Ratio Analysis

FM Assignment - 2

Anu’s Laboratories Ltd and
Divi’s Laboratories Ltd.

SUBMITTED BY:
Iris Charu Gomes ( F11079)
NeethuThresaJacob(F11096)
Swarupa Rani Sahu(F11116)
Divyanshi Gupta ( F11121)

INTRODUCTION

OVERVIEW OF INDIAN PHARMACEUTICAL INDUSTRY

The Indian pharmaceutical industry currently tops the chart amongst India's science-based
industries with wide ranging capabilities in the complex field of drug manufacture and technology. A
highly organized sector, the Indian pharmaceutical industry is estimated to be worth $ 4.5 billion,
growing at about 8 to 9% annually. It ranks very high amongst all the third world countries, in terms
of technology, quality and the vast range of medicines that are manufactured. It ranges from simple
headache pills to sophisticated antibiotics and complex cardiac compounds; almost every type of
medicine is now made in the Indian pharmaceutical industry. The Indian pharmaceutical sector is
highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two
decades. The pharmaceutical and chemical industry in India is an extremely fragmented market with
severe price competition and government price control. The pharmaceutical industry in India meets
around 70% of the
country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and injectibles. There are approximately 250 large units and about 8,000 Small Scale
Units, which form the core of the pharmaceutical industry in India (including 5 Public Sector
Units).

Financial ratio:

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken
from an enterprise's financial statements. Often used in accounting, there are many standard ratios
used to try to evaluate the overall financial condition of a corporation or other organization.
Financial ratios may be used by managers within a firm, by current and
potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial
ratios to compare the strengths and weaknesses in various companies.If shares in a company are
traded in a financial market, the market price of the shares is used in certain financial ratios.

Financial ratios quantify many aspects of a business and are an integral part of the financial
statement analysis. Financial ratios are categorized according to the financial aspect of the business
which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity
ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the
firm's ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and
control of its expenses to generate an acceptable rate of return. Market ratios measure investor

response to owning a company's stock and also the cost of issuing stock.

Financial ratios allow for comparisons
 between companies
 between industries
 between different time periods for one company
 between a single company and its industry average
Ratios generally hold no meaning unless they are benchmarked against something else, likpast
performance or another company. Thus, the ratios of firms in different industries, which
face different risks, capital requirements, and competition are usually hard to compare.

ANU’S LABORATORIES LIMITED

Anu’s Laboratories Limited is a US $ 50 million public listed company established in
1996,and managed by experienced professionals engaged in manufacturing of Active Pharmaceutical
ingredients and Drug intermediaries. Anu’sLaba is the market leader across the world with over 60%
market share for three of its products in their addressable markets.For eight other products,Anu’s Labs
has established itself as the prefferedsource.The company has two state-of-the-art manufacturing
facilities located in Hyderabad,India.

1. Current Ratio: Current assets
Current liabilities

The current ratio indicates the extent to which current liabilities are covered by those assets expected
to be converted to cash in the near future.

Year Calculation of Current Ratio Current ratio

2010-11 1596.47 1.98
804.46

2009-10 1434.68
759.52 1.89

2008-09 531.97 1.24
429.61

2007-08 529.11 1.98
267.29

Average
2.13

Interpretation:-

CURRENT RATIO (IN TIMES) FOR:

2010-11 Average Industry

1.98 2.13 1.50

The current ratio of Anu’s for the year 2010-11 is better than the industrial average of 1.50. But the
average of the current ratio for the previous three years was better than the present value. So the
current ratio has come down when compared to the previous years.

2.Acid Test Ratio = Current Assets - Inventory
Current Liabilities

The acid test ratio is the ratio between quick current assets and quick liabilities. It is also called as
quick ratio.

Year Calculation of Acid Test Ratio Acid Test Ratio

2010-11 1596.47-691.93 1.12
804.46

2009-10 1434.68-744.95 0.91
759.52

2008-09 531.97 – 142.6 0.91
429.61

2007-08 529.11 – 168.96 1.35
267.29

Average 1.09

Interpretation:-

ACID TEST RATIO FOR :


01.12 1.09 0.90

The quick ratio of the company is better than the industrial average as well as than the previous three
years average.

3.Cash Liquidity Ratio = (Cash and Bank Balances + Marketable Securities)
Current Liabilities
This ratio measures the relationship of a firm’s cash and other current assets to its current liabilities.

Year Calculation of Cash Liquidity Ratio Cash Liquidity Ratio

2010-11 67.97+284.57 0.44
804.46

.
2009-10 45.26+130.26
759.52 0.23

2008-09 7.52 + 3.06 - 20.22 -0.02
429.61

2007-08 12.76 + 3.06 - 62.13 -0.17
267.29

Average of 2008-09, = 0.28 - 0.02 - 0.17 0.03
2007-08 & 2006-07 3

Interpretation:-


0.41 0.03 0.20

The cash liquidity ratio is better than the industry average. It is also better than the previous three
years. This shows that the company has more liquid cash in its hands than the previous three years.

4.Average Collection Period = Accounts Receivable
Net Sales/ 365

This ratio measures the liquidity of the firm’s debtors and shows the time taken in days to convert the
debtors into cash.

Year Calculation of Average Collection Period Average Collection Period (in
days)

2010-11 433.28 x 365 58.70
2694.14

2009-10 644.47x 365 115.41
2038.21

2008-09 352.66 x 365 176.17
730.67

2007-08 324.86 x 365 177.26
668.93

Interpretation:-

AVERAGE COLLECTION PERIOD FOR:


144.92 174.07 141.00

Lower the debt collection period, the better it is. The debt collection period of Anu’s Laboratories Ltd.
has decreased as compared to average past performance. This is a positive aspect. The industry
average is less. The company takes a very long time to collect from the debtors. So the company has
to improve its average collection period.
5.Accounts Receivables Turnover Ratio= Net sales
Accounts Receivables

This ratio shows how quickly the receivables or debtors are converted into cash.

