1

INTRODUCTION

LUPIN PHARMACEUTICAL

Mandideep
Ankleshwar Tarapur Goa

Mandideep
Aurangabad Jammu

The chairman of Lupin pharmaceutical is Dr. Desh Bandhu Gupta. Lupin ltd
was founded on 9th April 1968. In India Lupin have 20 brands in the “TOP
3” of their respective products segments. The company is named after
Roussel Hybrid, an Australian plant which has for centuries, served man and
the environment. There are different branches of Lupin spread all over India.
These branches are producing different product. The product wise location is
given bellow

Mandideep I-: this branch is working on API’S and formulation.

Mandideep II-: This branch is producing herbal products.

Ankleshwar-: This branch is producing API’S.

Aurangabad-: This branch is working on formulation.

Tarapur-: this is for API’S.

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Jammu-: This branch is for formulation.

Goa-: This is producing Non Cephalosporin Dosage forms.

API’S-: This is the active pharmaceutical ingredient. This is in the form of

powder and this is generally using in the formulation of medicine. It is the
kind of production.

FORMULATION -: This is production of capsules, tablets and syrup with

the help of API’S. A branch which is producing API’S will send this for
formulation.

In India Lupin have 20 brands in the “TOP 3” of their respective

products segments. Global leader in anti-tuberculosis products and
cephalosporin. Lupin products sold in over 70 countries.

When it comes to reliability and quality, Lupin’s name is amongst in

the mind of specialists. More and more specialists such as chest physicians,
consulting physicians, general surgeons, pediatricians, cardiologists and
diabetologists are choosing its products everyday. Despite the fact that the
Indian urban prescription market showed stagnation with only 0.1% of
growth, Lupin has bucked the trend by recording a strong growth of 8.2%
during the year.

AAMLA (Asia, Africa, Middle East & Latin America)-:

In its pursuit to be an innovation led translation pharmaceutical company,

Lupin has ventured penetrated into chosen markets represented by its
AAMLA division. The AAMLA geographic provide unique challenge and
opportunity. On one hand, there are highly regulated markets such as
Japan, Australia, South Korea, Mexico, U.A.E., Saudi Arabia etc. while,
on the there, there are less regulated markets such as Myanmar, Nigeria,
Kenya and Peru.
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1200

1000

800

600

400

200

0
2002-03 2003-04 2004-05 2005-06

 sales (rs. in million)

INDIA PHARMACEUTICAL MARKET-

Today, the pharmaceutical industry in India is estimated to be over a

US $5 billion. 2005 marked the beginning of an era in the Indian
pharmaceutical industry with the introduction product patent regime. The
bill not only provided the confidence to multinational companies to bring in
their research molecule but, it also gave Indian companies reason to focus on
developing brands and exploring in-licensing and marketing alliances. The
Indian pharmaceutical market continued to grow in size, powered by 9%
value and 7%volume growth respectively.

FINANCIAL OVERVIEW-:

In financial year 2005-06, the net sales of the company increased by 38%
from Rs. 11611.3 million to Rs. 16061 million in net profit, a 117% increase
over the previous year’s Rs. 843.6 million. Higher sales volume, especially
in the high value market of US and in formulations in the domestic markets
triggered the higher profitability. These entire factors contributed to the
growth in earning before interest, tax, depreciation and amortization
(EBITDA) by 106%, from Rs. 1457.9 million. During the year EBITDA
constituted 19% of net sales. The company registered strong export sales
constituted 46% of gross sales.
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3500

3000

2500

2000

1500

1000

500

0
2004-05 2005-06

--EBITDA (Rs, in million)

1- On the strength of the various ANDA’s filled by the company in the

previous year, the company, the company was able to launch 7 new
products in the US, from which sales of Rs. 2233 million were added
to the company’s top line. In particular, Ceftriaxone has been a major
success for the company, for which it now enjoys around 25% market
share. The price drop for the product was about 70% in hospital
market, being less intense, with fewer competitors participating in this
high-end niche generic product.

2- Domestically, the company’s strong performances within the recently

entered Anti-Asthma segment and its overall market penetration of its
multitude of leading products in other therapeutic areas have
generated significant revenues additions.

3- In terms of other product, Lupin has been able to maintain optimal

cost positioning and quality maintenance, the keys to success in this
industry. Despite price drops in various products, the company has
been able to maintain and grow its market share to make strong
margins from these products, contributed to the strong financial
performance of the company.
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45
40

35
30

25
20

15

10

5
0
2004-05 2005-06

--EPS (Rs. In million)

As a result of these factors, the profit after tax recorded was Rs. 1827.2
million, with cash profits amounting to Rs. 2230.7 million. The earning per
share was Rs. 44.59. The Board recommended a dividend of 65%, absorbing
a sum of Rs. 297.5 million, inclusive of tax on dividend.

8000
7000
6000
5000
4000
3000
2000
1000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

--API SALES GROWTH

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FINANCIAL OVERVIEW (2004-05)-:

In financial year 2004-05, the net sales of the company by 4% from

Rs.11192.8 million to Rs.11611.3 million. The net profit after extraordinary
items was Rs.843.6 million as against Rs.987.1 million in the previous year.
The company made a strategic decision to significantly increase investment
in intellectual capital, marketing and R&D. The company witnessed a dip in
margin in its Pen G based API product and faced market uncertainty in the
last quarter owing to the introduction of VAT. These entire factors
contributed to the reduction of the Earning before tax, Depreciation and
Amortization (EBITDA) from Rs.2801.7 million in the previous year to
Rs.1457.9 million.
2500

2000

1500

1000

500

0
2004-05 2005-06

--PBT (Rs. In million)

The company registered strong export sales worth Rs.5619.1 million,

thereby constituting 48% of the net sales. The company expanded its product
pipe line, R&D Company investing substantially higher amount in R&D
(Rs.760.1 million in revenue, Rs.76 million in capex). The R&D expenditure
increased to7.2% of net sales in the previous financial year 2004-05 up from
4.11% in the previous year.
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90
80
70
60
50
40
30
20
10
0
2004-05 2005-06

--REGULATED MARKETS
-- SEMI REGULATED MARKET

Ratio Analysis: Introduction

A ratio is a quantity that denotes the

proportional amount or magnitude of one
quantity relative to another
Ratio Analysis is the most commonly used
analysis to judge the financial strength of a
company. A lot of entities like research houses,
investment bankers, financial institutions and
investors make use of this analysis to judge the
financial strength of any company.

Fundamental Analysis has a very broad scope. One aspect looks at the
general (qualitative) factors of a company. The other side considers tangible
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and measurable factors (quantitative). This means crunching and analyzing

numbers from the financial statements. If used in conjunction with other
methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet,
income statement, and cash flow statement. It's comparing the number
against previous years, other companies, the industry, or even the economy
in general. Ratios look at the relationships between individual values and
relate them to how a company has performed in the past, and might perform
in the future.

Financial ratios are calculated from one or more pieces of information from
a company's financial statements. For example, the "gross margin" is the
gross profit from operations divided by the total sales or revenues of a
company, expressed in percentage terms. In isolation, a financial ratio is a
useless piece of information. In context, however, a financial ratio can give a
financial analyst an excellent picture of a company's situation and the trends
that are developing.

A ratio gains utility by comparison to other data and standards. Taking our
example, a gross profit margin for a company of 25% is meaningless by
itself. If we know that this company's competitors have profit margins of
10%, we know that it is more profitable than its industry peers which is quite
favorable. If we also know that the historical trend is upwards, for example
has been increasing steadily for the last few years, this would also be a
favorable sign that management is implementing effective business policies
and strategies.

