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A PROJECTREPORT

ON

FINANCIAL ANALYSIS OF

NOVARTIS INDIA LTD

A Project report submitted in the partial fulfillment of the requirement for the

degree of MBA (Pharm tech).

Under Guidance of- Compiled by-

Dr Ashok Panigrahi Yashica Jain (A008)

(Associate Professor- Shagun Agrawal (A001)

-NMIMS-Shirpur)

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Certificate

This is to certify that Ms.Yashica Jain and Ms.Shagun Agrawal worked during the period. 15.02.2014 to 20.03.2014 on the development of the project “Financial analysis of Novartis India Ltd.”, in the partial fulfillment of the requirement for the degree of MBA (Master of Business Administration) under my guidance & supervision. To the best of my knowledge, the matter represented in this project is a bonafide & genuine piece of work. During their association with the project I found them to be sincere & motivated individuals. Their conduct was excellent. I wish them all success in their career. Faculty Signature Dr. Ashok Panigrahi Associate Professor NMIMS Shirpur Date:

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Acknowledgment

We are very much thankful to all who have supported us for completion of our

project effectively and on time.

We would like to express our special thanks of gratitude to our beloved professor

“Dr. Ashok Panigrahi” who constantly guided and supported us at every stage.

We would also like to thank our colleagues who helped us a lot in gathering

different information and guiding us in making this project unique.

Thanking you !

Yashica Jain

Shagun Agarwal

MBA Pharm Tech-2nd year

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Preface

With the rapid growth of trade, commerce and industries, the numbers of publicly

traded companies are considerably increasing in India. Pharmaceutical is an

important adjunct of industrialization in the country.

In this paper, an attempt is made to analyze the financial performance, background, outcomes, management and also to test the strengths & weaknesses of one of the well known pharmaceutical industry in India named NOVARTIS INDIA LTD. Since last five years i.e. from 2009 to 2013. This study is based on both primary and secondary Data. The collected data have been tabulated, analyzed and interpreted with the help of different analytical techniques and financial ratio analysis.

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CONTENTS

1. Introduction-

Company profie

History of the Company

Future Plans

Board of Directors

2. Awards and Achievements

3. SWOT Analysis, STP and Competitors

4. Product Profile-

Formulations

5.Research and Development

6. Annual Report (2011-12 & 2012-13)-

Balance Sheet

Profit and Loss Sheet

7. Financial Analysis-

Introduction

Nature of financial analysis

Objective of financial analysis

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8. Ratio Analysis-

Financial ratios

Utility of financial ratios

Advantages

Role of financial ratios

9. Classification of Ratios-

Liquidity ratios

Leverage ratios

Turnover ratios

Profitability ratios

Profitability ratios based on investment

10. Findings 11. Conclusion 12. References

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INTRODUCTION

Company Profile:-

Novartis India Limited is a pharmaceutical company. The business

operations of the Company include Pharmaceuticals, Generic, over the

counter (OTC) and Animal Health.

The Pharmaceuticals segment consists of a portfolio of prescription

medicines, which are provided to patients through healthcare

professionals. The Generics segment consists of retail generics products.

The Generics segment’s unit primarily focuses on the therapeutic segments,

such as Anti-TB, Anti-DUB (Gynecology), Anti-histamines, Antibiotics, Anti-

ulcerants, Anti-diabetes and Cardiovascular.

The Animal Health segment has a presence primarily in the cattle and

poultry market segments. The OTC segment is mainly in the vitamins,

minerals and nutritional supplements (VMS) and cough, cold and allergy

market segments.

During the fiscal year ended March 31, 2012, it introduced Enplus product in the Poultry segment, and, Antifur, Vayuhara, Vetimam and Feedavit in the Cattle segment.

Novartis is a world leader in the research and development of products to protect and improve health and well-being. The company has core businesses in pharmaceuticals, vaccines, consumer health, generics, eye care and animal health.

Headquartered in Basel, Switzerland, Novartis employs nearly 115 000 people in over 140 countries worldwide to help save lives and improve the quality of life. The Group is present in India through Novartis India Limited, listed on the Mumbai Stock Exchange and its wholly owned subsidiaries Novartis Healthcare Private Limited, Sandoz Private Limited and Chiron Behring Vaccines Private Limited.

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Company meets the varied and often complex needs of patients and societies. Novartis is positioned to lead in innovation, partner with others and offer solutions to patients across a broad healthcare spectrum. In addition, a diverse portfolio reduces financial risk, bringing greater value to those who invest in our company.

