plan.
Exploratory research is research conducted for a problem that has not been clearly defined. It often
occurs before we know enough to make conceptual distinctions or posit an explanatory relationship.
Exploratory research helps determine the best research design, data collection method and selection
of subjects. It should draw definitive conclusions only with extreme caution. Given its fundamental
nature, exploratory research often concludes that a perceived problem does not actually exist.
Exploratory research often relies on secondary research such as reviewing available literature and/or
data.

3.7. Data collection

Main data for our research are the annual financial reports on Ind-Swift Limited from 2011 to 2013.
When we measurement the ratio analysis for any company, we must be used in annual financial
report otherwise we dont measurement. We have also used four main financial statements for ratio
analysis of pharmaceutical company such as; balance sheets, an income statement, cash flow
statement; statement of shareholders equity. After the research problem has been identified and
selected the next step is to gather the requisite data. While deciding about the method of data
collection to be used for the researcher should keep in mind two types of data viz. primary and
secondary.

Types of Data

Secondary

Primary

21

The secondary data as it has always been important for the completion of any report provides a
reliable, suitable, adequate and specific knowledge. The standard cost reports, working sheets
provide the knowledge and information regarding the relevant subject. Secondary data is the data
compiled by someone other than the user. It includes published in the form of documents, research
papers, web pages and other organizational records.
It is recommended to use secondary data in order to avoid duplicating of efforts, running up,
unnecessary costs, and tiring of informants.

3.7.1. Secondary Data Sources:

1. Internet Sites.
2. Reference Books
3. Company Records (Annual Reports of the company)
4. Outline Application forms.

3.7.2. Objective to bank upon secondary Data:

There are some advantages of using secondary data:
1. The secondary data is more economical.
2. The use of secondary data saves much more time. Secondary data is useful to indicate
deficiencies & gaps.
3. Hence, analysis of secondary data may improve the understanding of the problem & throw more
light on newer ideas.
4. In this context it can be stated that secondary data was used because it was readily available for
use & was very relevant to the pertinent issues. It has been collected sometime in the past, but is
not so remote to render the data unless. Moreover, the proper accuracy of the data has also been
appropriately ensured by considerable extent of care in its collection.
5. The relevant secondary data has been obtained from the internal source within the company.
The information has been sourced from the accounting record &MIS report of the Regional
Office of the company. Some of the information has been extracted from the intranet or web
portal of the company.

22

3.8. Data Analysis

3.8.1. Studying the annual report:

For this purpose, secondary data is collected. Analysing the financial statement of the company
for the present year as well as the past year and identifying the main source as well as
application of funds. Ratio analysis would be used to provide us a deep view into the companys
financial statement. The analysis of financial statement is a process of using ratio analysis to
evaluate the relationship between components part of financial statement to obtain a better
understanding of the firms position & performance. This would be followed by an insight into
the working capital cycle of the company. This involves calculation of the raw material
inventory period, conversion period, average credit period etc.

3.8.2. Limitations of the Study:-

The personal biases of the respondents might have entered into their response.
1. The first limitation of this project is limitation in categories of accounting ratios. This
project only focuses on four types of accounting ratios about: liquidity, solvency, activity,
and profitability ratios. Therefore, this project cannot express all aspects, functions also
disadvantages of other accounting ratios that are not mentioned
2. Besides, this work process is designed under a tight college timetable and working pressure.
Hence, it is not a perfect and standardized research to investors and users.
3. Qualitative Information: All the analysis is based on quantitative information. There is not
much importance given to qualitative information.
4. Historical Data: All the study is based on historical data so that it has no more importance.
5. Lack of Comparative Data: There was no other organization by which we can compare the
data of INDSWIFT PHARMACEUTICAL LTD. for effective analyses.
6. Secrecy: Some of the information was kept confidential and was not disclosed to any person
whosoever.

23

3.8.3. Interpretation

We used the model for performance evaluation of pharmaceutical company. It is briefly discussed
on next page. It indicates the different steps such Selection of financial report, Identification of
balance sheet, income statement and cash flow statement,

ratio analysis, mathematical

calculation and statistical analysis of the company.

First step of model is the selection of financial report that means a chore of annual financial report.
The annual financial report present financial data of a company's position, operating performance,
and funds flow for an accounting period .We are using the annual reports from 2011 to 2013 of the
company.
Second step of model, we identify the balance sheet, income statement, cash flow statement from
the annual financial report. We use some data from balance sheets for different kind of ratio such as
liquidity ratios, solvency ratios. In contrast, we was used some sources from income statement.
When we analysis the profitability ratios we must be use income statement of the company.
The third step of model, we identify the suitable ratio for performance evaluation and we analysis
the ratio such as liquidity ratio, solvency ratio, profitability ratio, activity ratio, etc. All types of
ratio are important for knowing how well a company is in generating its assets, liquidity, revenue,
expense, shareholder equity profit or loss etc.
The Forth step of model, we use Mathematical calculation. Here we identify some figure from the
income statement and balance sheet from 2011 to 2013.
The five step of model; we used the graphical analysis for evaluation of the company. The graphical
analysis is an inexpensive, easy-to-learn program for producing, analysing, and printing graphs.
Here we used Microsoft excel for graphic representation.
The finally step of model, we analyse the various ratios. We also analyse why the company is not in
a good position and where its lacking.

3.9. Ratio Analysis

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

24

then calculated. Ratio analysis is used to evaluate various aspects of a companys operating and
financial performance such as its liquidity, solvency, activity and profitability. 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.
Financial ratio analysis is a useful tool for users of financial statement. It has following advantages:
Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company by just
looking at few numbers instead of reading the whole financial statements.
Limitations
1. Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of
financial ratio analysis are:
2. Different companies operate in different industries each having different environmental
conditions such as regulation, market structure, etc. Such factors are so significant that a
comparison of two companies from different industries might be misleading.
3. Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence ratio
analysis is less useful in such situations.
4. Ratio analysis explains relationships between past information while users are more concerned
about current and future information.