This analysis makes use of certain ratios to achieve the above-mentioned

purpose. There are certain benchmarks fixed for each ratio and the actual
ones are compared with these benchmarks to judge as to how sound the
company is. The ratios are divided into various categories, which are
mentioned below:

Financial ratio analysis groups the ratios into categories which tell us about
different facets of a company's finances and operations. An overview of
some of the categories of ratios is given below.
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• Leverage Ratios which show the extent that debt is used in a

company's capital structure.
• Liquidity Ratios which give a picture of a company's short term
financial situation or solvency.
• Operational Ratios which use turnover measures to show how
efficient a company is in its operations and use of assets.
• Profitability Ratios which use margin analysis and show the return
on sales and capital employed.
• Solvency Ratios which give a picture of a company's ability to
generate cash flow and pay it financial obligations.

CLASSIFICATION OF RATIOS

The use of ratio analysis is not confined to financial manager only. There are
different parties interested in the ratio analyses for knowing the financial
position of a firm for different purposes. In vies of various users of ratios,
there are many types of ratio which can be calculated from the information
given in the financial statements. The particular purpose of the user
determines the particular ratios that might be used for financial analysis.
Similarly the interests of the owners and the management also differ. The
shareholders are generally interested in the profitability or dividend position
of a firm while management requires information on almost all the financial
aspects of the firm to enable it to protect the interests of all parties.

RATIOS

(A) (B) (C)

TRADITIONAL FUNCTIONAL CLASSIFICATION SIGNIFICANCE RATIOS
CLASSIFILCATION OR OR
OR
STATEMENT RATIOS CLASSIFICATION ACCORDING TO RATIOS ACCORDING TO
TESTS IMPORTANCE

1. BALANCE SHEET RATIOS

1.LIQUIDITY RAT IOS 1.PRIMARY RATIOS
POSI TION STATEMENT 2.LEVERAGE RATIOS 2.SECONDARY RATIOS
RATIOS 3.ACTIVITY RATIOS
2. PROFIT AND LOSS A/C 4.PROFITABILITY
RATIOS
OR
REVENUE/INCOME
STATEMENT RATIOS
3.COMPOSITE/MIXED RATIOS
OR
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INTER STATEMNT RATIOS

(A)TRADITIONAL CLASSIFICATION OR STATEMNT

RATIOS

Traditional classification or classification according to statement, from which these

ratios are calculated, is as follows.

TRADITIONAL CLASSIFICATION OR STATEMENT RATIOS

(A) (B)
BALANCE SHEET RATIOS PROFIT AND LOSS A/C RATIOS COMPOSITE/MIXED
OR OR OR
POSITON STATEMENT RATIOS REVENUE/INCOME STATEMENT RATIOS INTER-STATEMENT
RATIOS

1. CURRENT RATIO 1.GROSS PROFIT RATIO 1. STOCK TURNOVER RATIO

2. LIQUID RATIO (ACID TEST
OR QUICK RATIO)
3. ABSOLUTE LIQUIDITY RATIO
4. DEBT EQUITY RATIO
5. PROPRIETORY RATIO
6. CAPITAL GEARING RATIO
7. ASSETS-PROPRIETORSHIP
RATIO
8. CAPITAL INVENTORY TO
WORKING CAPITAL RATIO
9. RATIO OF CURRENT
ASSETS TO FIXED ASSETS
2.OPERATING RATIO
3. OPERATING PROFIT RATIO
4.NET PROFIT RATIO
5.EXPENSE RATIO
6.INTEREST COVERAGE RATIO
2. DEBTORS TURNOVER
3. PAYABLE TURNOVER RATI0
4. FIXED ASSET
TURNOVER RATIO
5. RETURN ON EQUITY
6. RETURN ON
SHAREHOLDERS FUNDS
7. RETURN ON CAPITAL
CAPITAL EMPLOYED
8. CAPITAL TURNOVER RATIO
9. WORKING CAPITAL
TURNOVER RATIO.
10. RETURN ON TOTAL
RESOURCES
11. TOTAL ASSETS TURNOVER

EXPLAINATION

1. BALANCE SHEET OR POSITION STATEMENT RATIOS:

Balance sheet ratios deal with the relationship between the two
balance sheet items. Both its items must however, pertain to the same
balance sheet.

2. PROFIT AND LOSS A/C OR REVENUE/INCOME

STATEMENT RATIOS: These ratios however deal with the
relationship between two profit and loss A/C items. Both the items
must however belong to the same profit and loss A/C.
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3. COMPOSITE/MIXED RATIOS OR INTER STATEMNT

RATIOS: These ratios exhibit the relation between a profit and loss
A/C of income statement item and a balance sheet item.

(B)
FUNCTIONAL CLASSIFICATION OR
CLASSIFICAITON ACCORDING TO TESTS
In view of the financial management or according to the tests satisfied,
various ratios have been classified as below:

FUNCTIONAL CLASSIFICATION IN VIEW OF FINANCIAL MANAGEMENT OR

CLASSIFICATION ACCORDING TO TESTS

LIQUIDITY RATIOS LONGTERM SOLVENCY AND ACTIVITY RATIOS PROFITABILITY RATIOS

LEVERAGE RATIOS

(a)1.CURRENT RATIO FINANCIAL OPERATING 1.INVENTORY TURNOVER (a)IN RELATION TI SALE

2.LIQUID RATIO(ACID COMPOSITE RATIO 1.GROSS PROFIT
TEST OR QUICK RATIOS 1.DEBT EQITY RATIO 2.DEBTORS TURNOVER RATIO
3.ABSOLUTE LIQUID 2.DEBT TO TOTAL CAPITAL 3.FIXED ASSET TURNOVER 2.OPERATING RATIO
OR CASH RATIO 3.INTEREST COVERAGE 4.TOTAL ASSET TURNOVER 3.OPERATING PROFIT
4. INTERNAL MEASURE 4.CASH FLOW/DEBT RATIO RATIO
5. CAPITAL GEARING 5.WORKING CAPITAL 4.NET PROFIT RATIO
(b)1. DEBTORS TURNOVER TURNOVER RATIO 5.EXPENSE RATIO
RATIO 6.PAYABLE TURNOVER (b)IN RELATION TO
2. CREDITOR TURNOVER RATIO INVESTMENTS
RATIO 7.CAPITAL EMPLOYED 1. RETURN ON
3. INVENTORY TURNOVER TURNOVER INVESTMENTS
RATIO 2. RETURN ON
CAPITAL
3. RETURN ON EQITY
CAPITAL
4. RETURN ON TOTAL
RESOURCES
5. EARNING PER SHAR
6. PRICE EARNING
RATIO
EXPLAINATION

1. LIQUIDITY RATIOS: There are ratios, which measure the short-

term solvency or financial position of a firm. These ratios are
calculated to comment upon the short term paying capacity of a
concern or the firm ability to meet its current obligations.
2. LONG TERM SOLVENCY AND LEVERAGE RATIOS: Long-
term solvency ratios convey a firm’s ability to meet the interest cots
and repayments schedules of its long term obligations.
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3. ACTIVITY RATIOS: Activity ratios are calculated to measure the

efficiency with which the resources of a firm have been employed.
These ratios are also called turnover ratios because they indicate the
speed with which assets are being turned over into sales.
4. PROFITABILITY RATIOS: These ratio measures the results of
business operations or overall performance and effectiveness of the
firm. There are two type of profitability ratios 1.in relation to sales
2.in relation to investments.