Companies unique portfolio focuses on science-based healthcare sectors that are growing rapidly, reward innovation, and enhance the lives of patients. Novartis is the only company with leading positions in each of these key areas:-

1. Pharmaceuticals: innovative patent-protected medicines 2. Alcon: global leader in eye care with surgical, ophthalmology and

consumer products 3. Sandoz: affordable, high-quality generic medicines and biosimilars 4. Consumer Health: self-medication products and treatments for

animals 5. Vaccines and Diagnostics: vaccines and diagnostic tools to protect

against life-threatening diseases

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History of the Company:-

Novartis was created in 1996 through the merger of Ciba-Geigy and Sandoz, two companies with a rich and diverse corporate history. Throughout the years, Novartis and its predecessor companies have discovered and developed many innovative products for patients and consumers worldwide.

Novartis has been in India since 1947. The Group operates in India through four entities namely Novartis India Limited, listed on the Mumbai Stock Exchange, Novartis Healthcare Private Limited, Sandoz Private Limited and Chiron-Behring Vaccine Private Limited. In India Novartis have a presence in pharmaceuticals, generics (pharmaceutical products that are off patent), Vaccines, OTC (over-the-counter medicines), eye care and Animal Health.

With approximately 4500 associates in India, 115000 associates in 140 countries worldwide, Novartis associates share a vision of a better today and tomorrow for patients – a vision that drives our growth and success. The greatest job satisfaction for our associates is the knowledge that they improve the quality of life for patients with increasing precision and efficiency through breakthrough science and innovation.

Our performance-oriented culture and responsible approach attract top experts in all areas – research and development, marketing and sales, finance and administration. Our talented associates have made us a global leader in healthcare. Novartis is committed to rewarding the people who invest ideas and work in our company.

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Future Plans of Company:-

Novartis said Thursday that it expects to have at least 14 blockbuster drugs

on the market by 2017, up from seven last year, including serelaxin and

LCZ696 for heart failure and AIN457 for treating psoriasis and multiple

sclerosis. CEO Joseph Jimenez remarked that "as a science-driven

company... our leading pipeline in all phases of development positions us

well for continued future growth."

In an update to investors, the company noted that it has 139 projects in

development, including 73 new compounds across a range of indications.

Novartis indicated that over the next 12 months it expects results from 13

pivotal studies, to submit nine marketing applications and to receive seven

regulatory decisions.

The drug maker highlighted its oncology pipeline as a source of future

growth, despite the patent on chronic myeloid leukemia (CML) drug Glivec

(imatinib) expiring in 2014. Novartis said it plans to start clinical trials next

year designed to show that its newer CML treatment Tasigna (nilotinib) can

achieve sustained treatment-free remission, which it noted, if positive,

could lead to a "major paradigm shift" in the condition. According to the

company, Afinitor (everolimus) has the potential to exceed sales of $2

billion in breast cancer alone by 2017, while new products and possible

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future launches, including the ALK inhibitor LDK378 and the pan-PI3K

inhibitor BKM120, could contribute more than $1 billion in revenue.

Novartis noted that it has initiated a clinical development programme for

BKM120 called PRISM across a number of tumour types including breast

cancer. Meanwhile, the company said it plans to start pivotal studies of

LDK378 in December. The drug has shown activity in patients with Alk+

non-small-cell lung cancer, as well as activity on brain metastases.

Regulatory filings for the compound are expected to begin in 2014.

The company also confirmed that it will initiate regulatory filings for

serelaxin in early 2013 in the US and Europe after recently reporting late-

stage results from the RELAX-AHF study in patients with acute heart failure.

Novartis added that in Phase II studies, AIN457 has shown rapid

improvement of signs and symptoms in patients with moderate to severe

psoriasis. Late-stage trials of the therapy are ongoing in this indication, with

regulatory filings planned to start in late 2013, while the drug is also being

investigated in multiple sclerosis.

Novartis indicated that to keep control of R&D costs while managing more

projects, it has adopted new technologies and methods to reduce

recruitment time and trial costs, while improving study quality and patient

comfort and safety. These include mobile field monitoring, continuous

manufacturing and Telehealth.