Year Calculation of Accounts Receivables Turnover Accounts Receivables Turnover Ratio
Ratio (in times)

2010-11 2694.14 6.22
433.28

2009-10 2038.21

644.47 3.16

2008-09 730.67 2.07
352.66

2007-08 668.93 2.06
324.86

Average 2.12

Interpretation:-

ACCOUNTS RECEIVABLES TURNOVER RATIO (IN TIMES) FOR:


2.52 2.12 2.59

The higher the accounts receivables turnover ratio, the better it is. There has been a significant
increase in the receivables turnover ratio indicating a higher conversion of debts into cash in the year
2009-10 but the industry average is way too high. The company has to still improve its receivables
turnover ratio.
6.Inventory Turnover Ratio = Cost of goods sold
Inventories
This ratio indicates the number of times inventory is replaced during the year. It measures the
relationship between the cost of goods sold and the inventory level.

Year Calculation of Inventory Turnover Ratio Inventories Turnover Ratio (in
times)

2010-11 2260.99 3.03
691.93

2009-10 1636.69 2.06
744.95

2008-09 661.99 4.64
142.60

2007-08 616.72 3.65
168.96

Average 3.33

Interpretation:-

INVENTORIES TURNOVER RATIO (IN TIMES) FOR:


2.70 3.33 4.41

The inventory turnover ratio, an indicator of frequency of converting the present inventory into cash,
has decreased slightly from the previous three year’s average indicating low efficiency in selling of
inventories. The industry average is way too high and therefore they have to work towards moving the
inventories as fast as they can.
7.Fixed Assets Turnover Ratio = Net Sales

Fixed Assets
The fixed asset turnover measures how effectively the firm uses its plant and equipment.

Year Calculation of Fixed Assets Turnover Fixed Assets Turnover Ratio (in
Ratio times)

2010-11 2694.14 2.33
1158.0

2009-10 2038.21 2.51
812.14

2008-09 730.67 3.78
193.07

2007-08 668.93 5.28
126.74

Average 3.87

Interpretation:-

FIXED ASSETS TURNOVER RATIO (IN TIMES) FOR:


2.68 3.87 2.54

The higher the fixed asset turnover ratio the better it is. The company’s fixed asset turnover ratio is
better than the industry ratio showing that the company is using the fixed assets in an efficient way
but the ratio has gone down when compared with the previous three years.

8.Total Assets Turnover Ratio = Net sales
Total assets

This ratio measures the turnover of all the firm’s assets.

Year Calculation of Total Assets Total Assets Turnover Ratio
Turnover Ratio (in times)

2010-11 1.00
2694.14
2303.723

2009-10 2038.21 0.82
2472.984

2008-09 730.67 1.10
663.09

2007-08 668.93 1.37
488.33

Average 1.12

Interpretation:-


1.09 1.12 0.57

The total asset turnover indicates sales generated per rupee of asset employed in the company. The
ratio has gone down when compared to the previous years and it is lower than the industry average.
This is because of the low inventory turnover ratio. The company has to move its inventory in a faster
manner to improve the total asset turnover ratio.
9.Debt Ratio = Total Liabilities ( Current Liabilities + Loan Funds)
Total Assets
This ratio shows the percentage of funds provided by creditors.

Year Calculation of Debt Ratio Debt ratio

2010-11 804.46+494.71 0.48
2303.723

2009-10 759.52+397.32 0.53
2472.984

2008-09 426.36 0.64
663.09

2007-08 300.43 0.62

488.33

Average
0.65

Interpretation:-


0.63 0.65 0.49

The higher the debt ratio, the better it is. The debt ratio has gone down a little when compared to the
average of the previous three years. This is evident from the decrease in current assets like cash as
interpreted from the previous ratios like current ratio and cash liquidity ratio.

10.Long term debt to Total Capitalization Ratio = Long term debt
Long term debt + shareholder’s equity

This ratio measures the extent to which long term debt is used for financing

Year Calculation of Long term debt to Total Long term debt to Total Capitalization
Capitalization Ratio Ratio
(in times)

2010-11 494.71 0.23
494.71+1619.8

2009-10 397.32 0.20
397.32+1610.29

2008-09 63.81 0.21
63.81 + 236.73

2007-08 31.81 0.16
31.81 + 187.90

Average of 2008-09, = 0.34 + 0.21 + 0.16 0.24
2007-08 & 2006-07 3

Interpretation:-


0.33 0.24 NA

This ratio is good when it is high. The ratio has gone up when compared to the previous years which
show that the company has utilized the long term debts efficiently in the year 2009-10.

11.Debt Equity Ratio = Total liabilities
Shareholder’s equity

It measures debt relative to equity base in the capital structure.

Year Calculation of Debt-Equity Ratio
Debt-Equity Ratio (in times)

2010-11 1299.17 0.80
1619.8

2009-10 1156.84 0.81
1610.29

2008-09 426.36 1.80
236.73

2007-08 300.43 1.60
187.90

Average of 2008-09, = 2.27 + 1.80 + 1.60 1.89
2007-08 & 2006-07 3

Interpretation :-


1.72 1.89 0.50

The higher the ratio the better it is. The debt equity ratio has gone down when compared to the
previous years but it is better than the industry average.

12.Times interest earned = Operating profit
Interest Expense

It measures how many times interest expense is covered by operating earnings.It is a measure of the
firm’s ability to meet its annual interest payment.

Year Calculation of Times Interest Earned
Times Interest Earned (in times)

2010-11 416.59 2.52
165.03

2009-10 365.57 3.45
105.87

2008-09 12.52 0.46
27.42

2007-08 9.71 0.50
19.36

Average 4.09

Interpretation:


2.52 4.09 7.20

Higher the ratio the better it is. The ratio is less than the previous three years and it is quite low when
compared to the industry average. The company’s TIE is less which shows that the company has
lower returns when compared to the interest paid.

13.Fixed Charge coverage = Operating profit + lease payments
Interest Expense + lease payments

It measures coverage capability more broadly than times interest earned by including lease payments
as a fixed expense.

Year Calculation of Fixed Charge coverage
Fixed Charge coverage (in times)

2010-11 416.59+0 1.26
165.03+0

2009-10 365.57+0 1.73
105.87+0

2008-09 12.52 + 0.38 0.46
27.42 + 0.38

2007-08 9.71 + 0.09 0.50
19.36 + 0.09

Average 2.04

Interpretation:


1.26 2.04 144.02

Higher the ratio the better it is. In this case, the ratio has decreased when compared to the previous
years. But it is very less when compared to the industry average..