(C) CLASSIFICATION ACCORDING TO SIGNIFICANCE OR

IMPORTANCE

The ratios have also been classified according to their significance or

importance. Some ratios are more important then others and the firm may
classify them al primary and secondary ratios. The British Institute of
management has recommended the classification of the ratios according to
importance for inter firm comparison. For inter-firm comparisons the ratios
may be classified as Primary and Secondary ratios. The primary ratios is one
of which is of the prime importance to a concern; thus return on the capital is
employed is named as primary ratio. The other ratios, which support the
other ratios, are called secondary ratios.

IMPORTANT FORMULA USED IN RATION ANALYSIS

Liquidity Analysis Ratios

Current Ratio
Current Assets
Current Ratio = ------------------------
Current Liabilities

Quick Ratio
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Quick Assets
Quick Ratio = ----------------------
Current Liabilities

Quick Assets = Current Assets - Inventories

Net Working Capital Ratio

Net Working Capital
Net Working Capital Ratio = --------------------------
Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios

Return on Assets (ROA)
Net Income
Return on Assets (ROA) = ----------------------------------
Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Return on Equity (ROE)

Net Income
Return on Equity (ROE) = --------------------------------------------
Average Stockholders' Equity

Average Stockholders' Equity

= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Return on Common Equity (ROCE)

Net Income
Return on Common Equity (ROCE)
--------------------------------------------
=
Average Common Stockholders' Equity

Average Common Stockholders' Equity

= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2
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Profit Margin
Net Income
Profit Margin = -----------------
Sales

Earnings Per Share (EPS)

Net Income
Earnings Per Share (EPS) = ---------------------------------------------
Number of Common Shares Outstanding

Activity Analysis Ratios

Assets Turnover Ratio
Sales
Assets Turnover Ratio = ----------------------------
Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Accounts Receivable Turnover Ratio

Sales
Accounts Receivable Turnover Ratio = -----------------------------------
Average Accounts Receivable

Average Accounts Receivable

= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Inventory Turnover Ratio

Cost of Goods Sold
Inventory Turnover Ratio = ---------------------------
Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios

Debt to Equity Ratio
Total Liabilities
Debt to Equity Ratio = ----------------------------------
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Total Stockholders' Equity

Interest Coverage Ratio

Income Before Interest and Income Tax Expenses
Interest Coverage Ratio = -------------------------------------------------------
Interest Expense

Income Before Interest and Income Tax Expenses

= Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios

Price Earnings (PE) Ratio
Market Price of Common Stock Per Share
Price Earnings (PE) Ratio = ------------------------------------------------------
Earnings Per Share

Market to Book Ratio

Market Price of Common Stock Per Share
Market to Book Ratio = -------------------------------------------------------
Book Value of Equity Per Common Share

Book Value of Equity Per Common Share

= Book Value of Equity for Common Stock / Number of Common Shares

Dividend Yield
Annual Dividends Per Common Share

Dividend Yield
------------------------------------------------
=
Market Price of Common Stock Per Share

Book Value of Equity Per Common Share

= Book Value of Equity for Common Stock / Number of Common Shares

Dividend Payout Ratio

Cash Dividends
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Dividend Payout Ratio = --------------------

Net Income

ROA = Profit Margin X Assets Turnover Ratio

ROA = Profit Margin X Assets Turnover Ratio
Net Income Net Income Sales
ROA = ------------------------ = -------------- X ------------------------
Average Total Assets Sales Average Total Assets

Profit Margin = Net Income / Sales

Assets Turnover Ratio = Sales / Averages Total Assets

INTERPRETATIONS THEORY OF THE RATIOS

The interpretations of the ratios are an important factor. Though calculation

of the ratios is important but it is only a clerical task whereas interpretation
needs skill, intelligence and foresightedness. The inherent limitations of the
ratio analysis should be kept in mind while interpreting them. The impact of
the factors such as price level changes, change in accounting policies,
window dressing etc., should be also be kept in mind when attempting to
interpret ratios. The interpretation of the ratios can be made in the following
ways.

1. SINGLE ABSOLUTE RATIOS: the single ratios can be studied in

relation to certain rules of thumb, which are based upon well-proven
conventions.

2. GROUP OF RATIOS: Ratios may be interpreted by calculating a

group of related ratios. A single ratios supported by a group of related
ratios become more understandable and meaningful.
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3. HISTORICAL COMPARISION: one of the earliest and most popular

ways of evaluating the performance of the firm is to compare its
present ratios with the past ratios called comparision overtime.

4. PROJECT RATIOS: Ratios can be also calculated for future

standards based upon the projected or perform financial statements.
These future ratios may be taken as standard for comparison and the
ratios calculated on actual financial statements can be compared with
the standard ratios to find out variances.

5. INTER FIRM COMPARISION: Ratios of one firm can also be

calculated with the ratios of the other selected firm in the same
industry at the same point of time. This kind of comparison helps in
evaluating relative financial position and performance of the firm.

GUIDELINES OR PRECUATIONS FOR THE USE OF RATIOS

The calculation of the ratios may not be a difficult task but their use is not
easy. The information on which these are based, the constraints of the
financial statements, objective for using them, the caliber of the analyst, etc.
are the important factors which influence the use of ratios. Following are the
guidelines for interpreting ratios.

1. ACCURACY OF THE FINANCIAL STATEMENTS: The reliability

of the ratios are linked with the data available in the financial
statements. Before calculating the ratios one should see whether the
proper conventions have been used for preparing financial statements
or not.

2. OBJECTIVE OF THE PURPOSE OF ANALYSIS: The type of

ratios to be calculated will depend upon the purpose for which these
are required. If the purpose is to study the financial position then the
ratios of current assets and liabilities will be studied. The purpose of
“user” is important for the analysis of ratios.
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3. SELECTION OF RATIOS: another precaution in ratio analysis is

the proper selection of appropriate ratios. The ratios should match the
purpose for which these are required.

4. USE OF STANDARDS: The ratios will give an indication of

financial position only when discussed with the reference to certain
standards. Unless otherwise these ratios are compared with certain
standards one will not be able to reach at conclusions.

5. CALIBER OF THE ANALYST: The ratios are only the tools of the
analysis and their interpretation will depend upon the caliber and
competence of the analyst. He should be familiar with the various
financial statements and significant changes etc.

6. RATIOS PROVIDE ONSY A BASE: The ratios are only guidelines

for there analyst, he should not base his decisions entirely on them. He
should study any other relevant information, situation in concern,
other economic environment.

USE AND SIGNIFICANCE OF RATIO ANALYSIS

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

analysis. It is used as a device to analyze and interpret the financial health of
enterprise. Just like the doctor examines the patient by recording his body
temperature, blood pressure, and etc. before making his conclusion
regarding the illness and before giving his treatment.

The use of ratios is not confined to financial managers only but

there are different parties also which are interested in the ratio analysis for
knowing the financial position of a firm for different purposes like supplier
of goods on credit, financial institutions, invertors, shareholders etc. With
the use of ratio analysis one can measure the financial condition of a firm
and can point our whether the condition is strong, good, poor etc.
Applications of the ratio analysis are:

 MANAGERIAL USES OF RATIO ANALYSIS

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1. HELPS IN DECISION MAKING: Financial statements are

prepared primarily for decision-making. Ratio analysis helps in
making decisions from the information provided in these
financial statements.

2. HELPS IN FINANCIAL FORECASTING AND

PLANNING: Ration analysis is of much help in financial
forecasting and planning. Planning is looking ahead and the
ratios calculated for a number of years work as a guide for the
future. Meaningful conclusions can be drawn from these ratios.