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Board of Directors:-

Name Board Relationships

Gary Rosenthal Chief Executive Officer, Chief Financial Officer, Vice President of Finance, Chief Executive Officer of Novartis Corp and President of Novartis Corp

André Wyss President and Head of Pharma North America

Cynthia Cetani Chief Compliance Officer and Vice President

Cathryn M. Clary M.D. Chief Scientific Officer for US General Medicines and Head of US Medical

Rhonda Crichlow Head of US Diversity & Inclusion and Vice President

Nikos Georgiades Head of Primary Care & Established Medicines

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Name Board Relationships

Business Unit and Vice President

Brian Hanifin Head of US Pharmaceutical Operations and Vice President

Jesus Leal Head of the US General Medicines Respiratory Business Unit and Vice President

Carol Lynch Head of the US General Medicines Specialty Business Unit and Vice President

Patrice Matchaba Head of Global Development - US

Gregory Oakes Head of US Managed Markets & Market Access and Vice President

Caryn Parlavecchio Head of US General Medicines - Human Resources and Vice President

Kevin T. Rigby Head of US General Medicines Public Affairs & Communications and Vice President

Dagmar Rosa-Bjorkeson Head of the US General Medicines Multiple Sclerosis and Vice President

Christi Shaw North American Region Head of Novartis Oncology

Dorothy Watson Vice President and General Counsel

Diane Young M.D. Vice President and Global Head of Clinical Development –Oncology

Meryl Zausner Chief Financial & Administrative Officer of US General Medicines and Vice President

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Board of Directors of Novartis India Limited:-

Name Board Relationship

Christopher Snook Ranjit Shahani

Rajen Malhotra Jai Hiremath

Chairman Vice chairman Director Director

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2. Awards and Achievements

Novartis among top 20 best performing companies worldwide in carbon emissions from 2005 to 2012Of 100 companies analyzed, Novartis ranked #18 across all industries, #4 in the healthcare sector and #1 in Switzerland.

Novartis recognized among world’s most sustainable companies in Corporate Knights Global 100Inclusion in the 2014 index acknowledges Novartis leadership in key areas of corporate responsibility. Companies named to the Global 100 are recognized as the top overall sustainability performers in their respective industries.

Novartis wins Scrip Award for Jian Kang Kuai Che healthcare project in ChinaNovartis was honored with the first ever "Scrip Award for Best Advance in an Emerging Market." Novartis won for its Jian Kang Kuai Che healthcare project in China, which works to improve healthcare conditions in rural Xinjiang through educational programs in schools and by recruiting and training healthcare workers.

Novartis listed in STOXX Global ESG Leaders IndexFor the third consecutive year, Novartis remains in the STOXX Global ESG Leaders indices – comprising the leading global companies in terms of ESG (environmental, social and governance) performance.

Novartis recognized among 25 best multinational employers by Great Place to Work® Institute. The Top 25 World’s Best Multinational Workplaces is the world’s largest annual study of workplace excellence, identifying the top 25 best multinationals in terms of workplace culture.

Novartis Pharmaceutical US chosen for 2013 list of best employers for mothers.Working Mother Magazine selected the Novartis Pharmaceuticals

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Division in the US for its 2013 list of the best employers for moms. The magazine highlighted the Global Executive Female Leadership Program supporting career development of women and child care support.

Novartis was accredited as the first global CEO Cancer Gold Standard employer by the CEO Roundtable on Cancer.The standard recognizes organizations that encourage healthy lifestyles and provide employees with cancer prevention, detection, and treatment programs.

Award of Excellence for Innovations in Diversity: Research shows diverse leadership teams deliver better business results. In executive teams, the magic ratio has been shown to be 30% women. The innovative Novartis Pharmaceuticals “Executive Female Leadership Program” was recently recognized by Profiles in Diversity Journal.

Fortune 500 World’s Biggest Corporations: Novartis listed as the third largest healthcare company worldwide.

2013 European Graduate Barometer: Novartis enters the list of the 50 preferred employers among European Engineering/IT students.

Top 50 Companies for Diversity 2013: Novartis Pharmaceuticals Corporation recognized among the best employers for diversity in the US in DiversityInc's Top 50 Companies for Diversity.

Fortune's World's Most Admired Companies 2013: Novartis ranked top pharmaceutical company infortune’s World's Most Admired Companies 2013 for the third time in a row.

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3. SWOT Analysis, STP and Competitors

Novartis

Parent Company Novartis

Category Pharmaceutical

Sector Health Care

Tagline/ Slogan Novartis: No pipelines, just pipedreams

USP

Discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.

STP

Segment Animal health, Diagnostics, Oncology, cns drugs, vaccines & generics

Target Group Healthcare professionals, Doctors,

Positioning

We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.

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SWOT Analysis

Strength

1.Has a global reach in over 140 countries

2. Core businesses in pharmaceuticals, vaccines, consumer health, generics and animal health

3. Novartis Biotechnology leadership camp organized by it is a unique step

4. Mergers and acquisitions have it a strong brand

5. First company-wide health and well-being initiative at Novartis

Employee strength of over 120,000.