25

3.10. Ratio Chart

Ratios

Liquidity Ratio

Solvency Ratio

Activity Ratio

Profitability Ratio

Current Ratio

Debt-Equity Ratio

Inventory
Turnover Ratio

Gross Profit Ratio

Quick Ratio

Total Asset to
Debts Ratio

Debtors Turnover
Ratio

Operating Ratio

Proprietory Ratio

Working Capital
Turnover Ratio

Net Profit Ratio

Fixed Asset
Turnover Ratio

Return on
Investment

Current Asset
Turnover Ratio

Earning Per Share

Dividend Per
Share

26

3.11. Types of ratios

1. Liquidity Ratios
Liquidity ratios analyse the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these
ratios show the cash levels of a company and the ability to turn other assets into cash to pay off
liabilities and other current obligations.
Liquidity is not only a measure of how much cash a business has. It is also a measure of how
easy it will be for the company to raise enough cash or convert assets into cash. Assets like
accounts receivable, trading securities, and inventory are relatively easy for many companies to
convert into cash in the short term. Thus, all of these assets go into the liquidity calculation of a
company.
Here are the most common liquidity ratios.
1.1. Current ratio
1.2. Quick Ratio

2. Solvency Ratios
Solvency ratios, also called leverage ratios, measure a company's ability to sustain operations
indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency
ratios identify going concern issues and a firm's ability to pay its bills in the long term. Many
people confuse solvency ratios with liquidity ratios. Although they both measure the ability of a
company to pay off its obligations, solvency ratios focus more on the long-term sustainability of
a company instead of the current liability payments.
Solvency ratios show a company's ability to make payments and pay off its long-term
obligations to creditors, bondholders, and banks. Better solvency ratios indicate a more
creditworthy and financially sound company in the long-term.
The most common solvency ratios include:
2.1. Debt-equity ratio
2.2. Total asset to debt ratio
2.3. Proprietary ratio

3. Activity Ratios
Accounting ratios that measure a firm's ability to convert different accounts within its balance
sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm
based on its use of its assets, leverage or other such balance sheet items. These ratios are
important in determining whether a company's management is doing a good enough job of
generating revenues, cash, etc. from its resources.
27

The most common solvency ratios include:

3.1. Inventory turnover ratio
3.2. Debtors turnover ratio
3.3. Creditors turnover ratio
3.4. Working capital turnover ratio
3.5. Fixed assets turnover ratio
3.6. Current assets turnover ratio

4. Profitability Ratios
Profitability ratios compare income statement accounts and categories to show a company's
ability to generate profits from its operations. Profitability ratios focus on a company's return on
investment in inventory and other assets. These ratios basically show how well companies can
achieve profits from their operations.
Investors and creditors can use profitability ratios to judge a company's return on investment
based on its relative level of resources and assets. In other words, profitability ratios can be used
to judge whether companies are making enough operational profit from their assets. In this
sense, profitability ratios relate to efficiency ratios because they show how well companies are
using their assets to generate profits. Profitability is also important to the concept of solvency
and going concern.

Here are some of the key ratios that investors and creditors consider when judging how
profitable a company should be:
4.1. Gross profit ratio
4.2. Operating ratio
4.3. Net profit ratio
4.4. Return on Investment
4.5. Earning per Share
4.6. Dividend per Share

28

Chapter 4. Data Collection and Interpretation

4.1. CURRENT RATIO

Current Ratio is a relationship of current assets to current liabilities and is computed to access the
short-term financial position of the enterprise. It means current ratio is an indicator of the enterprise
ability to meet its short term obligations. Current assets are the assets that are either in the form of
cash or cash equivalents or can be converted into cash or cash equivalents in a short time (say,
within a years time) and current liabilities are liabilities repayable in the short period of time.

Computation:
The ratio is calculated as follows:

Current Ratio:

It is generally accepted that current assets should be two times the current liabilities, and then only
will realization from current assets be sufficient to pay the current liabilities in time and enable the
enterprise to meet other day-to-day expenses

2.00

Current Ratio

1.50

2011

2012

2013

C. Assets

80573.94

98618.25

84283.16

C. Liabilities

70861.63

94579.81

58056.38

Ratio

1.14

1.04

1.45

1.00
0.50
0.00

2011

2012

2013

Objective:
The objective of calculating current ratio is to assess the ability of the enterprise to meet its shortterm liabilities promptly. It is used to assess the short-term solvency of the business enterprise since
29

this ratio assumes that current assets can be converted into cash to meet current liabilities. It shows
the number of times the current assets are in excess over current liabilities.

Significance
A low ratio indicates that the enterprise may not be able to meet its current liabilities on time and
inadequate working capital. On the other hand a high ratio indicates funds are not used efficiently
and are lying idle. It indicates poor investment policies of the management. The current ratio thus,
throws a good light on the short-term financial position and policy of a firm. An enterprise should
have a reasonable current ratio. Although there is no hard and fast rule yet a current ratio of 2:1 is
considered satisfactory.

Findings
The current ratio means the ability of the firm to meet its current liabilities. Current assets get
converted into cash in the operating cycle of the firm and provide the funds needed to pay current
liabilities. As per the above flow of ratio during the last three years it has increased but as per
standards it should be around 2:1 whereas it is 1.45:1 which is still less than required. And even if
we see previous years it was 1.04:1 for 2012 and 1.14:1 for 2011 respectively.

Suggestions
The company is over utilising its funds as in this case we can clearly see that the company is being
on the riskier side. It is suggested to decrease the liabilities of the company.

30

4.2. Quick Ratio

It is also known as Liquid ratio and Acid test ratio. Quick ratio is a relationship of Quick assets with
current liabilities and is computed assess the short-term liquidity of the enterprise in its correct
form. Quick/liquid assets put against the current liabilities given the quick/liquid ratio.

Computation:
Liquid assets are the assets which are either in the form of cash or cash equivalents or can be
converted into cash within one year short period. Liquid assets are computed by deducting stock
and prepaid expenses from total current assets. Liquid assets include cash, bills receivable,
marketable securities, and debtors (excluding bad and doubtful debt), etc. Stock is excluded from
liquid assets because it may take some time before it is converted into cash. Similarly, prepaid
expenses do not provide cash at all and are thus, excluded from liquid assets.
A quick ratio of 1:1 is usually considered favourable, since for every rupee of current liabilities,
there is a rupee of quick assets.

Quick Ratio:

Quick Asset: C. Asset Prepaid Exp. - Stock

Quick Ratio
1
0.8
0.6
0.4
0.2
0

2011

2012

2013

2011

2012

2013

C. Assets

80573.94

98618.25

84283.16

Prepaid Exp.