3. HELPS IN COMMUNICATING: The financial strengths and

weakness of the firm are communicated in a more easy and
understandable manner by the use of these ratios. The ratios
help in communication and enhance the value of the financial
statements.

4. HELPS IN COORDINATION: Ratios even help in

coordination, which is of utmost importance in effective
business management. Better communication of efficiency and
weakness of an enterprise results on better coordination in the
enterprise.

5. HELPS IN CONTROL: Ratio analysis even helps in making

effective control of the business. Standard ratios can be based
upon Performa of financial statements and variance or
deviations, if any, helps in comparing the actual with the
standards so as to take a corrective action at the right time.

6. OTHER USES: There are so many other uses of the ratio

analysis. It is an essential part of the budgetary control and
standard costing. Ratios are of immense importance in the
analyses and interpretation of financial statements as they bring
the strength or weakness of the firm

 UTILITY TO SHARE HOLDERS AND INVESTORS

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The investor in the company will like to assess the financial

position of the concern where he is going to invest. Firstly the investor
will try to ass3ess the value of fixed assets and the loans raised against
them. The investor will feel satisfied only if the concern has sufficient
amount of assets. Long-term solvency ratios will help him in assessing
the financial position of the concern. Profitability ratios, on the other
hand, will be useful to determine profitability position. Ratio analysis
will be useful to the investor in making up his mind whether present
financial position of the concern warrants further investment or not.

 UTILITY TO THE CREDITORS

The creditors or the suppliers extend short-term credit to the

concern. They are interested to know whether financial position of the
concern warrants their payments at a specified time or not. The concern
pays short-term creditors out of its current assets. If the current assets are
quiet sufficient to meet current liabilities then the creditor will not
hesitate in extending credit facilities. Current and acid test ratios will give
an idea about their current financial position of the concern.

 UTILITY TO THE EMPLOYEES

The employees are also interested in the financial position of

the concern especially profitability. Their wage increase and amount
of fringe benefits are related to the volume of profits earned by the
concern. The employees make use of information available in the
financial statements. Various profitability ratios relating to gross
profit, operating, net profit, etc., enable the employees to put forward
their viewpoint for the increase of wages and other benefits.

 UTILITY TO GOVERNMENT
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Government is interested to know the overall strength of the

industry. Various financial statements published by industrial units are
used to calculate ratios for determining short-term. Long-term and overall
financial position of concerns. Profitability indexes can also be prepared
with the help of ratios. Government may base its future policies on the
bases of industrial information available from various units. The ratios
may be used as indicators of overall financial strength of public as well
as private sector. In the absence of the reliable economic information,
government plans and policies may not prove successful.

 TAX AUDIT REQUIREMENTS

The Finance Act, 1984, inserted section 44 AB in the Income Tax Act.
Under this section every assessed engaged in any business and having
turnover or gross receipts exceeding Rs. 40 lakh is required to get the
accounts audited by a charted accountant and submit the tax audit report
before the due date for filing the return of income under section 139(1). In
case of a professional, a similar report is required if the gross receipts
exceeds Rs. 10 lacks. Clause 32 of the income Tax Act t\requires that the
following accounting ratios should be given:

1. Gross Profit/turnover
2. Net Profit/turnover
3. Stock-in-trade/turnover
4. Materials consumed/Finished Goods Produced
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LIMITATIONS OF THE RATIO ANALYSIS

 LIMITED USE OF A SINGLE RATIO: A single ratio, usually,

does not convey much of a sense. To make a better interpretation a
number of ratios have to be calculated which is likely to confuse the
analyst than help him in making any meaningful conclusion.

 LACK OF ADEQUATE STANDARDS: There are no well-accepted

standards or rules of thumb for all ratios, which can accept as norms.
It renders interpretation of the ratios difficult.

 INHERENT LIMITATIONS OF ACCOUNTING: like financial

statements, ratios also suffer from the inherent weakness of
accounting records such as their historical nature.

 CHANGES OF ACCOUNTING PROCEDRURE: Changes in

accounting procedure by a firm often makes ratio analysis misleading
e.g. Changes in the valuation of inventories.

 WINDOW DRESSING: Financial statements can easily be window

dressed to present a better picture of its financial and profitability
position to outsiders. Hence one has to be very careful from making a
decisions from ratios calculated from such financial statements.

 PERSONAL BIAS: Ratios are only a means to financial analysis and

not an end in itself. Ratios have to be interpreted and different people
may interpret the same ratios in different ways.

 UNCOMPARABLE: Not only industries differ in their nature but

also the firms of the similar business widely differ in their size and
accounting procedures etc., It makes the comparison of ratios difficult
and misleading. Moreover, comparisons are made difficult due to
differences in definitions of various financial terms used in the ratio
analysis.
 23

 ABSOLUTE FIGURES DISTORTIVE: Ratios devoid of absolute

figures may prove distractive as ratio analysis is primarily a
quantitative analysis and not qualitative analysis.

 PRICE LEVEL CHANGES: While making ratio analysis, no

consideration is made to the changes in price levels and this makes the
interpretation of the ratios invalid.

 RATIOS NO SUBSTITUTE: Ratio analysis is merely a tool of

financial statements. Hence, ratios become useless if separated from
the statements from which they are computed.

CURRENT RATIO

Current ratio may be defined as the relationship between current assets and
current liabilities. This ratio is also known as working capital ratio, is a
measure of general liquidity and is most widely used to make the analysis of
the short-term position or liquidity of a firm. It is calculated by dividing the
total of current assets by total of the current liabilities.

CURRENT RATIO = __CURRENT ASSETS__

CURRENT LIABILITIES

Two basic components of this ratio are: current assets and current liabilities.

Current assets include cash and those assets, which can be easily converted

into cash within a short period of time generally, one year, such as

marketable securities, bills receivable, sundry debtors etc. Current liabilities

are those obligations which are payable within a short period of generally
 24

one year and include outstanding expenses, bills payable, sundry creditors,

accrued expenses, dividend payable etc.

SIGNIFICANCE AND LIMITATIONS OF CURRENT RATIO

Current ratio is a general and a quick measure of liquidity of a firm. It

represents the ‘margin of safety’ or ‘cushion’ available t the creditors and

current liabilities. It is most widely used for making short-term analyses of

the financial position or short-term solvency of the firm. But one has to be

careful while using current ratio as a measure of liquidity because it suffers

from the following limitations:

 CRUDE RATIO: It is the crude ratio because it measures only the

quantity but not the quality if the current assets.
 WINDOW DRESSING: Valuation of current assets and window
dressing is another problem of the current ratio. Current assets and liabilities
are manipulated in such a way that current ratio loses its significance.

IMPORTANT FACTORS FOR REACHING A CONCLUSION

 25

A number of factors should be taken into consideration before reaching a

conclusion about short-term financial position. Sone of these factors is.

I. TYPE OF BUSINESS
II. TYPE OF PRODUCTS
III. REPUTATION OF THE CONCERN
IV. SEASONAL INFLUENCE
V. TYPE OF ASSETS AVAILABLE

PRACTILCAL CALCULATION OF CURRENT RATIO

CURRENT RATIO = CURRENT ASSETS : CURRENT LIABILITIES

TABLE

YEAR 2004 2005 2006

CONTENTS
ASSETS 4461.7 5102.5 11144.8

LIABILITIES 1967.3 2396.4 2995.4

CURRENT RATIO 2.267:1 2.111:1 3.720:1

WORKING NOTES-:
 26

CURRENT ASSETS= INVENTORIES+SAUNDRY DEBTORS+CASH

AND BANK BALANCES

2004 = 2153+2158.3+150.4 =4461.7

2005 = 2480.8+2353.9+177.8 = 5102.5

2006 = 3102.0+3483.9+4558.0 = 111444.8

CURRENT LIBILITIES

2004= 1967.3

2005 = 2396.4

2007 = 2995.4

GRAPH

4
3.702
3.5
3
2.5
2.267
2 2.111 CURRENT
1.5 RATIO

1
0.5
0
2004 2005 2006
 27

INTERPRETATION OF CURRERENT RATIO

 In the year 2004 the current ratio of LUPIN LABORATORIES PVT

(LTD) was satisfactory as the ratio was 2.26:1 which was more than
the standard ratio 2:1 for the current ratio. This means that the firm
was liquid and has the ability to pay its current obligations in time as
and when they become due.