Weakness

1. Controversies regarding their advertising of certain products affected brand image 2. Case regarding Indian patent laws also created a problem for the brand

Opportunity

1. Broad-based medical innovation, in technologies and businesses across the spectrum of health care

2. Venture into health needs in under-developed and poor countries

4. Leverage its core business expertise and resources to create sustainable solutions in countries around the world.

Threats

1. Increasing obsolesce of technology

2. Competition from peers

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Competitors-

1. Abbott Laboratories

2. Amgen

3. AstraZeneca

4. Bristol-Myers Squibb

5. Johnson & Johnson

6. Merck

7. GSK

8. Pfizer

9. Roche Holdings

10. Sun Pharma

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Product Profile

Novartis is recognized worldwide for offering innovative patent-protected medicines to patients and physicians. 1. Vaccines and Diagnostics:-

Novartis is a leader in providing products to fight vaccine-preventable viral and bacterial diseases and to help prevent transfusion-related transmission of HIV and other viruses.

2. Sandoz (generics):-

Sandoz is a global leader in the rapidly growing generics industry, delivering affordableand high-quality medicines to patients worldwide.

3. Animal Health:-

Animal Health focuses on the well-being of companion animals and on the health and productivity of farm animals

4. Alcon (eye care):-

As a global leader in eye care, Alcon develops and manufactures innovative medicines and devices to serve the full life cycle of eye care needs. Alcon offers the broadest spectrum of surgical, pharmaceutical and vision care products to treat many eye diseases and conditions.

5. Over-the-Counter:-

Over-the-Counter (OTC) is a leader in offering products designed for self-care and the prevention of common medical conditions and ailments, to help people take care of themselves and their families to live healthy lives.

Novartis global Pharmaceuticals portfolio includes more than 50 key marketed products, many of which are innovative leaders in their therapeutic areas. In 2012 we received a total of 13 approvals in the United States, Europe and Japan.

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Key pharmaceutical products marketed by Novartis are listed below by therapeutic area:-

Hypertension:-

Amturnide

Cibacen

Diovan (valsartan)

Diovan HCT/Co-Diovan

Exforge

Exforge HCT

Tekamlo/Rasilamlo

Tekturna/Rasilez

Tekturna HCT/Rasilez HCT

Metabolism:-

Eucreas

Galvus

Infectious Diseases:-

Cubicin

Tyzeka / Sebivo

Neuroscience:-

Clozaril/Leponex (clozapine)

Comtan

Exelon & Exelon Patch

Extavia (interferon beta-1b)

Fanapt (iloperidone)

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Focalin & Focalin XR

Gilenya

Ritalin & Ritalin LA

Stalevo (carbidopa, levodopa and entacapone)

Tegretol (carbamazepine)

Trileptal

Oncology:-

Afinitor/Votubia

Exjade (deferasirox)

Femara (letrozole tablets/letrozole)

Respiratory:-

Foradil (formoterol)

Seebri Breezhaler (glycopyrronium)

Ultibro Breezhaler (indacaterol / glycopyrronium)

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Research and Development

Novartis create innovative medicines and prioritize work based on unmet medical need and strong scientific understanding of disease - not the size of the potential commercial market.

Novartis researchers are working to map complex protein signaling networks known as molecular signaling pathways inside of cells. These molecular pathways are highly controlled and interconnected signal-relay systems, similar to communication networks, and are responsible for normal cell function. When a protein in a pathway does not function properly, the result can be abnormal signaling and disease. Scientists at the Novartis Institutes for Biomedical Research (NIBR) develop small molecule drugs or antibodies to target key nodes within pathways that, when defective, lead to disease.

To translate scientific discoveries from the lab bench to the clinic, Novartis uses proof-of-concept clinical trials (small scale studies used to get an early read on a drug’s safety and effectiveness) to help find and advance the most promising drug candidates. These proof-of-concept studies often focus on treating a rare, but genetically well-defined disease.

By focusing on the patient and following the science, Novartis has discovered innovative treatments for disorders ranging from cancer to degenerative disease

Thanks to this approach, Novartis has one of the strongest and most productive pipelines in the industry, with 144 projects in clinical development, many of which are new molecular entities.

One of the innovative techniques that Novartis researchers use to help find and advance the most promising drug candidates is computer modeling and simulation. Watch the video below to learn about Computer-Aided Drug Design.

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NOVARTIS PHARMACEUTICALS

FINANCIAL REPORTS

(2012-2013)

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BalanceSheet - Novartis India Ltd.