177.92

178.49

63.88

Stock

47174.50

36553.35

32945.90

Quick Assets

33221.52

61886.41

51273.38

C. Liabilities

70861.63

94579.81

58053.38

Ratio

0.47

0.65

0.88

31

Objective
The objective of computing liquid ratio is to assess the short-term solvency of the enterprise. A part
of the current assets are not readily realisable or convertible into cash. Therefore, the current ratio
does not indicate adequately the ability of the enterprise to discharge the current liabilities as and
when they fall due whereas while computing the liquid assets, a part of current assets that are not
liquid are eliminated. This ratio is an indicator of short-term debt payment capacity of enterprise
and thus, is a better indicator of liquidity. This ratio is very important for banks and financial
institutions but not for manufacturing concerns. The comparison of Current ratio with liquid ratio
would indicate the degree of inventory held.

Significance:
A high quick ratio compared to current ratio may indicate under stocking while a low quick ratio
indicates over stocking.

Findings
In the last year 2013 the quick ratio of the company was 0.88:1. In year 2011 quick ratio was 0.47:1
and in 2012 it was 0.65:1. It is generally accepted as 1:1, which represents that company is doing
well.

Suggestions
The company should carry on doing which will help improving this ratio i.e. buying more quick
assets of keeping more stock of quick assets.

32

4.3. DEBT-EQUITY RATIO

The debt-equity is computed to ascertain soundness of the long term financial position of the firm.
This ratio expresses a relationship b/w debt (external equities) and the equity (internal equities).
That means long term loans i.e. debenture, loans (from financial institutions). Equity means
shareholders funds i.e. preference share capital, equity share capital, reserves less losses and
fictitious assets (preliminary expenses).

Computation:
The debt-equity ratio indicates the proportion between shareholders funds and the long-term
borrowed funds. A higher ratio indicates a risky financial position while a lower ratio indicates
safer financial position. A low debt-equity ratio implies the use of more equity that debt which
means a larger safety by creditors and vice-versa.
Debt-equity ratio is acceptable if it is 2:1, which means debts can be twice the equity.

Debt equity ratio:

( )

( )

3.00
2.00

Debt
Equity
Ratio

1.00
0.00

2011

2012

Debt Equity Ratio

2011
2012
16728.03
27259.40
32280.86
31807.91
0.52
0.86

2013
59062.44
21000.97
2.81

2013

Objective
The objective of the debt equity ratio is to arrive at an idea of the amount of capital supplied to the
enterprise by the proprietors and of asset cushion or cover available to its creditors on liquidation.

33

Significance:
This ratio is sufficient to assess the soundness of long term financial position. It also indicates the
extent to which the firm depends upon outsiders for its existence. In other words, it portrays the
proportion of total funds acquired by a firm by way of loans.
A ratio of 1 or 1:1 means that creditors and stockholders equally contribute to the assets of the
business.
A less than 1 ratio indicates that the portion of assets provided by stockholders is greater than the
portion of assets provided by creditors and a greater than 1 ratio indicates that the portion of assets
provided by creditors is greater than the portion of assets provided by stockholders.
Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of
greater protection to their money. But stockholders like to get benefit from the funds provided by
the creditors therefore they would like a high debt to equity ratio.

Findings
In year 2011 ratio was 0.52:1, in 2012 ratio was 0.86:1 and in 2013 it was 2.81:1 which shows there
was a greater security for the creditors in 2011 & 2012. But in 2013 we have noticed a dramatic rise
in the debts. This shows that company has relied more on debts rather than equity in 2013.

Suggestions
It is suggested that company should not increase its debts any further, as ratio has raised from
0.86:1 in 2012 to 2.81:1 in 2013. It is almost ideal condition for company by such a dramatic
increase in figure might effect the companys.

34

4.4. TOTAL ASSET TO DEBT RATIO

It establishes a relationship between total assets and total long term debts. The two components of
this ratio i.e. total assets and debt are computed as follows:
Total Assets: Total Assets include fixed as well as current assets. However, it does not include
fictitious assets like preliminary expenses, underwriting commission, share issue expenses, discount
on issue of share/debentures, etc., and debit balance of Profit & loss Account.
Long Term Debts: Long-term debts refer to debts that will mature after one year. It includes
debentures, bonds, and loans from financial institutions

Computation:
This ratio is computed by dividing the total assets by long-term debts. This ratio is usually
expressed as a pure ratio, e.g., 2:1.

Total asset to debt ratio:

8.00

Total Assets to Debt Ratio

2011
2012
Total Assets
123718.99 156816.15
Long Term Debts
16728.03
27259.40
Ratio
7.40
5.75

6.00
4.00
2.00
0.00

2011

2012

2013
140735.27
59062.44
2.38

2013

Objective:
The objective of computing the ratio is to establish the relationship b/w total assets and long term
debts of the business. It measures the safety margin available to the providers of long-term debts.it
measures the extent to which debt is covered by the assets.

35

Significance:
A higher ratio represents higher security to lender for extending long term loans to the business. On
the other hand, a low ratio represents a risky financial position as it means that the business depends
heavily on outside loans for its existence. In other words, investment by the proprietors is low

Findings:
It was clear that companys total assets far exceeded its long-term debts in 2011 as ratio was 7.40:1,
but it gradually decreased and in 2012 ratio was 5.75, and ultimately in 2013 ratio was 2.38. This is
an almost ideal ratio for the business.

Suggestions:
High ratio surely provides a safety margin, but it also indicates that is resources are not being fully
utilized and its assets are sitting idle. Hence, a requirement arises to increase its long-term debts
which can be used in the organization.

36

4.5. PROPRIETARY RATIO

It establishes a relationship b/w proprietors fund and total assets. Proprietors funds means share
capital plus reserves and surplus, both of capital and revenue nature. Loss and fictitious assets, if
any are deducted. This ratio shows the extent to which the shareholders own the business. The
difference between this ratio and 100 represents the ratio of total liabilities to total assets.

Computation:
It is calculated by dividing equity (shareholders funds) by total assets. Higher the ratio, the better it
is for all concerns.

Proprietary ratio:

100

Proprietary Ratio

30.00
20.00
10.00
0.00

2011

2012

2011

2012

2013

Equity

32280.86

31807.91

21000.97

Total Assets

123718.99

154431.09

128641.05

Ratio

26.09

20.60

16.33

2013

Objective:
The proprietary ratio highlights the general financial position of the enterprise. This ratio is of
particular importance to the creditors who can ascertain the proportion of shareholders fund in total
assets employed in the firm. The higher the ratio, the better it is for all concerned.