 In the year 2005 the current ratio of the company was 2.11:1, which
was also satisfactory as was more than the standard ratio of 2:1. Thus
the company at that time also was in the position to pay the current
obligations as and when they become due.

 In the year 2006 the current ratio of the company was 3.72:1, which
was, much more than the standard figure of the current ratio i.e. 2:1.
This means that the firm was liquid but the cash and the bank balance
was high which showed that the cash and the bank balance is lying
idle due to many reasons.

 The current ratio in the year 2005 was less than the year 2004, which
indicates that the liquidity of the company was reduced and that the
liabilities were more than the paying capacity. The main reason of the
reduction of the ratio was reduction in the bank balances.

 The current ratio in the year 2006 was more than the year 2005, which
indicates that the liquidity of the company was increased and the
capacity to pay the liabilities was more. The main reason of this was
the increase in the bank balances, which increased drastically nearly
20% in the year 2006.
 28

WEIGHTED CURRENT RATIO

(PART OF CURRENT RATIO)

The two basic determinants pf current ratio as measure of liquidity are

current assets and current liabilities. However all types of current assets are

not equally liquid and all current liabilities are not repayable with the same

degree of quickness. So the discrimination can be made among the different

components of current assets and current liabilities, the former on the basis

of relative quickness with which each individual item of current liabilities

mature for payment. The discrimination can be expressed by assigning by

assigning proper weight among each component of current assets and

current liabilities. Weights to be assigned on each individual components of

current assets and current liabilities, will depend upon the degree of their

relative liquidity in case of current assets and relative urgency payments in

case of current liabilities having due regard, however in each case the nature

and types of business. For e.g. cash and bank balance being most liquid asset

may be assigned a weightage of 100% followed by short-term securities

90% receivables 80% inventories 70%and so on. In the same manner,

advances received from the customers, tax payable and proposed dividend

may be assigned an weighted of 100% followed by trade creditors and

 29

accounts payable 90%, bank overdraft 80%. Formula of weighted current

ratio:

WEIGTED CURRENT RATIO=

TOTAL PRODUCT OF CURRENT RATIO

TOTAL PRODUCT OF CURRENT LIABILITY

PRACTICAL CALCULATLION OF WEIGHTED CURRENT RATIO

WIGHTED CURRENT RATIO=TOTAL PRODUCT OS CURRENT ASSETS : TOTAL

PRODUCT OF CURRENT LIABILITIES

TABLE

YEAR
2004 2005 2006
CONTENTS
PRODUCT OF 309684 354940 920686
CURRENT ASSETS
PRODUCT OF 157384 189944 204752
CURRENT
LIABILITIES
WEIGHTED 1.96 1.86 4.49
CURRENT RATIO
 30

WORKING NOTES
 TOTAL PRODUCT OF CURRENT ASSETS=(AMOUNT OF A PERTICULAR
CURRENT ASSET) X (PERCENTAGE WEIGHT)

2004= CASH AND BANK BALANCES X 100% =150.4 X 100% = 15040

DEBTORS X 80% = 2158.3 X 80% = 172664
INVENTORIES X 60% = 2153.0 X 60% = 129180
TOTAL = 309684

SIMILARLY FOR YEARS 2005 AND 2006 AND ALSO

CURRENT LIABILITIES
 TOTAL PRODUCT OF CURRENT LIABILITIES=(AMOUNT OF A
PETICULAR CURRENT LIABILITY) X (PERCENTAGE WEIGHT)
GRAPH

4.5 4.49
4
3.5
3
2.5
weighted current
2 1.96 ratio
1.86
1.5
1
0.5
0
2004 2005 2006
 31

ANALYSIS OF THE WEIGHTED CURRENT RATIO

 The weighted current ratio is measured on the basis of the weightage

given to the current assets and current liabilities so it is more reliable
than the current ratio.

 In the year 2004 the weighted current ratio of Lupin Ltd. was 1.96:1
which indicates the satisfactory ratio and the liquidity of the company
is more and that the company is at the capacity to pay the liabilities
due as the current assets are more than the current liabilities.

 In the year 2005 the ratio was 1.86:1 which indicates that the
company is in a good position as the current assets are more than the
current liabilities and the company is in the position to pay all the
current liabilities due to the company.

 In the year 2006 the ratio was 4.49:1 which was almost double than
the standard ratio, which is 2:1. This is basically because of the
increase in the bank balance and the cash in hand which increased
almost 20 times to that of the 2005. But this is not a very good sign
for the company as the cash in bank is so much that it is remaining
idles after paying dues to the creditors and there are not many
opportunities to invest that money.

 In the year 2005 the ratio was decreased as compared to the 2004 ratio
basically because the more increase in the current liabilities less
increase in the current assets (bank balance, inventories).

 In the year 2006 the ratio had increased drastically mainly due to the
great increase in the bank balance in the current assets.
 32

QUICK OR ACID TEST OR LIQUID RATIO

Quick Ratio, also known as acid test or Liquid Ratio is more rigorous test of
liquidity than the current ratio. The term ‘liquidity’ refers t o the ability of a
firm to pay its short-term obligations as and when they become due. The two
determinants of current ratio, as a measure of liquidity are current assets and
current liabilities. Current assets include inventories and prepaid expenses,
which are not easily convertible into cash within a short period. Current
assets include inventories and prepaid expenses, which are not easily
convertible into cash within a short period. Quick ratio may be defined as
the relationship between quick/liquid assets and current or liquid liabilities.
An asset is said to be liquid if it can be converted into cash within a short
period without loss of value. In that sense, cash in hand and cash art bank are
most liquid assets. The other assets, which can be included in the liquid
assets and sundry debtors, marketable securities and short-term or temporary
investments. Inventories cannot be termed to be liquid asset because they
cannot be converted into cash immediately without a sufficient loss of value.
In the same manner, prepaid expense is also excluded from the list of
quick/liquid assets because they are not expected to be converted into cash.
The quick ratio can be calculated by dividing the total of the quick assets by
total current liabilities. Thus:

QUICK/LIQUID OR ACID TEST RATIO=QUICK OR LIQUID ASSETS

QUICK/LIQUID LIABILITIES

PRACTICAL CALCULATION OF THE LIQUID, ACID TEST OR

QUICK RATIO

QUICK/LIQUID OR ACID TEST RATIO = QUICK OR LIQUID ASSETS______

LIQUID/CURRENT LIABILITIES
 33

TABLE

YEAR
CONTENTS 2004 2005 2006
2308.7 2531.7 8041.9
LIQUID ASSETS
LIQUID 1967.3 2374.3 2995.4
LIABILITIES
1.17:1 1.06:1 2.68:1
LIQUID RATIO

WORKING NOTES

 LIQUID ASSETS=CURRENT ASSETS-INVENTORIES

2004 = 4461.7 – 2153.0 = 2308.7

2005 = 5102.5 – 2480.8 = 2531.7
2006 = 11144.8 – 3102.9 = 8041.9

CURRENT LIABILITIES = REFER FROM ABOVE CALCULATION

GRAPH
(REFERRING THE ABOVE TABLE)
3
2.68
2.5

1.5
LIQUID RATIO
1.17
1 1.06

0.5

0
2004 2005 2006
 34

ANALYSIS OF QUICK, ACID TEST OR LIQUID RATIO

 In the year 2004 the current ratio was 1.17:1 which indicates the high
liquidity of the company and good ratio for paying the liabilities for
lupin laboratories. The ratio is good as there are funds left after paying
the liabilities to put in some more new emerging opportunities.