31 march 2013 31 march 2012 Equity and Liabilities:- Shareholders’ Funds Share capital 159.8 159.8 Reserves and surplus 8842.3 8018.9 9002.1 8178.7

Non-Current Liabilities:- Long-term Borrowings 1.4 Other Long-term Liabilities 37.8 38.7 Long-term Provisions 249.7 187.6 287.5 227.7 Current Liabilities:- Trade Payables 1,195.9 979.1 Other Current Liabilities 406.9 411.2 Short-term Provisions 519.4 540.2 2,122.2 1,930.5 Total 11,411.8 10,336.9

Assets Non-Current Assets Fixed Assets Tangible Assets 99.4 100.5 Intangible Assets 0.2 0.6 Capital Work-in-Progress 2.7 1.0 102.3 102.1 Non-Current Investments 0.3 0.3 Deferred Tax Assets 162.1 172.6 Long-term Loans and Advances 810.9 711.4 Other Non-Current Assets 0.9 23.9 1,076.5 1,010.3

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Current Assets:- Inventories 1,101.5 790.1 Trade Receivables 824.4 699.5 Cash and Bank Balances 393.0 828.9 Short-term Loans and Advances 7,971.1 6,997.6 Other Current Assets 45.3 10.5 10,335.3 9,326.6 Total 11,411.8 10,336.9

Profit and Loss Account of Novartis india:-

31 march 2013 31 march 2012 Revenue:- Revenue from Operations (Gross) 9,065.0 8,468.0 Less: Excise Duty 31.4 25.1 Revenue from Operations (Net) 9,033.6 8,442.9 Other Income 831.9 840.1 Total Revenue 9,865.5 9,283.0

Expenses:- Cost of Materials Consumed 403.6 313.9 Purchases of Stock-in-Trade 3,579.3 3,023.8 Changes in Inventories of Finished Goods and Stock-in-Trade (266.4) (222.9) Employee Benefits Expense 1,623.0 1,376.8 Finance Costs 2.2 5.4 Depreciation Expense 35.9 26.7 Other Expenses 2,793.7 2,512.4 Total Expenses 8,171.3 7,036.1 Profit before Tax 1,694.2 2,246.9

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Tax Expense For the year Current Tax 570.0 745.0 Deferred Tax 10.5 (15.0) 580.5 730.0 For earlier years Current Tax (Net) (73.7) (3.3) Fringe Benefits Tax (9.9) — 496.9 726.7 Profit for the year 1,197.3 1,520.2

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FINANCIAL ANALYSIS

Introduction:-

Financial Analysis is the process of determining the operating & financial characteristics of a firm from accounting data & financial statement. The goal of such analysis is to determine efficiency & performance of the firm management, as reflected in the financial records and reports. Its main aim is to measure the firm’s liquidity, profitability and other indications that business is conducted in a rational and orderly way.

The basic financial statement - Of the various reports that the companies issue to their shareholder, the

annual report is by far the most important. Two types of information are given in this report, first there is a text that describes the firms operating results during the past year and discusses new development that will affect future operations. Second there are few basic financial statements –the income statement, the balance sheet, the statement of retained earnings and the sources and uses of funds statements.

The financial statement taken together gives an accounting picture of the

firm’s operation and financial positions.

“Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of trends of these factors as shown in a series of statements”

--- John N. Myer

“The analysis and interpretation of financial statement are an attempt to determine the significance and meaning of the financial statement data so that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities (both current & long term) and profitability of a sound dividend policy”

--- R.D. and S. % Mc Muller

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Thus, analysis of financial statement means such a treatment of the

information contained in the financial statement as to afford a full

diagnosis of the profitability and financial position of the firm concerned.

Nature of financial statement:-

According to the American institute of certified public accountants “……………… financial statement reflected a combination of recorded facts, accounting conventions and personal judgments. Objective of financial analysis: -

The number and types of people interested in financial statements have

changed radically over a period of time. They need varied information and

fortunately such information may be classified as relating to profitability,

liquidity and solvency.

The Project “ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENTS” is undertaken to fulfill the following objectives.

To estimate the earning capacity

To gouge the financial position and financial performance of the firm

To determine the long terms liquidity of the funds as well as solvency

To determine the debt capacity of the firm

To decide about the future prospective of the firm

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Ratio Analysis

FINANCIAL RATIO:- A ratio may be defined as a fixed relationship in degree or number between

two numbers. In finance, ratios are used to point out relationship that is

(1) To Compare Different Companies in Some Industry: ratio can high light

the factors association with successful and unsuccessful firms. They can reveal

strong firms and weak firms, overvalued undervalued firms.

(2) To Compare Different Industries: Every industry has its own unique set

of operating and financial characteristics. These can be identified with the help of

ratios.