37

Significance:
A ratio indicates adequate safety for creditors. But a very high ratio indicates improper mix of
proprietors funds and loan funds, which results in lower return on investment. It is so because on
loan funds, interest is deductible as an expense and thus, the enterprise does not pay income tax
thereon. As a result, higher return on investment. A low ratio on the other hand, indicates
inadequate or low safety concern for the creditors. It may lead to unwillingness of creditors to
extend credit to the enterprise. It is so because in case of liquidation creditors being unsecured are
likely to lose their money.

Findings:
The proprietary ratio of the company in 2011 was 26.09%, in 2012 was 20.60% and in 2013 it was
16.33% and has decreased gradually over the years, which is not considered good for creditors. As
per standards proprietary ratio should be 60% to 75%, where as in this case it is only 16.33%.

Suggestions:
It is suggested to decrease the equity as total assets are already sitting idle. It can be done by
decreasing its Equity Capital, Preference Capital, Reserves and Surplus, Accumulated funds.

38

4.6. INVENTORY TURNOVER RATIO

It establishes a relationship b/w the cost of goods sold during a given period and average amount of
inventory carried during the period. It indicates whether the investment in stock has been efficiently
used or not, the purpose being to check whether only the required minimum amount is invested in
stocks.

Computation:
Higher ratio indicates that more sales are being produced by a unit of investment in stocks.
Industries in which the stock turnover ratio is high usually work on a comparatively low margin of
profit. The ratio shows better performance if it increases, since it means that the investment in
stocks is leading to higher sales. The reverse is also true.

Inventory Turnover ratio:

()

COGS = Sales Gross profit/loss

Average Stock =

+
2

Inventory Turnover Ratio

20.00
15.00
10.00
5.00
0.00

2011

2012

2013

2011 (P)

2012 (L)

2013 (L)

Sales

86414.42

158341.05

38920.86

G. Profit/G. Loss

4480.87

-2385.06

-12094.22

COGS

81933.55

160726.11

51015.08

Avg. Stock

8774.55

9837.28

9888.68

Ratio

9.34

16.34

5.16

39

Objective
The objective of computing inventory turnover ratio is to ascertain whether investment in stock has
been judicious or not i.e. that only the required amount is invested in stock. A higher ratio indicates
that more sales are being produced by a rupee of investment in stocks.

Significance:
A high ratio indicates that more sales are being produced by a rupee of investment in stocks. A very
high inventory turnover ratio indicates overtrading and it may lead to working capital shortage. A
low inventory turnover ratio may reflect inefficient use of investment, over-investment in stocks,
accumulation of stocks at the end of the period in anticipation of higher prices or unsalable goods,
etc. Thus, only an optimum inventory turnover ratio ensures adequate working capital and also
enables the business to earn a reasonable margin of profit.

Findings
In the year 2011 inventory turnover ratio was 9.34, in 2012 it was 16.34 and in 2013 it was 5.16
times. Although in 2012 it was noticed that inventory turnover ratio was 16.34 times which
represents overtrading.

Suggestions
No suggestions as company is doing well have improved form 16.34 times to 5.16 which is much
better.

40

4.7. Debtors Turnover Ratio

It establishes a relationship b/w net credit sales and average debtors or receivables of the year.
Average debtors are calculated by dividing the sum of debtors in the beginning and at the end by 2.

Computation
While calculating debtors turnover, it is important to remember that doubtful debts are not
deducted from total debtors, since here the purpose is to calculate the number of days for which
sales are tied up in debtors and not the realizable value of debtors. In case details regarding opening
and closing receivables and credit sales are not given, the ratio may be worked out as followings:

Debtors Turnover Ratio:

4.00

Debtors Turnover Ratio

3.00

2011

2012

2013

2.00

Net Cr. Sales

86414.42

158341.05

38920.86

1.00

A/c's Receivables

23665.67

45991.68

36408.28

Ratio

3.65

3.44

1.07

0.00

2011

2012

2013

Objective:
This ratio indicated the no. of times the receivables are turned over in a year in relation to sales. It
shows how quickly debtors are converted into cash and thus, indicates the efficiency of the staff
entrusted with collection of amount due from debtors.

Significance:
A high ratio is better since it would indicate that debts are being collected more promptly. Prompt
collection of book debts means more available funds which can be put to some other use. A

41

standard ratio should be setup for measuring the efficiency. A ratio lower than the standard would
indicate inefficiency in collection and more investment in debtors than required.

Findings
It is noted that in year 2011 & 2012 the Debtors turnover ratio was 3.65 & 3.44 respectively, and in
the previous year i.e. 2013 it fell to 1.07 which means inefficiency in collection and more
investment in debtors.

Suggestions
It is advised that collection should be made frequently and investment in the debtors should be
reduced so as to even the scales.

42

4.8. WORKING CAPITAL TURNOVER RATIO

It establishes a relationship b/w working capital and sales. It indicates the number of times a unit
invested in working capital produces sales. This ratio indicates whether the working capital has
been effectively utilised or not. In fact, in the short run, it is the current assets and current liabilities
which play a major role.

Computation
This ratio is better than stock turnover ratio, since it shows the efficiency or inefficiency in the use
of the entire working capital and not merely a part of it, viz., the capital invested in stock-it is the
whole of the working capital that leads to sales. The ratio is computed as follows:

Working capital turnover ratio:

Working Capital = Current Assets Current Liabilities

50.00
40.00
30.00
20.00
10.00
0.00

Working Capital Turnover Ratio

2011

2012

2013

2011

2012

2013

Sales

86414.42

158341.05

38920.86

Working Capital

9712.31

4038.44

26229.78

Ratio

8.90

39.21

1.48

Objective
The objective of computing the ratio is to ascertain whether or not working capital has been
effectively utilised in making sales. It measures the effective utilization of working capital. It also
shows the no. of times a unit invested in working capital produces sales.

43

Significance:
The higher the ratio, the better it is. But a very high ratio may indicate overtrading, the working
capital being inadequate for the sale of promotions,

Findings:
In the year 2011 working capital turnover ratio was 8.90 was high but good as higher the ratio, the
better it is, but in 2012 it rose to 39.21 which represents overtrading and working capital became
inadequate. In 2013 it dramatically fell to 1.48 which is low.

Suggestions:
The company tried to decrease its working capital turnover ratio but over did it.

44

4.9. FIXED ASSET TURNOVER RATIO

It establishes a relationship b/w net fixed assets and net sales indicating how efficiently they have
been used in achieving the sale. When compared with a previous period or with the industry
standard, it indicates whether the investment in fixed assets has been judicious or not.