14. Cash Flow Adequacy = Cash Flow From Operating Activities
Average Long Term Debt Maturities

It measures how many times average annual payments of long term are covered by operating debt
cash flows.

Year Calculation of Cash Flow Adequacy
Cash Flow Adequacy (in times)

2010-11 284.57 3.52
(62.51+99)/2

2009-10 130.26 2.63
(99+0)/2

2008-09 -

Year Calculation of Net profit margin Net profit margin(%)

-
2007-08 -

Average 2.63

Interpretation:

3.52 2.63 0.76

2010-11 172.98 X 100 6.42%
2694.14

2009-10 211.65 X 100 10.38%
2038.21

2008-09 67.20 X100 9%
730.67

2007-08 54.90 X 100 8%
668.93

Average 11%

Higher the ratio the better it is. The current value ratio is higher than the industry average as well as
the last three years’ average.

15.Net Profit Margin= Net Profit X 100
Net Sales

Interpretation:-


6.42% 11% 26%

The higher the net profit margin, the better it is. The net profit margin of the company is quite small
when compared to the industry and it has gone by a few notches when compared to the previous three
years.

16.Gross Profit Margin :-Gross Profit
Net sales

This is also known as gross margin. This ratio is the result of the relationship between prices, sales
volume and costs.

Year Calculation of Gross Profit Gross Profit Margin

2010-11 251.56 0.09
2694.14

2009-10 259.90 0.13
2038.21

2008-09 233.03 0.32
730.67

2007-08 265.48 0.40
668.93

Average 0.16

Interpretation:-

.09 0.16 0.31

Company gross profit ratio has shown a decrease in value when compared to the previous three years
and it is much lower than the industrial average. So the company’s performance is poor in this respect.

17. Operating Profit Ratio :-Operating Profit
Net sales

Year Calculation of Operating Profit Operating Profit %

2010-11 416.59* 100 15%
2694.14

2009-10 365.57 *100 18%
2038.21

2008-09 12.52*100 2%
730.67

2007-08 9.71* 100 1%
668.93

Average 21 %

Interpretation:-


15% 21 % 36%

The operating profit margin in the year 2010-11 has come down when compared to the previous three
years and it is less than even half of the industry average.

18. Cash Flow margin:-Cash flow from operating activities
Net sales

This ratio tells that how much cash profit has been earned by the company by selling the goods. This
ratio is very important to know the short run liquidity and solvency position of the company.

Year Calculation of Cash flow margin Cash flow margin %

2010-11 284.57*100 10.56%
2694.14

2009-10 130.26*100 6.4%
2038.21

2008-09 -20.22*100 -3%
730.67

2007-08 -62.13*100 -9%
668.93

Average -8.0%

Interpretation


10.56% -8.0% 8.0%

The cash flow margin has gone up when compared to the previous three years. This is because the
company has more liquid cash in the current year and this is evident from the cash liquidity ratio.Also
the ratio has a higher value when compared with the industry average which shows that the company
hs more of liquid cash with it.

19. Return on investment = Net earnings
Total assets

This profitability ratio tells the relationship between net profits and assets. The return on investment
may also be called profit-to-asset ratio. This ratio told that how much company is earning by investing
that much amount in assets.

Year Calculation of Return on investment Return on investment

2010-11 172.98*100 6.40%
2703.723

2009-10 211.65*100 8.56%
2472.984

2008-09 67.20*100 10%
663.09

2007-08 54.90*100 11%
488.33

Average 10%

Interpretation


6.4% 10% 15%

The return on investment has gone down when compared with the previous three years and it is also
lower than the industry average. This is evident from the increase in the total asset turnover ratio of
the company.

20. Return on Stockholder’s equity:-Net earnings
Stockholder equity

This ratio tells the profitability is measured by dividing the net profits after taxes by the shareholders
equity. This ratio reveals how profitably the owner’s funds have been utilized by the firm.

Year Calculation of Return on equity Return on equity

2010-11 172.98*100 10.68%
1619.8

2009-10 211.65*100 13.14%
1610.29

2008-09 67.20*100 28%
236.73

2007-08 54.90 *100 29%
187.90

Average 20%

Interpretation:-


10.68% 20% 29%

The return on equity has decreased when compared to the previous three years and also it is lower
than the industry average. So, there is relatively lower return on the shareholder’s investments.

21. Cash return on assets:-Cash flow from operating activities
Total assets

This ratio explains that how much company has cash profit by having that much amount of total
assets. This ratio is very important for long run because it shows the cash position of the company
which helps to interpret the solvency position in the long run.

Year Calculation of Cash Return on asset Cash Return on asset

2010-11 284.57 0.10
2703.723

2009-10 130.26 0.06
2472.984

2008-09 -20.22 -0.03
663.09

2007-08 -62.13 -0.13
488.33

Average -0.06

Interpretation:-


0.10 -0.06 4.26

The higher the cash return on assets, the better it is. The company’s cash return on assets has
increased when compared to the past three years and has become positive from a negative value

22. Earnings per share:-Amount available for equity share holders
Number of equity shares

This is a widely used ratio. This ratio measures the profit available to equity shareholders on a per
share basis, that is, the amount that they can get on every share held. It is calculated by dividing the
profits available to the equity shareholder by the number of outstanding shares.

Year Calculation of Earnings per share Earnings per
share(Rs)

2010-11 172980000 0.71
244459983

2009-10 211.65 0.876
241520000

2008-09 67.20 7.24
92861510

2007-08 54.90 17.75
30923650

Average 8.0

Interpretation:-
2010-11
Average Industry

0.71 8.0 16.15

Earnings per share are the ratio of profit available for equity share holder by the number of equity
shares. Company’s EPS has drastically gone down when compared with the previous three years and
is also very less when compared with the company average.

23. Price to earnings:-Market price of the share
EPS
This is closely related to the earnings yield/earnings ratio. It is actually the reciprocal of the latter.
This ratio reflects the price currently being paid by the market for each rupee of currently reported
EPS. In other words, the P/E ratio measures investors expectations and the market appraisal of the
performance of a firm. This ratio is popularly used by security analysts to assess a firm’s performance
as expected by the investors.