(3) To Compare Performance in the Different Time Periods: Over a period

of years, a firm or a industry develop certain forms that may indicate future

success or failure. If relationship changes in firms data over different time periods,

the ratio may provide clues and trends of future problems.

Utility of Financial Analysis:-

Following are the advantages of Financial Analysis:-

With the help of ratios we can determine the ability of the firms to meet its

current-obligation.

Overall operating efficiency and performance of the firm.

Efficiency with which firms is utilizing its various assets in generating sales

Revenue.

Ratios help in inter-firm and intra-firm comparison.

They help in determining the financial strength by highlighting the liquidity.

They are useful in comparison of performance.

They are also useful in forecasting purpose.

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Advantages of Ratios:-

The ratio analysis is one of the most powerful tools of financial analysis. It is

use as a device to analysis and interprets the financial health of enterprise.

Just like a doctor examines his conclusion regarding the illness and before

giving his treatment, a financial analyst analyses the financial statement

with various tools of analysis before commenting upon the financial bearlth

or weakness of an enterprise. „A ratio is known as a symptom like blood

pressure, the pulse rate or the temperature of the individual‟. It is with

help of ratios that the financial statements can be analysed and decision

made from such analysis.

HELPS IN DIVISION MAKING: Financial statements are prepared primarily

for decision making, but the information provided in financial statements is

not an end in itself and no meaningful conclusions can be drawn from these

statements alone. Ratio analysis helps in making decisions from the

information provided in these financial statements.

HELPS IN FINANCIAL FORCASTING AND PLANNING: Ratios analysis is of

much help in financial forecasting and planning. Planning is looking ahead

and the ratios calculated for a number of year’s work as a guide for the

future. Meaningful conclusions can be drawn for future from these ratios.

Thus, ratio analysis helps in forecasting and planning.

HELPS IN COMMUNICATING: The financial strength and weakness of a firm

are communicated in aneasier and understandable manner by the use of

ratios the information contained in financial statements conveyed in a

meaningful manner to the one for whom it is meant. Thus, ratios help in

communicating and enhance the value of financial statements.

HELPS IN COORDINATION: Ratios even helps in coordinating, which is

utmost important in effective business management. Better

communication of efficiency and weakness of an enterprise results in better

coordination in the enterprise.

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HELPS IN CONTROL: Ratio analysis even helps in making effective control of

the business. Standard ratios can be based upon Performa Financial

Statements and variance or deviations, if any, can be founded by comparing

the actual with the standards so as to take corrective action at the right

time. The weakness or otherwise, if any, come to the knowledge of the

management which helps in effective control of the business.

Role of Financial Ratio: -

Aid in financial forecasting: Ratio analysis is very helpful in financial

forecasting. Ratio relating to the past sales, profits & financial position from

the basis for setting future trends.

Aid in comparison: With the help of ratio analysis ideal ratio can be

composed & they can be used for comparing a firm progress &

performance. Inter firm comparison with the industry averages is made

possible by ratio analysis.

Financial solvency of the firm: Ratio analysis indicates the trend in financial

solvency of the firm. Solvency has to dimensions:

Long-term Solvency

Short-term Solvency

Long term solvency refers to the financial viability of the firm while Short-

term solvency is the liquidity position of the firm.

Communication values: Different financial ratios communicate the strength

& financial standing of the firm to the internal & the external parties. They

indicate overall profitability of the firm

Other uses: Financial ratios are very helpful in the diagnosis & financial

health of a firm. They highlight the liquidity, solvency, profitability & capital

gearing etc. of the firm. They are useful tools of analysis of financial

performances.

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CLASSIFICATION OF RATIOS

RATIO ANALYSIS

Liquidity Ratio

Current ratio Liquid ratio

Leverage Ratio

Debt equity Total Assets Proprietary Capital Interest

Ratio to Debt Ratio Gearing Coverage

Turnover Ratio

Stock Debtors Creditors Fixed assets working capital

Turnover turnover turnover turnover turnover

Profitability Ratio

Gross Operating Net profit

Profits Ratio Ratio

Profitability Ratio based on investment

Return on Return on Return on equity Earning Per

Capital Shareholder fund shareholder fund Share

Employed

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1. LIQUIDITY RATIOS:-

Liquidity refers to the ability of the firm to meet its obligations inventory

the short-run, usually one year. Liquidity ratios are generally based on the

relationship between current assets and current liabilities (the sources for

meeting short-term obligations). Example: Current ratio, Acid test ratio.

I. Current ratio: also known as working capital ratio, this is used to

evaluate short term financial position of the business concern. It

indicates the ability of the firm to meet its short term obligations.

It compares the current assets and current liabilities of the firm.