 In the year 2005 the liquid ratio of Lupin was 1.06:1 which indicates
the satisfactory liquidity position of the company because during the
payment of the dues of the creditors there will be hardly any funds left
to use in any other opportunity as the funds left will be reserved for
the next years liability.

 In the year 2006 the ratio was 2.68:1 which was more than double if
the satisfactory ratio i.e. the company is in an a high liquidity position.
But such high ratio is also not good for the company as the funds are
left idle as they are not fully in the further opportunities due to many
reasons

 The ratio was decreased in the year 2005 mainly because of the high
increase in the liquid liabilities and less increase in the liquid assets.

 The ratio was increased in the year 2006 mainly because of the very
high increase in the cash and bank balance and less increase in the
liquid liabilities.
 35

ABSOLUTE LIQUID RATIO OR CASH RATIO

Although receivables, debtors and bills receivables are generally more liquid
than inventories, yet there may be doubts regarding their realization into
cash immediately or in time. Hence, some authorities are of the opinion that
the absolute liquid ratio should also be calculated together with current ratio
and acid test ratio so as to exclude even receivables from the current assets
and find our the absolute liquid assets. Absolute liquid assets include cash in
hand and at bank and marketable securities or temporary investments. The
acceptable norm for this ratio is 50% or .5:1 or 1:2 i.e. Re. 1 worth absolute
liquid assets are considered are considered adequate to pay Rs. 2 worth
current liabilities in time as ass the creditors are not expected to demand
cash at the same time and then cash may also be realized from debtors and
inventories. Thus

ABSOLUTE LIQUID RATIO=ABSOLUTE LIQUID ASSETS

CURRENT LIABILITIES

CASH RATIO= CASH AND BANK+SHORT-TERM SECURITIES

CURRENT LIABILITIES

PRACTICAL CALCULATION OF ABSOLUTE LIQUID RATIO OR

CASH RATIO

CASH RATIO = CASH & BANK+SHORT TERM SECURITIES

CURRENT LIABILITIES
 36

TABLE

YEAR 2004 2005 2006

CONTENTS

CASH & BANK + 604.7 631.3 5070

SHORT TERM
SECURETIES
CURRENT 1967.3 2396.4 2995.4
LIABILITIES

CASH RATIO 0.30 : 1 0.26 : 1 1.62 : 1

WORKING NOTES:

CASH AND BANK + SHORT TERM SECURITIES

2004 = 150.4 + 454.3 = 604.7
2005 = 177.8 + 453.5 = 631.3
2006 = 4558 + 512 = 5070

 CURRENT LIABILITIES= REFER FROM ABOVE CALCULATION

GRAPH
(REFERRING THE ABOVE TABLE)
 37

1.8
1.6 1.62
1.4
1.2
1
0.8 CASH RATIO
0.6
0.4
0.3 0.26
0.2
0
2004 2005 2006

ANALYSIS OF THE CASH RATIO OR ABSOLUTE LIQUIDITY

RATIO

1. The absolute liquid ratio in 2004 was .30:1 which is less than the
accepted norm i.e. .5:1. the ratio less than the standard ratio denotes
that the liabilities for LUPIN is more and that its liquid assets are less
but all the creditors do not ask for the cash at the same time so the
situation can be handled.

2. The absolute liquid ratio in 2005 was .26:1 which is very less than the
accepted norm and thus the asset liquidity condition of LUPIN is not
good and thus the creditors are more.

3. The absolute liquid ratio in 2006 is 1.62:1 which is very favorable for
LUPIN but it is advisable that the company should try to collect funds
from public more to use its ideal liquid assets on other big projects.

4. The absolute liquid ratio in 2006 is more favorable than 2004 and
2005 mainly because of the increase in the liquidity of the assets and
decrease in the creditors for LUPIN.
 38

CURRENT ASSETS MOVEMENT OR EFFICIENCY/ACTIVITY

RATIOS

Funds are invested in various assets in business to make sales and earn
profits. The efficiency with which asserts are managed directly affect the
volume of sales. The better the management of assets, the larger is the
amount of sales and the profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These ratios
are also called turnover ratios because they indicate the speed rate at which
the funds invested in inventories are converted into sale. Depending upon
the purpose a number of turnover ratios can be calculated as debtors
turnover capital turnover, etc.

There are 4 types of current assets movement or efficiency ratios:

I. INVENTORY OR STOCK TURNOVER RATIO.

II. CREDITORS/PAYABLES TURNOVER RATIO.
III. WORKING CAPITAL TURNOVER RATIO.
IV. DEBTORS/RECEIVIBLES TURNOVER RATIO.

EXPLAINATION

CREDITORS/PAYABLES TURNOVER RATIO

In the course of business operations, a firm has to make credit purchases and
incur short-term liabilities. A supplier of goods i.e. creditor is naturally
interested in finding out how much time the firm is likely to take in repaying
its trade creditors. The analysis for creditor’s turnover is basically the same
as of debtor’s turnover ratio except that in place of average daily sales,
average daily purchases are taken as the other component of the ratio and in
place of average daily sales; creditor’s turnover ratio can be calculated as:

CREDITORS/PAYABLE TURNOVER RATIO=NET CREDIT ANNUAL PURCHASES

AVERAGE TRADE CREDITORS
 39

If the information about the credit purchases is not available, the figure of
total purchases may be taken as the numerator and the trade creditors include
sundry creditors and bills payable. If opening and closing balances of the
creditors are not known, the creditors are turned over in relation to purchase.
Generally, higher the creditor’s velocity better it is or otherwise lower the
creditor’s velocity less favorable are the results.

PRACTICAL CALCULATLION ON CREDITORS/PAYABLES

TURNOVER RATIO

CREDITORS TURNOVER RATIO=NET CREDIT ANNUAL PURCHASES

AVERAGE TRADE CREDITORS

TABLE

YEAR 2004 2005 2006

CONTENTS
NET CREDIT 846.2 1192.2 1861
ANNUAL
PURCHASES
AVERAGE TRADE 1479.75 2238.2 2714.5
CREDITORS

CREDITORS 5.7times 5.3times 6.8times

TURNOVER RATIO

WORKING NOTES
 TRADE CREDITORS=SUNDRY CREDITORS+BILLS PAYABLE+A/C
PAYABLE
2004 = 2036.2+248.5=22847
2005 = 184.2+417.2=601.4
2006 = 1447.1+647.8=2094.9
 40

 AVERAGE TRADE CREDITORS=

OPENING TRADE CREDITORS+CLOSING TRADE CREDITORS
2
2004 = 674.8+284.7 /2 = 1479.75
2005 = 2284.7+601.4 / 2 = 2238.2
2006 = 601.4+2094.9 / 2 = 2714.5
 NET CREDIT ANNUAL PURCHASES = REFER FROM EXCEL
SHEET

GRAPH
(REFERRING THE ABOVE TABLE)

7 6.8
6
5.7
5.3
5

4
CREDITORS
TURNOVER
3
RATIO
2

0
2004 2005 2006
 41

ANALYSIS OF CREDITORS/PAYABLE TURNOVER

RATIOS

 The creditor’s turnover ratio in the year 2004 was 5.7 times which
indicates that velocity with which the creditors are turned over in relation
to purchases is in a satisfactory position.