Year Calculation of price to earning Price to earning

2010-11 3.10 4.37
0.71

2009-10 6.59 7.48
0.88

2008-09 185.65 25.65
7.24

2007-08 366.75 20.66
17.75

Average 5.95

Interpretation:-

4.37 5.95 30.72

Price earning ratio shows how much investors are willing to pay. It is the ratio of market price
by earning per share. The higher the ratio, the better it is. Here, there is a decrease in price earnings
ratio when compared to the previous years.And it is much below than the industry standard 0f 30.72

24. Dividend Pay-out ratio =Dividend per share X 100
EPS
It measures the relationship between the earnings belonging to the shareholder and dividend paid to
them. In other words, the D/P ratio shows what percentage share of the net profits after taxes and
preference dividend is paid out as dividend to equity shareholders.

Year Calculation of dividend pay-out ratio Dividend pay-out
ratio

2010-11 0 X 100 -
.71

2009-10 .10 X 100 11%
1.08

2008-09 1.5 X 100 21%
7.24

2007-08 1.5 X 100 8%
17.75

Average 8%

Interpretation:-


- 8% 22%

Dividend Payout Ratio shows, how much percentage the company is paying on the basis of its
earning. In our case the company did not give away any dividends in the year 2010-11 hence no
comparison with the industry average is possible but if we can compare the average of the last three
years with the industry average and we see that it is quite less than the industry average.
This can affect the loyalty of the shareholders towards the company.

25. Dividend yield ratio = Dividend per share X 100
Market value per share

This ratio is closely related to DPS. While the DPS are based on book value per share, the yield is
expressed in terms of market value per share.

Year Calculation of dividend yield ratio Dividend yield ratio

2010-11 0 X 100 -
3.10

2009-10 0.1 X 100 2.0%
6.59

2008-09 1.5 X 100 1%
185.65

2007-08 1.5 X 100 0%
366.75

Average 4%

Interpretation:-


- 4% 10%

Dividend Yield Ratio shows, how much percentage of dividend per share the company is paying in
comparison to its market price. The higher the percentage, better it is for the investors.In our case the
company did not give away any dividends in the year 2010-11 hence no comparison with the industry

average is possible but if we can compare the average of the last three years with the industry average
and we see that it is quite less than the industry average.

COMPARATIVE ANALYSIS

Comparison of current year ratios with Industrial averages.

Ratio 2011 Industry Average Score
Current Ratio 1.98 1.50 1
Acid test 1.12 0.90 1
Cash Flow Liquidity 0.44 0.20 1
Average Collection Period 58.7 141 1
Average Receivable turnover 6.22 2.59 -1
Fixed Assets turnover 2.33 2.54 -1
Total Assets Turnover 1.00 0.57 1
Debt Ratio 0.48 0.49 1
Long term Debt to total capitalization 0.23 0.53 -1
Debt to equity 0.80 0.50 1
Times interest earned 2.52 7.20 -1
Fixed charge changeover 1.26 144.02 -1
Cash flow adequacy 3.52 0.76 -1
Gross profit margin 0.09 0.31 -1
Operating profit margin 0.15 0.36 -1
Net profit margin 0.06 0.26 -1
Cash Flow Margin 0.11 0.08 1
Return on Investment 0.06 0.15 -1
Return on Equity 0.11 0.29 -1
Cash return on assets 0.11 4.26 -1
Earnings per share 0.71 16.15 -1
Price to earnings 4.38 30.72 -1
Dividend payout - 0.22 -
Dividend yield - 0.01 -
Inventory Turnover 3.03 4.41 -1
Net Score -7

Note: If the ratio shows a favourable change as compared to average performance of past three years,
the score of that particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

Comparison of current year ratios with the industry average

Ratio 2011 Industry Average Score
Current Ratio 1.98 1.50 -1
Acid test 1.12 0.90 1
Cash Flow Liquidity 0.44 0.20 1
Average Collection Period 58.7 141 1
Average Receivable turnover 6.22 2.59 1
Fixed Assets turnover 2.33 2.54 -1
Total Assets Turnover 1.00 0.57 1
Debt Ratio 0.48 0.49 1
Long term Debt to total capitalization 0.23 0.53 1
Debt to equity 0.80 0.50 -1
Times interest earned 2.52 7.20 -1
Fixed charge changeover 1.26 144.02 -1
Cash flow adequacy 3.52 0.76 1
Gross profit margin 0.09 0.31 -1
Operating profit margin 0.15 0.36 -1
Net profit margin 0.06 0.26 -1
Cash Flow Margin 0.11 0.08 1
Return on Investment 0.06 0.15 -1
Return on Equity 0.11 0.29 -1
Cash return on assets 0.11 4.26 1
Earnings per share 0.71 16.15 -1
Price to earnings 4.38 30.72 -1
Dividend payout - 0.22 -
Dividend yield - 0.01 -
Inventory Turnover 3.03 4.41 1
Net Score -2

Note: If the ratio shows a favourable change as compared to industry average, the score of that
particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

DIVI’S LABORATORIES

Established in the year 1990, with Research & Development as its prime fundamental, Divis
Laboratories focussed on developing new processes for the production of Active Pharma Ingredients
(APIs) & Intermediates. The company in a matter of short time expanded its breadth of operations to
provide complete turnkey solutions to the domestic Indian pharmaceutical industry.

With five years of experience, expertise and a proven track-record of helping many companies with
its turn-key and consulting strengths, Divis Laboratories established its first manufacturing facility in
1995.

RATIO ANALYSIS

1. Current Ratio: Current assets

Current liabilities
The current ratio indicates the extent to which current liabilities are covered by those assets expected
to be converted to cash in the near future

Year Calculation of Current Ratio Current ratio

2010-11 99621.76 2.477356
40212.93

2009-10 78625.04
25966.54 3.027937

2008-09 74500.08 3.538963
21051.39

2007-08 55532.91 2.858192593
19429.38

Average of previous 3 years = 2.858192593+3.538963+3.027937
3 3.141697275

Interpretation:-

CURRENT RATIO (IN TIMES) FOR:


2.477356 3.141697275 1.50

The current ratio of Divi’s Labs Ltd for the year 2010-11 is better than the industrial average of 1.50.
But the average of the current ratio for the previous three years was better than the present value. So
the current ratio has come down when compared to the previous years.