Computation:
It is calculated by dividing net sales by net fixed assets, where net fixed assets are obtained by
deducting accumulated depreciation form fixed assets. The ratio is computed as follows:

Fixed asset turnover ratio:

5.00
4.00
3.00
2.00
1.00
0.00

Fixed Assets Turnover Ratio

2011

2012

2013

2011

2012

2013

Net Sales

81933.55

160726.11

51015.08

Net Fixed Assets

20494.89

39622.33

42066.13

Ratio

4.00

4.06

1.21

Objective
The objective of calculating fixed assets turnover ratio is to establish whether the investment in
fixed assets is justified in relation to sales achieved.

Significance:
A higher ratio indicates efficient utilization of fixed assets. On the other hand, a low ratio indicates
an inefficient utilization. An increase in the ratio indicates that there is improvement in the
utilisation of fixed assets. If there is a fall in the ratio. It indicates that fixed assets remained idle and
therefore, the management should investigate and determine the reason for decline.
45

Findings
The company was successful in utilizing its fixed assets in year 2011 & 2012 are ratio was 4.00
times & 4.06 times respectively. But in 2013 it fell to 1.21 times which reflects that in year 2013 the
fixed assets remained idle.

Suggestions:
The company should manage its all resources efficiently and in this case its fixed remained idle
and did not yielded and benefit.

46

4.10.CURRENT ASSET TURNOVER RATIO

It establishes a relationship b/w net sales and current assets. It indicates how efficiently current
assets have been used in achieving the sales. As an indicator of efficient or inefficient use, the ratio
should be compared with the previous period or industry standard.

Computation:
The ratio is computed by dividing the net sales by current assets.
Note:
1. Net sales mean gross sales minus sales returns.
2. The ratio is usually expressed as X number of times.

Current asset turnover ratio:

2.00

Current Assets Turnover Ratio

1.50

2011

2012

2013

1.00

Net Sales

81933.55

160726.11

51015.08

0.50

C. Assets

80573.94

98618.25

84283.16

Ratio

1.02

1.63

0.61

0.00

2011

2012

2013

Objective
The objective of calculating this ratio is to establish whether the current assets have been effectively
used to produce the sales. In other words whether the current assets have been utilized efficiently or
not. The ratio is useful for those concerns where use of fixed assets is negligible.

47

Significance:
The higher the ratio the better it is. But, too high a ratio indicates overtrading.

Findings:
The company is unsuccessful in utilizing its current assets as over the years it is around 1 times. As
in 2011 it was 1.02, in 2012 it was 1.63 and in 2013 0.61 respectively.

Suggestions:
The company should focus more on utilising its current assets.

48

4.11.GROSS PROFIT RATIO

It establishes a relationship b/w gross profit on sales to net sales of a firm, which is calculated in
percentage.

Computation:
This ratio is computed by dividing gross profit by net sales. It is expressed as a percentage. In the
form of formula. This ratio may be expressed as follows:

Gross profit ratio:

100

Net sales mean Gross sales (both cash and credit) minus Sales returns.

Any fluctuation in the gross profit is the result of a change either in sales or the cost of goods
sold or both. Thus, this ratio shows the average margin on goods sold.
The gross profit is what is revealed by the Trading account. It results from the difference between
net sales and cost of goods sold without taking into account expenses charged to the Profit and Loss
Account. A decline in the gross profit ratio is a matter of concern and should be investigated
carefully. It may be due to the followings:
i.

The prices of materials may have gone up or wages may have increased and the selling price
may have not increased in proportion to it.

ii.

The selling price may have fallen without there being a relative fall in the prices of material
or wages.

iii.

The closing stock may have taken wrongly or wrongly valued. The gross profit and the
gross ratio will fall if the stock is undervalued.

iv.

Conversely, if the closing stock is overvalued in last year, the gross profit and gross profit
ratio will fall since the opening stock will be shown at a higher figure.

v.

Misappropriation of goods, so that the firm pays for them but someone else takes them
away.

vi.

Wastage and losses, etc.

vii.

Failure to record sales arising from goods despatched towards the close of the period.
There will be higher gross profit and gross profit ratio if the above causes reverse.

49

10.00%
0.00%
-10.00%

Gross Profit Ratio

2011

2012

2013

-20.00%
-30.00%
-40.00%

2011

2012

2013

Gross Profit

4480.87

-2385.06

-12094.22

Net Sales

86414.42

158341.05

38920.86

Ratio

5.19

-1.51

-31.07

Objective
The objectives of the Gross profit ratio are:
1. To determine the selling price so that there is adequate gross profit to cover the operating
expenses, fixed charges, dividends and building up reserves.
2. To determine, how much the selling price per unit may decline without resulting on losses in
operations of the firm.
3. Gross profit ratio, when compared to earlier years, if significantly different is a reason for
the management to investigate the change.

Significance:
Gross profit ratio is a reliable guide to the adequacy of selling prices and efficiency of trading
activities. This ratio should be adequate to cover the administrative and marketing expenses and
provide for fixed charges, dividends and building of reserves. This ratio is compared to earlier
years ratio or with ratios of other firms. In such cases, it has to be ensured that the method of
calculating gross profit should not change and when compared with other firms, the firms should
follow the same accounting system and practices. The higher the gross profit the better it is.

Findings
In the year Gross profit was 5.19%, but in 2012 it became a loss of -1.51%, and in 2013
dramatically gross loss of -31.07 was recorded. It is very clear that the company has suffered huge
losses in 2013.

50

Suggestions
The company should form a team to investigate the causes of this matter as it is of utmost
importance. And should implement counter measures to prevent future losses.

51

4.12.OPERATING RATIO
The operating ratio is computed to establish a relationship b/w operating cost and net sales. This
ratio indicates the proportion that the cost of sales or operating costs bears to sales.

Computation
This ratio is computed by dividing the operating cost by the net sales. This ratio is expressed as a
percentage. In the form of a formula, this ratio may be expressed as follows

Operating ratio:

Here

100

COGS (Cost of Goods Sold) = opening stock + purchases + Direct expenses +

Manufacturing Expenses - closing stock or Sales Gross Profit.
Operating Expenses = Administrative Expenses + Selling and Distribution Expenses
Operating ratio plus net profit ratio is 100 obviously the two ratios are inter-related. For example, if
the net profit ratio is 15%, it means that the operating ratio is 85%. A rise in the operating ratio
indicates decline in efficiency. Lower the ratio, the better it is.