 The creditors turnover ratio in the year 2005 was 5.3 times which
indicate the velocity with which the creditors are turned over in relation
to purchases is in a satisfactory position. Basically the ratio should be
more than 5 times.

 The creditors turnover ratio in the year 2006 was 6.8 times which
indicates that the velocity with which the creditors are turned over in
relation to purchases is high which indicates a good sign for LUPIN.

 The creditor’s turnover ratio in the year 2004 was more that 2005 which
indicates that the turn over of creditor’s rate had decreased which is not a
good sign. This is mainly due to the increase in the net credit annual
purchases.

 The creditor’s turnover ratio in the year 2006 had increased from 2005,
which is a good sign for the liquidity position of LUPIN. This is mainly
due to the increase in the net credit purchases.
 42

WORKING CAPITAL TURNOVER RATIO

Working capital of a concern is directly related to sales, the current assets

like debtors, bills receivables, cash, and stock, etc. change with the
increase or decrease in sales. The working capital is taken as:

WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

Working capital turnover ratio indicates the velocity of the utilization of net
working capital. This ratio indicates the number of times the working capital
is turned over in the course of a year. The ratio measures the efficiency with
which the working capital is being used by the firm. The higher ratio
indicated the efficient utilization of the working capital and low ration
indicated otherwise. But a very high working capital turnover ratio is not
good situation for any firm and hence care must be taken while interpreting
the ratio. Making of comparative and trend analysis can use the ratio for
different firms in the same industry and for various periods. The ratio can be
calculated as:

Working capital turnover ratio = Cost of Sales_____

Average working capital

Average working capital =

Opening working capital + closing working capital
2

If the figure of the cost of sale is not given then the figure of sales can be
used instead. On the other hand if opening working capital is not disclosed,
then working capital at the year-end will be used, In that case the ratios will
be:
 43

WORKING CAPITAL TURNOVER RATIO= _________SALES________

NET WORKING CAPITAL

PRACTICAL CALCULATION ON WORKING CAPITAL TURNOVER

RATIO

WORKING CAPITAL TURNOVER RATIO= COST OF SALES

AVERAGE WORKING CAPITAL

TABLE

YEAR 2004 2005 2006

CONTENTS
COST OF SALES 11192.8 11611.3 16061

AVERAGE 2638.2 2627.15 5517.75

WORKING
CAPITAL
WORKING 2.91 times 4.41 times 4.20 times
CAPITAL
TURNOVER
RATIO
 44

WORKING NOTES

 WORKING CAPITAL=CURRENT ASSETS-CURRENT LIABILITIES

2004 = 4461.7 - 1967.3 = 2494.4

2005 = 5102.5 - 2374.3 = 2728.2
2006 = 11144.8 - 2995.4 = 8149.4
 AVERAGE WORKING CAPITAL=
OPENING WOKING CAPITAL+CLOSING WORKING CAPITAL
2

2004 = 2242+2494.4 / 2 = 2638.2

2005 = 2494.4+2728.2 / 2 = 2627.15
2006 = 2728.2+8149.4 / 2 = 5517.75

 NET CREDIT ANNUAL SALES = REFER FROM THE EXCEL SHEET

GRAPH

4.5 4.41
4.2
4
3.5
3 2.91

2.5 W.C
2 TURNOVER
RATIO
1.5
1
0.5
0
2004 2005 2006
 45

ANALYSIS OF WORKING CAPITAL TURNOVER RATIO

 The working capital turnover ratio in the year 2004 was 2.91 times,
which is not a satisfactory ratio, and the company does not use which
indicates that LUPIN is not in a good position and the working capital
efficiently.

 The working capital turnover ratio in the year 2005 was 4.41 times
which a satisfactory ratio for the company and which indicates that
LUPIN is using efficiently the working capital and that the resources
are efficiently being utilized.

 The working capital turnover ratio in the year 2006 was 4.20 times
which indicates the satisfactory position of LUPIN and the working
capital is being reutilized efficiently more and more times by the
company.

 The working capital turnover ratio in the year 2004 was less than 2005
mainly because of the decrease in the cost of sales and the average
working capital of LUPIN.

 The working capital turnover ratio in the year 2005 was more than the
year 2006 mainly because of the increase in the working capital and
the decrease in the cost of sales of the company.
 46

INVENTORY/STOCK TURNOVER RATIO

Every firm has to maintain a certain level on inventory for finished goods
so as to be able to meet the requirements of the business. But the level of
inventory should neither to be too high or too low. But the level of
inventory should neither be too high nor too low. It is harmful to hold more
inventories for the following reasons.

a) It unnecessarily blocks capital which can otherwise be profitability

used somewhere else.
b) Over stocking will require more godown space, so more rent will be
paid.
c) There are chances of obsolescence of stocks. Consumers will prefer
goods of latest design, etc.
d) Slow disposal of stocks means slow delivery of cash also which will
adverselu affect liquidity.
e) There are chances of deterioration in quality if the stock are held for
more periods.

Inventory turnover ratio also known as stock velocity is normally calculated

as sales/average inventory. It would indicate whether inventory has been
efficiently used or not. The purpose is to see whether only the required
minimum funds have been locked up in inventory. Inventory turnover ratio
(I.T.R.) indicates the number of times the stock has been turn over during
the period and evaluates the efficiency with which a firm is able to manage
the inventory.

Inventory turnover ratio = _cost of goods sold______

Average inventory at cost
 47

PRACTICAL CALCUALTION ON INVENTORY/STOCK TURNOVER

RATIO

INVENTORY TURNOVER RATIO =

NET SALES__
AVERAGE INVENTORY AT COST

TABLE

YEAR 2004 2005 2006

CONTENTS
NET SALES 11192.8 11611.3 16061.0

AVERAGE 1785.8 2316.9 2791.85

INVENTORY AT
COST

INVENTORT 6.26 : 1 5.01 : 1 5.75 : 1

TURNOVER
RATIO

WORKING NOTES

 NET SALES =

2004 = 11192.8
2005 = 11611.3
2006= 16061.0

 AVERAGE INVENTORY AT COST=OPENING STOCK+CLOSING STOCK

2
2004 = 1418.6+2153.0 = 1785.8
2
 48

2005 = 2153.0+2480.8 = 2316.9

2
2006 = 2480.8+3102 = 2791.85
2

GRAPH
(REFERRING THE ABOVE TABLE)

7
6.26
6 5.75
5.01
5

4
Inventory
3 turnover ratio

0
2004 2005 2006

ANALYSIS OF THE INVENTORY/STOCK TURNOVER

RATIO

 The inventory turnover ratio of the LUPIN in the year 2004 was 6.26:1,
which is more than the standard ratio i.e. 5:1. The increased amount of
ratio indicates that the sales are high but the stock is not sufficient in the
company so as to meet the high demand which in turn decreases the
market share.
 49

 The inventory turnover ratio in the year 2005 was 5.01:1, which was very
accurate, and up to the mark of the standard ratio. This ratio indicates that
there was a perfect balance in LUPIN of the sales and there the market
demands were timely fulfilled and there was no shortage of goods.

 The inventory turnover ratio in the year2006 was 5.75:1, which indicates
that the sales of LUPIN were good but the stock of sales was some less
than required.