2.Acid Test Ratio = Current Assets - Inventory
Current Liabilities

The acid test ratio is the ratio between quick current assets and quick liabilities. It is also called as
quick ratio.

Year Calculation of Acid Test Ratio Acid Test Ratio

2010-11 99621.76-54306.55 1.126882
40212.93

2009-10 78625.04-47957.27 1.18105
25966.54

2008-09 74500.08-21051.39 1.658291
39590.75

2007-08 55532.91-27565.53 1.439437594

19429.38

Average of 2009-10, = 1.18105 + 1.658291 + 1.439437594 1.426259367
2008-09 & 2007-08 3

Interpretation:-

ACID TEST RATIO FOR :


1.126882 1.426259367 0.90

The quick ratio of the company is better than the industrial average. But, the quick ratio has come
down to some extent when compared to the previous three years.

3.Cash Liquidity Ratio = (Cash and Bank Balances + Marketable Securities)
Current Liabilities
This ratio measures the relationship of a firm’s cash and other current assets to its current liabilities.

Year Calculation of Cash Liquidity Ratio Cash Liquidity Ratio

2010-11 960.47+32595.79+0 0.834464437
40212.93

2009-10 979.87+36767.08+0 1.453676539
25966.54

2008-09 690.39+31551.47+0 1.531579
21051.39

2007-08 1.584828
581.43+30210.8+0
19429.38

Average of 2009-10, = 1.584828 +1.531579 +1.453676539
3 1.523361149
2008-09 & 2007-08

Interpretation:-


0.834464 1.523361149 0.20

The cash liquidity ratio is better than the industry average. But it has decreased than the previous three
years. This shows that the company has less liquid cash in its hands than the previous three years.

4.Average Collection Period = Accounts Receivable

Net Sales/ 365

This ratio measures the liquidity of the firm’s debtors and shows the time taken in days to convert the
debtors into cash.

Year Calculation of Average Collection Period Average Collection Period (in
days)

2010-11 39495.39 x 365 110.4289191
130543.86

23444.15 x 365
2009-10 92928.25 92.08302911

2008-09 28349.95 x 365 86.91481
119056

2007-08 21424.51 x 365 75.68779
103318.5

Interpretation:-

AVERAGE COLLECTION PERIOD FOR:


110.4289191 91.27863705 141.00

Lower the debt collection period, the better it is. The debt collection period of Divi’s Labs Ltd. has
increased as compared to average past performance. This is a negative aspect. The industry average is
more. The company takes a very less time to collect from the debtors. So the company has better
performance its average collection period compared to the industry.
5.Accounts Receivables Turnover Ratio= Net sales
Accounts Receivables

This ratio shows how quickly the receivables or debtors are converted into cash.

Year Calculation of Accounts Receivables Turnover Accounts Receivables Turnover Ratio
Ratio (in times)

2010-11 130543.86 3.305293605
39495.39

2009-10 92928.25 3.963814001
23444.15

2008-09 119056 4.199514
28349.95

2007-08 103318.5 4.822442
21424.51

Average of last 3 yrs. = 4.328590144

Interpretation:-

ACCOUNTS RECEIVABLES TURNOVER RATIO (IN TIMES) FOR:


3.305293605 4.328590144 2.59

The higher the accounts receivables turnover ratio, the better it is. There has been a significant
decrease in the receivables turnover ratio indicating a lower conversion of debts into cash in the year
2010-11 but the industry average is way too low. The company performs better in receivables
turnover ratio as compared to the industry.

6.Inventory Turnover Ratio = Sales
Inventories
This ratio indicates the number of times inventory is replaced during the year. It measures the
relationship between the cost of goods sold and the inventory level.

Year Calculation of Inventory Turnover Ratio Inventories Turnover Ratio (in
times)

130543.86
2009-10 54306.55 2.403833

2008-09 92928.25 1.93773
47957.27

2007-08 119056 3.007168
39590.75

2007-08 103318.5 3.748103519
27565.53


Interpretation:-

INVENTORIES TURNOVER RATIO (IN TIMES) FOR:


2.403833
2.897667098 4.41

The inventory turnover ratio, an indicator of frequency of converting the present inventory into cash,
has decreased slightly from the previous three year’s average indicating low efficiency in selling of
inventories. The industry average is way too high and therefore they have to work towards moving the
inventories as fast as they can.

7. Fixed Assets Turnover Ratio = Net Sales
Fixed Assets
The fixed asset turnover measures how effectively the firm uses its plant and equipment.

Year Calculation of Fixed Assets Turnover Fixed Assets Turnover Ratio (in
Ratio times)

2010-11 130543.86 2.213626065
58972.86

2009-10 92928.25 1.57593173
58967.18

2008-09 119056 2.019026
58967.07

2007-08 103318.5 2.079385
49687.02


Interpretation:-

FIXED ASSETS TURNOVER RATIO (IN TIMES) FOR:


2.213626065 1.891447528 2.54

The higher the fixed asset turnover ratio the better it is. The company’s fixed asset turnover ratio is
lower than the industry ratio showing that the company is not using the fixed assets in an efficient
way but the ratio has gone up when compared with the previous three years.

8. Total Assets Turnover Ratio = Net sales
Total assets

This ratio measures the turnover of all the firm’s assets.

Year Calculation of Total Assets Total Assets Turnover Ratio
Turnover Ratio (in times)

130543.86 0.565582
2010-11 230813.24

2009-10 92928.25 0.492598
188649.44

2008-09 119056 0.756629
157350.7

2007-08 103318.5 0.864113602
119565.8


Interpretation:-


0.565582 0.704446619 0.57

The total asset turnover indicates sales generated per rupee of asset employed in the company. The
ratio has gone down when compared to the previous years and it is lower than the industry average.
This is because of the low inventory turnover ratio. The company has to move its inventory in a faster
manner to improve the total asset turnover ratio.

9. Debt Ratio = Total Liabilities ( Current Liabilities + Loan Funds)
Total Assets
This ratio shows the percentage of funds provided by creditors.