COGS

81933.55

160726.11

51015.08

200.00%

Operating

150.00%

Expenses

1225.79

2263.44

1739.66

100.00%

Closing Stock

8277.81

11396.75

8380.60

G. Profit/G. Loss

4480.87

-2385.06

-12094.22

Operating Cost

70400.66

153977.86

56468.36

Net Sales

86414.42

158341.05

38920.86

Ratio

81.47

97.24

145.09

50.00%
0.00%

2011

2012

2013

52

Objectives:
Objectives that this ratio serves are the following:
1. To determine whether the cost content has increased or decreased in the figure of sales,
when compared
2. To determine, which element of the cost has gone up

Significance
It is the test of the operational efficiency of the business. It shows the percentage of sales i.e.
absorbed by the cost of sales and operating expenses. The lower the operating ratio the better it is,
because it would leave higher margin to meet interest, dividend, etc.

Findings
The operating ratio is much higher I the year 2011, 2012 & 2013 which is 81.47%, 97.24% &
145.09% respectively. It also reflects that the company has suffered losses in 2013, which is a
matter of concern.

Suggestions
The company should form a team to investigate the causes of this matter as it is of utmost
importance. And should implement counter measures to prevent future losses.

53

4.13.NET PROFIT RATIO

It establishes a relationship b/w net profit and sales, i.e. it shows the percentage of net profit earned
on the sales. It is computed by deducting all direct cost i.e. cost of goods sold and indirect cost i.e.
administrative cost and marketing expenses, finance charges and making adjustments for nonoperating expenses from net sales and adding non-operating incomes.

Computation:
The net profit ratio is calculated by dividing net profit by net sales multiply by 100, as it is
expressed in percentage. The ratio is computed by the following formula:

Net profit ratio:

10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%

Net profit
Net sales

100

Net Profit Ratio

2011

2012

2013

2011

2012

2013

Net Profit

4345.17

-2101.52

-11128.79

Net Sales

86414.42

158341.05

38920.86

Ratio

5.03

-1.33

-28.59

Objectives
The net profit ratio is an indicator of overall efficiency of the business. The higher the net profit
ratio the better it is for the business. This ratio helps in determining the operational efficiency of the
business.

54

Significance:
An increase in the ratio over the previous periods shows improvement in the operational efficiency
and decline means decline in the operational efficiency. A comparison with the industry standard is
also an indicator of the efficiency of the business. Sometimes PBT/sales ratio is taken as a better
indicator of the profitability since tax liability on profit is beyond the control of the enterprise.

Findings
It is noted that in year 2011, 2012 & 2013 the net profit was 5.03%, -1.33% & -28.59%
respectively. And in previous two years the company has incurred a net loss.

Suggestions:
The company should form a team to investigate the causes of this matter as it is of utmost
importance. And should implement counter measures to prevent future losses.

55

4.14.Return ON Investment (ROI)

It establishes a relationship of profit (profit means profit before interest and tax) with capital
employed. The net result of operation of a business is either profit or loss. The sources i.e. funds
used by the business to earn (profit or loss) are proprietors (shareholders) funds and loans. The
overall performance of the enterprise can be judged by this ratio when compared with the previous
periods to judge improvement in performance.

Computation:
This ratio is computed by dividing the net profit before interest, tax and dividends by capital
employed. In the form of formula, this ratio may be expressed as follows:

Return ON Investment:

The ratio is usually expressed in percentage.

100

Capital employed is computed by any of the following methods:

Total of:
1. Share capital (both preference and equity),
2. Reserves
3. Long-term loans
Less:
1. Fictitious assets (like preliminary expenses)
2. Non-operating assets like investments.
Note: Since, non-operating assets are excluded while determining capital employed, income from
investments should also be excluded from profit.

Return On Investment
2011

2012

2013

20.00%

Net Fixed Assets

20494.89

39622.33

42066.13

10.00%

Working Capital

9712.31

4038.44

26229.78

0.00%

Capital Employed

30207.2

43660.77

68295.91

PBITD

4480.87

-2385.06

-12094.22

Ratio

14.83

-5.46

-17.71

-10.00%
-20.00%

2011

2012

2013

56

Objectives:
Return on Capital Employed or Return on Investment judges the overall performance of the
enterprise. It measures how efficiently the sources entrusted to the business are used. The return on
capital employed is a fair measure of the profitability of any concern with the result that the
performance of different industry may be compared. This ratio also helps in judging performance
efficiency of different departments or units within the enterprise.

Significance:
An enterprise should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compared with its own past ratio or with the ratio of similar enterprises in the industry or
with the industry average.

Findings:
Due to gross loss and net loss the return on investment and has also suffered. The Return on
Investment in 2011, 2012 & 2013 was 14.83%, -5.46% & -17.71% respectively.

Suggestions:
There is an urgent need to find the cause of loss and to take counter measures as that future losses
can be averted.

57

4.15.EARNING PER SHARE

It is the earnings of the company attributable to the equity shareholders divided by the no. of equity
shares. In other words this ratio measures the earnings available to an equity shareholder on per
share basis.

Computation:
EPS is computed by the following formula:

Earning Per Share:

Preference share dividend is deducted from the net income to arrive at the income available for
equity shares. This income, if divided by the of equity shares, gives the income earned for each
equity share.

Earning Per Share

2011

10.00
0.00
-10.00

Net profit/loss after

2011

-20.00

2012

2013

2012

2013

Tax

434517000

210152000

1112879000

Preference dividend

250000000

250000000

250000000

184517000

460152000

1362879000

No. of equity shares

42178370

46178370

46178370

Ratio

4.37

-9.96

-29.51

-30.00
-40.00

Objective:
This ratio helps in evaluating prevailing market price of share in the light of profit earning capacity.

Significance:
The more the earning per share better is the performance and prospects of the company.
58

Findings:
In the year 2011 the EPS was 4.37 per share but in the year 2012 & 2013 the figures became
negative. Hence, company was not able to earn anything from its shares.

Suggestions:
It is a matter of concern that for two years the shareholders havent got any dividend, as this would
affect the demand of the companys share in the share market.

59

4.16.DIVIDEND PER SHARE

The Earning per Share (EPS) represents to what extent the profits belong to the owners of a firm.
But, it is customary in all companies to retain a part of profits in the business and distribute only the
balance among shareholders. The profit so distributed among shareholders is termed as dividend.
Thus, dividend per share ratio represents the dividend distributed per equity share.