Current assets are those which are either in the form of cash or

cash equivalent. Current Liabilities are those which are to be

discharged during the accounting period

Current ratio = current assets

Current liabilities

Significance: Ideal current ratio is 2:1. A very high ratio indicates availability of

idle cash and is not a good sign.

II. Quick ratio: it is very useful in measuring liquidity position of a

firm. It measures the firm’s capacity to pay off current obligations.

It is used as complimentary ratio to the current ratio.

Quick ratio = liquid assets

Current liabilities.

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Significance: Liquid ratio of 1:1 is considered satisfactory. If quick assets are equal

to current liabilities, then the concerm may be able to meet its short term

obligations.

2. LEVERAGE RATIOS:-

Leverage ratios analyze the long term solvency that help us judge the

ability of a firm to pay the interest regularly as well as repay the principal

when due to debenture holders, long term lenders.

I. Debt equity ratio: shows a relationship between long term debt and

shareholder’s fund. This ratio indicates the relation between outsider’s

fund and shareholder’s fund. Also called external internal equity ratio

Debt equity ratio= debt or long term debt

Equity shareholder’s fund

Significance: A ratio of 1:1 is usually considered to be satisfactory. This ratio is

calculated to know about the organization’s repayment capacity of long term

debts.

II. Total asset to debt ratio: shows a relationship between total assets and

the long-term debts.

Total asset to debt ratio= total assets

Long term debts

III. Proprietary ratio: this establishes the relationship between

shareholder’s funds to assets of the firm. It is important for determining

long term solvency of the term. Also known as euity ratio or net worth

to total assets ratio.

Proprietary ratio= Equity

Total assets

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Significance: Higher the ratio, dependency on external sources and loans for

working capital will be less and financial condition of the organization will be

sound.

IV. Capital gearing ratio: it shows relationship between equity capital (

including reserves and undistributed profits) and fixed cost bearing

capital ( preference sharing capital, fixed interest bearing loans)

Capital gearing ratio= equity share capital+ reserves+ P&L balance

Fixed cost bearing capital

Significance: A high gearing will be beneficial to equity shareholders when rate of

interest/dividend payable on fixed cost bearing capital is lower than the rate of

return on investment in business.

V. Interest coverage ratio: also known as debt service ratio. This is

calculated by dividing net profit before charging interest and income tax

by ‘fixed interest charges’.

Interest coverage ratio= net profit before charging interest and income tax

‘Fixed interest charges’

Significance: This shows how many times the interest charges are covered by

profits available to pay interest charges. It is helpful in finding out whether the

business will earn sufficient

3. Turnover ratios/Activity Ratios: These ratios measures how well the resources at the disposal of concern are being utilized. They are known as turnover ratios as they indicate the rapidity with which the resources

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available to the concern are being used to produce sales. In other words, they measure the efficiency and rapidity of resources of the company like stock, debtors, fixed assets, working capital, etc. They are generally calculated on the basis of sales or cost of sales.

I. Stock turnover Ratio: a.k.a inventory ratio. This ratio indicates

relationship between cost of goods sold during the year and average stock kept during that year.

Stock turnover ratio= cost of goods sold

Average stock

Significance: This ratio indicates whether stock has been efficiently used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year. The higher the ratio, the better it is, since it indicates that stock is selling quickly. In business, where the STR is high, goods can be sold at a low margin of profit and even then, the profitability may be quite high.

II. Debtor’s turnover ratio: a.k.a receivable turnover ratio. This ratio indicates relationship between credit sales and average debtors during the year. Debtors Turnover Ratio= Net credit sales

Average debtors + Average B/R

Significance: This ratio indicates the speed with which the amount is collected

from debtors. The higher the ratio, the better it is, since it indicates that the

amount from debtors is being collected quickly. A lower DTR will indicate the

inefficient credit sales policyof the management.

III. Creditors turnover ratio: This ratio indicates relationship between

credit purchases and average creditors during the year.

Creditors turnover ratio= Net credit purchases

Average creditors + Average B/P

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Significance: This ratio indicates the speed with which the amount is being paid to

the creditors. The higher the ratio, the better it is, since it will indicate that the

creditors are being paid more quickly which increases the credit worthiness of the

firm.

IV. Fixed assets turnover ratio: This ratio indicates relationship between

costs of goods sold and fixed assets during a year.

Fixed assets turnover ratio= cost of goods sold

Net fixed assets

Significance: This ratio reveals how efficiently the fixed assets are being utilized. If

there is increase in ratio, it indicates that there is better utilization of fixed assets

and vice versa.

V. Working capital turnover ratio: This ratio indicates relationship

between sales and working capital.