Year Calculation of Debt Ratio Debt ratio

48008.69
2010-11 230813.24 0.207998

34441.93
2009-10 188649.44 0.182571

2008-09 31171.89 0.198105
157350.7

2007-08 32167.2 0.269033385
119565.8

Average of 3 yrs. =
0.21656969

Interpretation:-


0.207998 0.21656969 0.49

The higher the debt ratio, the better it is. The debt ratio has gone down a little when compared to the
average of the previous three years. This is evident from the decrease in current assets like cash as
interpreted from the previous ratios like current ratio and cash liquidity ratio.

10. Long term debt to Total Capitalization Ratio = Long term debt
Long term debt + shareholder’s equity

This ratio measures the extent to which long term debt is used for financing

Year Calculation of Long term debt to Total Long term debt to Total Capitalization

Capitalization Ratio Ratio
(in times)

7795.76 0.746172
2010-11 7795.76 +2651.91

8475.39
2009-10 8475.39+2642.88 0.762294

10120.5
2008-09 10120.5+1295.16 0.886545

12737.82
2007-08 12737.82+1291.14 0.907966093


Interpretation:-


0.746172
0.852268457 0.53

This ratio is good when it is high. The ratio has gone down when compared to the previous years
which show that the company has not utilized the long term debts efficiently in the year 2010-11.

11. Debt Equity Ratio = Total liabilities
Shareholder’s equity

It measures debt relative to equity base in the capital structure.

Year Calculation of Debt-Equity Ratio
Debt-Equity Ratio (in times)

48008.69
2010-11 182804.55 0.262623

2009-10 34441.93 0.223348
154207.51

0.247045
2008-09 31171.89
126178.8

2007-08 32167.2 0.368051536
87398.63


Interpretation :-


0.262623 0.279481646 0.50

The higher the ratio the better it is. The debt equity ratio has gone down when compared to the
previous years but it is lower than the industry average.

12.Times interest earned = Operating profit
Interest Expense

It measures how many times interest expense is covered by operating earnings.It is a measure of the
firm’s ability to meet its annual interest payment.

Year Calculation of Times Interest Earned
Times Interest Earned (in times)

2010-11 50735.73 376.7971036
134.65

2009-10 40970.03 165.9444692
246.89

2008-09 55230.3 67.54348
817.7

2007-08 44424.7 55.91318
794.53

Average of 2009-10, 2008-09&2007-08 96.46704206

Interpretation:


376.7971036 96.46704206 7.20

Higher the ratio the better it is. The ratio is better than the previous three years as well as the industry
average. This shows that the company has higher returns when compared to the interest paid.

13.Fixed Charge coverage = Operating profit + lease payments
Interest Expense + lease payments

It measures coverage capability more broadly than times interest earned by including lease payments
as a fixed expense.

Year Calculation of Fixed Charge coverage
Fixed Charge coverage

2010-11 50789.73 269.2272992
188.65

2009-10 41021.46 137.5082462
298.32

2008-09 55271.66 64.3397
859.06

2007-08 44455.49 53.85814
825.42

Average of 2009-10, 2008-09 & 2007-08 85.23536267

Interpretation:


0.58 269.2272992 144.02

Higher the ratio the better it is. In this case, the ratio has increased when compared to the previous
years as well as the industry average.

14. Cash Flow Adequacy = Cash Flow From Operating Activities
Average Long Term Debt Maturities

It measures how many times average annual payments of long term are covered by operating debt
cash flows.

Year Calculation of Cash Flow Adequacy
Cash Flow Adequacy (in times)

2010-11 32595.79 15.99463669
2037.92

2009-10 36767.08 18.41290859
1996.81

2008-09 31551.47 15.26106
2067.45

2007-08 30210.8 22.11884
1365.84

Average of 2009-10, 2008-09 & 2007-08 18.59760237

Interpretation:


15.99463669 18.59760237 0.76

Higher the ratio the better it is. The current value ratio is much higher than industry average & higher
than the last three years’ average

15.Gross Profit Margin :-Gross Profit
Net sales

This is also known as gross margin. This ratio is the result of the relationship between prices, sales
volume and costs.

Year Calculation of Gross Profit Gross Profit Margin

2010-11 51558.25 0.394949636
130543.86

2009-10 41712.86 0.448871683
92928.25

2008-09 56118.73 0.471364
119056

2007-08 45248.96 0.437956
103318.5

Average of 2009-10, 2008-09 & 2007-08 0.45273065

Interpretation:-


0.394949636 0.45273065 0.31

Company gross profit ratio has decreased when compared to the previous three years. So the company
has not performed very well this year. But comparing with the industry average company’

16. Operating Profit Ratio :-Operating Profit
Net sales

It measures the profit generated after consideration of cost of products sold.

Year Calculation of Operating Profit Operating Profit %

2010-11 50735.73 0.388646
130543.86

2009-10 40970.03 0.440878
92928.25

2008-09 55230.3 0.463902
119056

2007-08 44424.75 0.429979
103318.5

Year Calculation of Net Profit Margin Net Profit Margin

Average of 2009-10, 2008-09 & 2007-08 0.444919568

Interpretation:-


0.388646 0.444919568 0.36

The operating profit margin in the year 2010-11 has gone down when compared to the previous three
years but it is quite high when compared with the industry average.

17.Net Profit Margin= Net Profit X 100
Net Sales

It measures profit generated after consideration of all expenses and revenues.

2010-11 43556.61 X 100 33.3654%
130543.86

2009-10 34420.46 X 100 37.0398%
92928.25

2008-09 42445.57 X100 35.6518%
119056

2007-08 35355.52 X 100 34.219%
103318.5

Average of 2009-10,2008-09 & 2007-08 35.6371%

Interpretation:-


33.3654% 35.6371% 26%

The higher the net profit margin, the better it is. The net profit margin of the company is higher than
the industry but it has gone down a little when compared to the previous three years.

18. Cash Flow margin:-Cash flow from operating activities
Net sales

This ratio tells that how much cash profit has been earned by the company by selling the goods. This
ratio is very important to know the short run liquidity and solvency position of the company.

Year Calculation of Cash flow margin Cash flow margin %

2010-11 32595.79 *100 24.96922%
130543.86

2009-10 36767.08*100 39.56501%
92928.25

2008-09 31551.47*100 26.5014%
119056

2007-08 30210.8*100 29.2405%
103318.5

Average of 2009-10,2008-09&2007-08 31.76895%

Interpretation


24.96922% 31.76895% 8%

The cash flow margin has gone down when compared to the previous three years. This is because the
company has less liquid cash in the current year and this is evident from the cash liquidity ratio.