Computation:
The dividend per share (DPS) ratio represents the dividend distributed per equity share. It is
computed by dividing the profit distributed as equity dividend (i.e., dividend paid to equity share
holders) by the no. of equity shares issued. In the form of formula, this ratio may be represented as
follows:

Dividend per Share:

0.40

Dividend Per Share

0.30

2010

2012

2013

0.20

Dividend Paid

15612000

0.10

No. of equity shares

42178370

46178370

46178370

Ratio

0.37

0.00

2011

2012

2013

Objective:
The objective of computing this ratio is to measure the dividend distributed per equity share.

60

Significance:
In general, Higher the dividend per share, better it is and vice-versa. It should be noted that dividend
per share is not a measure of profitability of a company since retained earnings might had been
utilised for payment of dividend.

Findings:
Due to losses incurred by the company it was not able to pay any dividend to its shareholders in
2012 and 2013. But in 2011 also dividend paid was just Rs. 0.37 per share.

Suggestions:
So, company has to at least create a reserve for shareholders in order to pay even when company
incur losses.

61

Findings
1. Ind Swift has been able to meet their matured current obligations under the study period.
Overall Management of liquidity of funds of Ind Swift indicates a proper management of
fund.
2. IND SWIFT has been aggressive in financing its growth with debt. Ind Swift are
overstrained by debt expense and the greater the possibility of bankruptcy or default.
3. It is evident from fixed asset ratio of Ind Swift under the study is more asset intensive. It is
an indication of more money must be reinvested into it to continue generating earnings.
4. It is obvious from return on investment ratio of Ind Swift is very unsatisfactory, as company
was unsuccessful in generating for shareholders or investors.
5. Gross Profit ratio of Ind Swift is very lower in fact it is in negative which indicates that the
company has suffered losses from past two years.
6. Proprietary ratio was very high which represents an improper mix of loans and funds. But
Inventory turnover ratio, Debtors turnover ratio and working capital turnover ratio
outperformed in previous year and have noticed a decline in current year.
7. Earning per share and Dividend per share was nil as the company has suffered losses in
current year as well as in previous years.

62

Suggestions
1. For solving the problems of debtors management of IND SWIFT, an effective professional
coordination between sales, production and finance departments is called for. Prompt
billing, timely reminders to defaulting customers and immediate action should be ensured.
The investment in loans and advances should be minimized to the extent possible.
2. To improve the financial position of IND SWIFT, equity oriented dependability have to be
reduced properly.
3. To improve the financial stability of Ind Swift under the study, proper mixture of stake in
the business between the owners and the creditors have to be made in which significant
pressure on future cash flows can be avoid.
4. Higher degree of multiple correlations implies the presence of explained variables (liquidity,
solvency, efficiency and financial stability) that have led to lower profitability over and
above poor financial position and performance, are in action. To remove such problems,
accurate liquidity management, correct solvency or leverage management and appropriate
wealth management is highly needed.
5. As far as company is concerned, the management of the company should contemplate its
efforts on improving assets and liabilities mix, so that the company's financial position could
be improved.

63

Conclusions
1. From the study of the financial performance of Ind Swift it can be concluded that the
liquidity position was almost at par reflecting the ability of the companies to pay short-term
obligations on due dates.
2. Long-term solvency of Ind Swift in all years shows that companies relied more on external
funds in terms of long-term borrowings thereby providing a lower degree of protection to
the creditors.
3. Debtors turnover ratio of Ind Swift needs to be improved as the solvency of the firm
depends upon the sales income generated from the use of various assets.
4. Working Capital turnover ratio, fixed assets turnover ratio and current assets turnover ratio
have showed a downward trend and consequently the financial stability of Ind Swift has
been decreasing at an intense rate.
5. The Indian pharmaceutical industry will witness an increase in the market share. The sector
is poised not only to take new challenge but to sustain the growth momentum of the past
decade.

64

REFERENCES
1. http://www.ehow.com/how_6908642_interpret-accounting-information-decisionmaking.html
2. http://www.investopedia.com/terms/r/ratioanalysis.asp
3. http://accountingexplained.com/financial/ratios/advantages-limitations
4. http://www.myaccountingcourse.com/financial-ratios/
5. Clausen, James. (2009). Accounting 101 Financial Statement Analysis in Accounting:
Liquidity Ratio Analysis Balance Sheet Assets and Liabilities.
6. Clausen, James. (2009), Accounting 101 Income Statement: Financial Reporting and
analysis of Profit and Loss.
7. Clausen, James. (2009), Basic Accounting 101- Asset Turnover Ratio: Inventory, Cash,
8. Thachappilly, Gopinathan. (2009). Profitability Ratios Measure Margins and Returns:
Profit Ratios Work with Gross, Operating, Pretax and Net Profits.
9. Thachappilly, Gopinathan. (2009). Financial Ratio Analysis for Performance Check:
Financial Statement Analysis with Ratios Can Reveal Problem Areas.
10. Thachappilly, Gopinathan. (2009). Liquidity Ratios Help Good Financial management:
Liquidity Analysis reveals likely Short-Term Financial Problems.
11. Thachappilly, Gopinathan. (2009). Debt Ratios Look at Financial Viability/Leverage: The
Ratio of Debt to Equity Has Implications for Return on Equity.
12. Zain, Maria. (2008). How to Use Profitability Ratios: Different Types of Calculations that
Determine a Firm's Profits
13. http://www.indswiftltd.com
14. Analysis of Financial Statement by T. S. Grewals
15. http://www.caclubindia.com
16. http://www.wikipedia.com

65

17. Annexure: 1

Balance Sheet

AS AT 31-03-2013

(Rs. in Lacs.)
AS AT
31-03-2013

PARTICULARS
I.