Working capital turnover ratio=cost of goods sold or sales

Working capital

Significance: This ratio reveals how efficiently working capital has been utilized in

making sales. In other words, it shows the number of times working capital has

been rotated in producing sales. A high working turnover ratio shows efficient use

of working capital and quick turnover of current assets like stock and debtor.

4. Profitability ratios: These ratios measure the profit earning capacity of the

company. Generally, profitability ratio is calculated in percentage (%).

I. Gross profit ratio: It shows relationship between gross profit and sales.

It shows margin of profit on sale.

Gross profit ratio= gross profit X 100

Net sales

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Significance: It reveals profit earning capacity of business w.r.t. its sales. Increase

in gross profit ratio indicates reduction in cost while decrease in gross profit ratio

will indicate increase in cost or sales at a lesser price.

II. Operating ratio: This ratio indicates the proportion that the cost of

goods sold bears to sales.

Operating ratio= cost of goods sold + operating exp. X 100

Net sales

Significance: It is the measure of efficiency and profitability of the business. The

lesser is the ratio, the better it is because less operating ratio means higher net

profit.

III. Net profit Ratio: This ratio indicates relationship between net profit

and net sales

Net profit Ratio= Net profit X 100

Net sales

Significance: It shows the operational efficiency of the business. Decrease in the

ratio indicates managerial inefficiency and excessive selling and distribution

expenses. Increase in it shows better performance.

5. Profitability ratios based on Investment: These ratios reflect the true

earning capacity of the resources employed in the enterprise.

I. Return on capital employed: It reflects the overall profitability of

the business. It is calculated by comparing the profit earned and the

capital employed to earn it.

Rate on capital = Profit before interest, tax and dividends X 100

Employed Capital employed

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Significance: This ratio is a barometer of the overall performance which measures

how efficiently the capital employed in the business is being used.

II. Return on total shareholder’s fund: To calculate this, net profit after

interest and tax is divided by shareholder’s fund

Return on total = net profit after interest and tax

Shareholder’s fund Total shareholder’s funds

Significance: It reveals how profitably the proprietor’s funds have been utilized by

the firm

III. Return on Equity Shareholder’s funds: This ratio measures the

profitability of the funds belonging to the equity shareholders.

Return on Equity Shareholders funds-

= Net profit (after interest, tax & preference dividend X 100

Equity Shareholders funds

Significance: It measures how efficiently the equity shareholders’ funds are being

used in the business. The higher the ratio, the better it is, because in such case,

equity shareholders may be given a higher dividend.

IV. Earning per share: This ratio measures the profit available to the

equity shareholders on per share basis. All profits left after payment

of tax and preference dividend are available to equity shareholders.

Earning per share= Net profit – Dividend on preference share

Number of equity shares

Significance: It is helpful in the determination of the market price of the equity

share of the company. It is also helpful in estimating the capacity of the company

to declare dividends in equity shares.

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FINDINGS

1. Current ratio:

2012 2013

Interpretation: Ideal current ratio should be 2:1. So, we can say that the

company’s financial position is satisfactory and compared to 2012, the current

ratio of 2013 is less.

2. Quick ratio:

2012 2013

Interpretation:ideally, it should be 1:1. So, it can be concluded that company’s

financial position in 2013 is more sound compared to 2012.

3. Debt equity ratio:

2012 2013

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Interpretation: ideally, it should be 1:1. So, it can be said that the organization’s

repayment capacity of long-term debts is same for both the years which is not

satisfactory.

4. Total assets to debt ratio:

2012 2013

Interpretation:Total assets in both the years are more than sufficient to repay in

cash the total debts.

5. Proprietor’s ratio:

2012 2013

Interpretation: Since it is same for both the years, it can be concluded that the

financial condition of the company is sound.

6. Capital gearing ratio:

2012 2013

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Interpretation:

6. Interest coverage ratio:

2012 2013

Interpretation:from the findings, it can be said that the business will earn

sufficiently.

7. Fixed assets turnover ratio:

2012 2013

Interpretation: it can be concluded that the fixed assets are not being utilized

properly since there is a decline in the ratio of 2013 compared to 2012.

9. Working capital turnover ratio:

2012 2013

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Interpretation: since there is decrease in the ratio in 2013, it can be said that the

working capital has not been utilized efficiently in making sales.

10. Net profit ratio:

2012 2013

Interpretation: the decrease in ratio in 2013 implies managerial inefficiency and

excessive selling and distribution expenses.

11. Return on capital employed:

2012 2013

Interpretation: the capital employed in the business is not utilized properly as

there is a decline in the ratio in 2013.

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Conclusion