19. Return on investment = Net earnings
Total assets
This profitability ratio tells the relationship between net profits and assets. The return on investment
may also be called profit-to-asset ratio. This ratio told that how much company is earning by investing
that much amount in assets.

Year Calculation of Return on investment Return on
investment

2010-11 43556.61*100 24.9692%
230813.24

2009-10 34420.46*100 39.565%
188649.44

2008-09 42445.57*100 26.5014%
157350.7

2007-08 35355.52*100 29.5699%
119565.8

Average of 2009-10, 2008-09&2007-08 24.9302%

Interpretation


24.9692% 24.9302% 15%

The return on investment has gone up slightly when compared with the previous three years and it is
also higher than the industry average.

20. Return on Stockholder’s equity:-Net earnings
Stockholder equity

This ratio tells the profitability is measured by dividing the net profits after taxes by the shareholders
equity. This ratio reveals how profitably the owner’s funds have been utilized by the firm.

Year Calculation of Return on equity Return on equity

2010-11 43556.61*100 23.8269%
48008.69

2009-10 34420.46*100 22.3209%
34441.93

2008-09 42445.57*100 33.639%
31171.89

2007-08 35355.52*100 40.45317%
32167.2

Average of 2009-10, 2008-09&2007-08 32.1377%

Interpretation:-


23.8269% 32.1377% 29%

The return on equity has decreased when compared to the previous three years and it is also lower
than the industry average. There is low return on the shareholder’s investments.

21. Cash return on assets:-Cash flow from operating activities
Total assets

This ratio explains that how much company has cash profit by having that much amount of total
assets. This ratio is very important for long run because it shows the cash position of the company
which helps to interpret the solvency position in the long run.

Year Calculation of Cash Return on asset Cash Return on asset

2010-11 32595.79 0.141221491
230818.24

2009-10 36767.08 0.194896311
188649.44

2008-09 31551.47 0.200517
157530.7

2007-08 30210.8 0.252671
119565.8

Average of 2007-08,2008-09&2009-10 0.216028

Interpretation:-


0.141221491 0.216028 4.26

The higher the cash return on assets, the better it is. The company’s cash return on assets has
decreased when compared to the past three years.

22. Earnings per share:-Amount available for equity share holders
Number of equity shares

This is a widely used ratio. This ratio measures the profit available to equity shareholders on a per
share basis, that is, the amount that they can get on every share held. It is calculated by dividing the
profits available to the equity shareholder by the number of outstanding shares.

Year Calculation of Earnings per share Earnings per
share(Rs)

2010-11 43556.61*100000 32.84933358
132595110

2009-10 34420.56*100000 26.04766182
132144145

2008-09 42445.57*100000 65.30088
65000000

2007-08 35355.52*100000 54.39311
65000000

Average of 2009-10, 2008-09&2007-078 48.58054881

Interpretation:-


32.84933358 48.58054881 16.15

Earnings per share are the ratio of profit available for equity share holder by the number of equity
shares. Company’s EPS has gone down when compared with the previous three years and is high
comparedto the company average.

23. Price to earnings:-Market price of the share
EPS
This is closely related to the earnings yield/earnings ratio. It is actually the reciprocal of the latter.
This ratio reflects the price currently being paid by the market for each rupee of currently reported
EPS. In other words, the P/E ratio measures investors’ expectations and the market appraisal of the

performance of a firm. This ratio is popularly used by security analysts to assess a firm’s performance
as expected by the investors.

Year Calculation of price to earning Price to earning

2010-11 675.9 20.575
32.8493

2009-10 662.45 25.4322
26.047

2008-09 476.8 7.30158
65.3008

2007-08 634.5 11.66508
54.393

Average of 2009-10, 2007-08 & 2008-09 14.799

Interpretation:-


20.575 14.799 30.72

Price earning ratio shows how much investors are willing to pay. It is the ratio of market price
by earning per share. The higher the ratio, the better it is. Here, there is a increase in price earnings
ratio when compared to the previous years. But compared to the industry average it is low.

24. Dividend Pay-out ratio =Dividend per shareX 100

EPS
It measures the relationship between the earnings belonging to the shareholder and dividend paid to
them. In other words, the D/P ratio shows what percentage share of the net profits after taxes and
preference dividend is paid out as dividend to equity shareholders.

Year Calculation of dividend pay-out ratio Dividend pay-out
ratio

2010-11 10 X 100 30.442%
32.8493

2009-10 6 X 100
26.047 23.03%

2008-09 6 X 100 9.18%
65.3008

2007-08 4 X 100 7.35%
54.39311

Average of 2008-09,2009-10&2007-08 13.19%

Interpretation:-


30.442% 13.19% 22%

Dividend Payout Ratio shows, how much percentage the company is paying on the basis of its
earning. The dividend payout ratio of the company is very high when compared with the industry
average and is also better than the past three years. This will lead to the better loyalty of the
shareholders but the company has to consider using these funds for the reinvestments
.
25. Dividend yield ratio = Dividend per share X 100
Market value per share

This ratio is closely related to DPS. While the DPS are based on book value per share, the yield is
expressed in terms of market value per share.

Year Calculation of dividend yield ratio Dividend yield ratio

2010-11 10 X 100 1.479%
675.9

2009-10 6 X 100 0.9057%
662.45

2008-09 6 X 100 1.258%
476.8

2007-08 4 X 100 0.6304%
634.5

Average of 2009-10, 2008-09&2007-08 0.9315%

Interpretation:-


1.479% 0.9315% 1%

Dividend Yield Ratio shows, how much percentage of dividend per share the company is paying in
comparison to its market price. The higher the percentage, better it is for the investors. The percentage
has increased compared to the average of the previous three years. Also it is quite high with respect to
the industry.