AS AT
30-06-2012

AS AT
31-03-2011

EQUITY AND LIABILITIES

Shareholder's Funds

a)

Share Capital

2,343.57

2,343.57

2,263.57

b)

Reserves and Surplus

18,657.40

29,464.34

30,017.29

c)

Money received against share warrants

Total (A)

21,000.97
729.50

Share Application Money Pending Allotment (B)

300.00
32,107.91
-

700.00
32,980.86
-

Non-Current Liabilities
a)

Long -term borrowings

59,062.44

27,259.40

16,728.03

b)

Deferred Tax Liability (Net)

1,164.17

2,129.60

2,413.14

c)
d)

Other Long term Liabilities

Long term provisions

625.44
96.37

678.25
61.18

689.30
46.03

Total (C)
Current Liabilities

60,948.42

30,128.43

19,876.50

a)

Short-term borrowings

35,219.36

44,613.25

34,174.18

b)

Trade Payables

14,095.95

33,442.60

20,797.49

c)
d)

Other Current Liabilities

Short-term provisions

8,741.07

16,523.96

14,827.82

1,062.14

Total ( D)

58,056.38

94,579.81

70,861.63

140,735.27

156,816.15

123,718.99

18,888.69

GRAND TOTAL (A+B+C+D)

II

ASSETS
Non-current assets

a)

Fixed Assets

(i)

Tangible Assets

38,718.16

37,171.79

(ii)

Intangible assets

3,347.97

2,450.54

1,606.20

(iii)

Capital Work in Progress

3,488.82

4,626.13

12,190.29

(iv)

Intangible assets under Development

196.11

306.35

169.86

Total (E)

45,751.06

44,554.81

32,855.04

b)
c)

Non-current Investments
Long-term Loans and advances

4,518.88
1,670.65

4,557.48
3,550.38

4,557.48

d)

Other non-current assets

4,511.52

5,535.23

1,549.14

Total (F)

10,701.05

13,643.09

10,290.01

Inventories

32,945.90

36,553.35

47,174.50

Trade Receivables

36,398.34

45,027.48

23,162.40

Cash and Cash equivalents

1,779.08

4,559.86

3,678.07

Short-term loans and advances

9,269.52

8,483.10

2,923.82

4,183.39

CURRENT ASSETS

Other Current Assets

3,890.32

3,994.46

3,635.15

Total (G)

84,283.16

98,618.25

80,573.94

GRAND TOTAL (E+F+G)

140,735.27

156,816.15

123,718.99

66

Annexure: 2
Profit & Loss Account
PARTICULARS

(Rs. in Lacs.)
PERIOD ENDED PERIOD ENDED PERIOD ENDED
31-03-2013
30-06-2012
31-03-2011

INCOME
Revenue from operations
Other Income

39,312.23
634.37

159,046.56

87,647.15

2,932.28

2,057.33

TOTAL REVENUE (A)

39,946.60

161,978.84

89,704.48

EXPENDITURE
Cost of Material Consumed
Changes in inventories of Finished Goods/WIP

28,762.65
22.24

121,257.34
14,476.39

78,479.29
(11,092.57)

Employee Benefits Expenses

4,081.51

3,948.08

2,646.90

Financial Cost
Depreciation/Amortisation
Other Expenses

8,641.10
1,848.21
8,685.11

12,096.70
2,324.93
10,260.46

7,164.10
1,551.39
6,474.50

52,040.82
(12,094.22)

164,363.90
(2,385.06)

85,223.61

TOTAL EXPENSES (B)

Profit/Loss Before Tax (A-B)
Tax Expenses
Provision for Tax
Mat Credit Entitlement
Provision for Deferred Tax (Net)
Add Income Tax for Previous Year Adjusted
Profit (Loss) for the period

(965.43)

(283.54)

(11,128.79)

(2,101.52)

4,480.87
879.83
(879.83)
147.21
11.50
4,345.17

Basic Earning per Share

-24.10

-4.84

11.13

Diluted Earning per Share

-24.10

-4.27

10.87

Nominal Value per Share

2.00

2.00

2.00

67

Annexure: 3
Cash Flow Statement
(Rs. in lacs)
31.03.2013

(Rs. in lacs)
30.06.2012

(Rs. in lacs)
31.03.2011

A. CASH FLOW FROM OPERATING ACTIVITIES

Net Profit before tax

-12094.22

-2385.06

4480.87

940.24

668.53

Adjustment for Non Cash & Non-Operating Items

I.

Misc. Expenditure Written off

II.

1026.03

Depreciation/Amortisation

1638.21

2152.54

1551.39

III.

Interest Income

(502.86)

(1056.02)

(85.51)

IV.

Bad Debts Written off

503.28

V.

Loss on Sale of Assets

VI.

Dividend Income

(0.49)

(97.35)

(66.28)

VII.

Interest Paid

8516.70

12070.87

6124.94

Profit on Sale of Assets

(16.37)

(2.47)

(0.87)

0.00

286.31

124.40

25.83

VIII.
IX.

Impairment of Assets

X.

Exchange Loss

476.59

Operating Profit before Working Capital Changes

-832.01

563.95

7.17

12498.84

13183.52

Adjustment for Current Items

I.

Increase/ (Decrease) in current Liabilities

(27147.17)

13465.53

7743.22

II.

(Increase)/Decrease in current Loan & Advances

1112.85

(4578.02)

(226.49)

III.

(Increase)/Decrease in Trade Receivable

8504.73

(21890.91)

(4190.85)

IV.

(Increase)/Decrease in Inventory

3607.45

10621.14

(10277.23)

V.

(Increase)/Decrease in other current Assets

104.15

(359.30)

Cash Flow from Operating Activities before Taxes

(14650.00)

9757.28

6232.17

348.26

(245.81)

9409.02

5986.36

Taxes Paid
I.

Income Tax Paid

19.55

Net Operating Activities (A)

(14630.45)

B. Cash Flow from Investing Activities

I.

Dividend Received

0.49

97.35

66.28

II.

Subsidy Received

24.69

28.58

(14.06)

III.

Interest Received

502.86

1056.02

IV.

Net Increase/Decrease in Investments

38.61

V.

Net Purchase of Fixed Assets ( Including Capital WIP)

VI.

Increase in Misc. Expenditure

(14700.09)

(8034.25)

(2.31)

(4926.33)

(611.06)

-2772.29

-18444.47

-9655.07

(8516.70)

(12070.87)

(6124.94)

0.00

(182.32)

(181.82)

(3336.63)

Net Cash used in Investing activities (B)

C. Cash Flow from Financing Activities
Interest Paid
I.

85.51
(1147.49)

II.

Dividend Paid

III.

Increase in Unsecured Loans

(6163.33)

3374.85

640.72

IV.

Increase in Secured Loans

28572.49

17595.58

7342.63

V.

Proceed from Share Warrents

1200.00

VI.

Proceed from Advance against Share Capital

729.50

430.00

Net Cash Flow from Financing Activities

(C)

14621.96

9917.24

2106.59

Net increase in Cash or Cash Equivalents

(A+B+C)

-2780.78

881.79

-1562.12

Add : Opening Balance of Cash & Equivalents

4559.86

3678.07

5240.19

Closing Balance of Cash & Cash Equivalents

1779.08

4559.86

3678.07

68

69