COMPARATIVE ANALYSIS

Comparison of current year ratios with average performance of previous three years

Ratio 2011 Average of last 3 years Score
CURRENT RATIO 2.477356 3.141697275 -1
QUICK RATIO 1.126882 1.426259367 1
CASH FLOW LIQUIDITY 0.834464 1.523361149 -1
AVERAGE COLLECTION PERIOD 110.4289 84.8952116 -1
ACCOUNTS RECIEVABLE
TURNOVER 3.305294 4.328590144 -1
INVENTORY TURNOVER 2.403833 2.897667098 -1
FIXED ASSET TURNOVER 2.213626 1.891447528 1
TOTAL ASSETS TURNOVER RATIO 0.565582 0.704446619 -1
DEBT RATIO 0.207998 0.21656969 1
LONG TERM DEBT TO TOTAL
CAPITALIZATION 0.746172 0.852268457 1
DEBT TO EQUITY 0.262623 0.279481646 1
TIMES INTEREST EARNED 376.7971 96.46704206 1

FIXED CHARGE COVERAGE 269.2273 85.23536267 1
CASH FLOW ADEQUACY 15.99464 18.59760237 -1
GROSS PROFIT MARGIN 0.39495 0.45273065 -1
OPERATING PROFIT MARGIN 0.388649 0.444919568 -1

NET PROFIT MARGIN 0.333655 0.356371772 -1
CASH FLOW MARGIN 0.249692 0.317689502 1
ROI 0.188709 0.249302645 -1
ROE 0.238269 0.321377603 -1
CASH RETURN ON ASSETS 0.141221 0.216028032 -1
EARNINGS PER COMMON SHARE 32.84933 48.58054881 -1
PRICE TO EARNINGS 20.57576 14.79963083 1
DIVIDEND PAYOUT 0.30442 0.131922693 1
DIVIDEND YIELD 0.014795 0.009315119 1
Net score -3

Note: If the ratio shows a favorable change as compared to average performance of past three years,
the score of that particular ratio is +1. If the change is unfavorable, the ratio gets a -1.

Comparison of current year ratios with the industry average

Ratio 2011 Industry average Score
CURRENT RATIO 2.477356 1.50 1
QUICK RATIO 1.126882 0.90 1
CASH FLOW LIQUIDITY 0.834464 0.20 1
AVERAGE COLLECTION PERIOD 110.4289 141.00 1
ACCOUNTS RECIEVABLE
TURNOVER 3.305294 2.59 1
INVENTORY TURNOVER 2.403833 4.41 -1
FIXED ASSET TURNOVER 2.213626 2.54 -1
TOTAL ASSETS TURNOVER RATIO 0.565582 0.57 -1
DEBT RATIO 0.207998 0.49 1
LONG TERM DEBT TO TOTAL
CAPITALIZATION 0.746172 0.53 -1
DEBT TO EQUITY 0.262623 0.50 -1
TIMES INTEREST EARNED 376.7971 7.20 1
FIXED CHARGE COVERAGE 269.2273 144.02 1
CASH FLOW ADEQUACY 15.99464 0.76 1
GROSS PROFIT MARGIN 0.39495 0.31 1
OPERATING PROFIT MARGIN 0.388649 0.36 1

NET PROFIT MARGIN 0.333655 0.26 1
CASH FLOW MARGIN 0.249692 0.08 1
ROI 0.188709 0.15 1
ROE 0.238269 0.29 -1
CASH RETURN ON ASSETS 0.141221 4.26 -1
EARNINGS PER COMMON SHARE 32.84933 16.15 1
PRICE TO EARNINGS 20.57576 30.72 1
DIVIDEND PAYOUT 0.30442 0.22 1
DIVIDEND YIELD 0.014795 0.01 1
Net score 9

Note: If the ratio shows a favourable change as compared to industry average, the score of that
particular ratio is +1. If the change is unfavourable, the ratio gets a -1.

IF SOMEBODY HAS TO INVEST, WHICH COMPANY AND WHY?

Results of comparison with industry averages
Divi’s Anu’s
laboratories laboratories
Return on Investment 1 -1
Return on Equity -1 -1
Dividend payout Ratio 1 -
Earnings per common share 1 -1

We infer from the above table that Divi’s laboratories is performing well compared to Anu’s
laboratories hence it would be advisable to invest only in Divi’s laboratories. Although the return on
equity is low compared to the industry average, as seen the company is performing well regard to
other ratios we can expect that the company’s return on equity may improve in future. As shown
clearly the performance of Anu’s laboratories is poor in all ratios it is not advisable to invest in the
company

IF SOMEBODY HAS TO LEND, WHICH COMPANY WOULD HE LEND AND WHY?

Results of comparison with previous years’
Divi’s Anu’s
laboratories laboratories
Debt to Equity 1 1
Times interest earned 1 -1
Fixed charge coverage 1 -1
Cash flow adequacy -1 -1

The debt-equity ratio is favorable in both the companies but when comparing the ratiosDivi’s
laboratories has better performance when compared to Anu’s laboratories, it would influence the
lender to lend the loan to Divi’s laboratories, rather than Anu’s laboratories.

ANALYSIS OF GOC AND NOC

Divi’s laboratories

YEARS 2010-11 2009-10 2008-09 2007-08
GOC(in days) 40.44462 27.63752 24.76941 14.58577
NOC(in days) 35.83315 23.05418 21.6295 11.2373

The GOC and NOC values are continuously increasing over the year indicating that the
company requires more time to convert its sales to cash. The debt conversion cycle is consequently
increasing. This is an indication of poor performance of the company in terms of credit management
as well as inventory management

Anu’s laboratories

YEARS 2010-11 2009-10 2008-09 2007-08

GOC(in days) 7.994412 11.72771 15.11399 9.966986
NOC(in days) 7.174945 9.441557 12.69496 8.281791

The GOC and NOC of the Anus’s laboratories is low compared to the previous years. This depicts
improvement in the company’s debt conversion cycle. The sales are getting converted into cash
comparatively at a faster rate.

Conclusion

The entire analysis has been performed on both the companies and the required ratios have been
calculated with regard to the last 3 years average and all the industry average. A score of +1 has been
awarded for the ratios that have met the criteria and a score of -1 for the ratios that has failed to meet
the criteria. Based on the analysis it has been recommended to the investor to invest in Divi’s
laboratories. Also the company is considered safe to lend money compared to Anu’s laboratories. But
the GOC and NOC of Anu’s laboratories is decreasing by year showing better debt conversion cycle.
Whereas for Divi’s laboratories it is continuously increasing which is not advisory.

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