 The inventory turnover ratio decreased from 2004 to 2005 from 6.26:1 to
5.01:1, which indicates that the net sales were less and that the balance
was gained between the sales and the stock in LUPIN.

 The inventory turnover ratio was increased from 2005 to 2006 from
5.01:1 to 5.75:1, which indicates that the the sales of the product has
increased but the balance of the stocks in LUPIN has decreased.
 50

DEBTORS OR RECEIVIBLES TURNOVER RATIO

A concern may sell goods on cash as well credit. Credit is one of the most
important elements of sales promotion. The volume of sales can be increased
but following a liberal credit policy. But the effect of a liberal credit policy
may result in tying up substantial funds of a firm in the form of trade debtors
(or receivables i.e. debtors plus bills receivables). Trade debtors are expected
to be converted into cash within a short period and are included in current
assets. Hence the liquidity position of a concern to pay its short-term
obligations in time depends upon the quality of its trade debtors.

Debtor’s turnover ratio indicates the velocity of debt

collection of firm. In simple words, it indicates the number of times average
debtors (receivables) are turned over during a year, thus:

DEBTORS(RECEIVIBLES)TURNOVER/VELOCITY=NET CREDIT ANNUAL SALE

AVERAGE TRADE DEBTORS

TRADE DEBTORS=SUNDRY DEBTORS+BILLS RECEIVIBLES AND ACCOUNTS

RECEIVIBLES

AVERAGE TRADE DEBTORS=OPENING TRADE DEBTORS+CLOSING TRADE DEBTOR

2

PRACTICAL CALCULATION ON DEBTORS/RECEIVIBLES

TURNOVER RATIO

DEBTORS/RECEIVIBLES TURNOVER RATIO= NET CREDIT ANNUAL SALES

AVERAGE TRADE DEBTORS
 51

TABLE

YEAR 2004 2005 2006

CONTENTS
NET CREDIT 11192.8 12611.4 16954.0
ANNUAL SALES
AVERAGE 6593 7564.8 9364.8
TRADE
DEBTORS
DEBTORS 1.69 1.66 1.81
TURNOVER
RATIO

WORKING NOTES

 TRADE DEBTORS = SUNDRY DEBTORS + BILLS REVEIVIBLES & A/C

RECEIVIBLES

2004 = 2158.3 + 2036.2 = 4194.5

2005 = 2353.9 + 184.2 = 2538.1
2006 = 3483.9 + 1447.1 = 4931

 AVERAGE TRADE DEBTORS =

OPENING TRADE DEBTORS+CLOSING TRADE DEBTORS
2

2004 = 8991.5+4194.5 / 2 = 6593

2005 = 4194.5+2538.1 / 2 = 7564.8
2006 = 4931+2538.1/2= 9364.8

NET CREDIT ANNUAL SALES= REFER FROM EXCEL SHEET

 52

GRAPH
REFERRING THE ABOVE TABLE

1.85
1.81
1.8

1.75

1.7 1.69 debtor turnover

ratio
1.66
1.65

1.6

1.55
2004 2005 2006

ANALYSIS OF THE DEBTORS TURNOVER RATIO

 The ratios in the year 2004 indicate that the ratio turned over 1.69 times
in a year which is satisfactory for LUPIN. The more times the ratio
turnovers in a year the more efficient are it for the company.

 The ratio in the year 2005 indicates that the ratio turned over for 1.66
times in a year which is satisfactory for a company.

 The ratio in the year 2006 indicates that the ratio is turned over for 1.81
times in a year which is approximately equal to 2 times which is good for
LUPIN which denotes that the management of the debtors is good as well
as more liquid are the debtors.
 53

ANALYSIS OF LONG TERM FINANCIAL POSITION OR

LONG TERM SOLVENCY

The term solvency refers to the ability of a concern to meet its long-term
obligations. The long-term in debt ness of a firm includes debentures
holders, financial institutions providing medium and long-term loans and
other creditors selling goods on installment bases. The long-term creditors of
a firm are primarily interested in knowing the firms ability to pay regularly
interested on long term borrowings, repayment of the principal amount at the
maturity and the security of their loans. Accordingly, long-term solvency
ratios indicate a firm’s ability to meet the fixed interest and costs and
repayments schedules associated with its long-term borrowings. The
following ratios serve the purpose of determining the solvency of the
concern.

 DEBT-EQUITY RATIO.
 FUNDED DEBT TO TOTAL CAPIT ALISATION RATIO.
 PROPRIETORY RATIO OR EQUITY RATIO.
 SOLVENCY RATIO OR RATIO OF TOTAL LIABILITIES TO
TOTAL ASSETS.
 FIXED ASSETS TO NET WORTH OR PROPRIETORS FUNDS
RATIO.
 FIXED ASSETS TO LONG-TERM FUNDS OR FIXED ASSETS
RATIO.
 RATIO OF CURRENT ASSETS TO PROPRIETOR’S FUNDS.
 DEBT SERVICE RATIO OR INTEREST COVERAGE RATIO.
 CASH TO DEBT SERVICE RATIO.
 54

(I) DEBT EQUITY RATIO

Debt equity ratio is also known as External internal equity ratio is calculated
to measure the relative claims of outsiders and the owners against the firm’s
assets. These ratios indicates the relationship between the external equities
or the outsider’s funds and the internal equities or the share holders funds,
thus:

DEBT-EQUITY RATIO = OUTSIDERS FUNDS

SHARE HOLDERS FUNDS

The two basic components of the ratio are outsider’s funds, i.e.., external
equities and shareholders funds, i.e. internal equities. The outsiders funds
include all debts/liabilities to outsiders, whether long-term or short term or
whether in the form of debentures bonds, mortgage or bills. The
shareholders funds consist of equity share capital, preference share capital,
capital reserves, revenue for contingencies, sinking funds etc. the
accumulated losses and differed expenses, if any, should be deducted from
the total to find out shareholders funds. When the accumulated losses or
differed expenses are deducted from the shareholders funds, it is called net
worth and the ratio may be termed as the ratio ma be termed as debt to net
worth ratio.
 55

(II) FUNDED DEBT TO TOTAL CAPITALISATION RATIO

The ratio establishes a link between the long-term funds raised from
ortsiders and total long-term funds available in the business. The two words
used in this ratio are

1. Funded debt
2. Total capitalization

Funded debt or total capitalization ratio = Funded debt_____

Total capitalization

Funded debt is a part of total capitalization, which is financed by outsiders.

Though there is no ‘rule of thumb’ but still the lesser the reliance on
outsiders the better it will be. If this ratio is smaller, better it will be, up to
50% or 55% this ratio may be to tolerable and not beyond.

PRACTICAL CALCULATION OF FUNDED DEBT TO TOTAL

CAPITALISATION RATIO

FUNDED DEBT OR TOTAL CAPITALISATION RATIO=FUNDED DEBT

TOTAL CAPITALISATION

 FUNDED DEBT=DEBENTURE+MORTGAGE LOANS+BONDS+OTHER

LONG TERM LOANS

 TOTAL CAPITALISATION=EQUITY SHARE

CAPITAL+PREFERENCE SHARE CAPITAL+RESERVES AND
SURPLUS+OTHER UNDISTRIBUTED
RESERVES+DEBENTURES+FUNDED DEBT
 56

TABLE

2004 2005 2006

YEAR

CONTENTS
FUNDED DEBT 3777.3 4421 9128.5

TOTAL 11160.4 12720.1 19517

CAPITALISATION

FUNDED DEBT .33 : 1 .34 : 1 .46 : 1

RATIO

GRAPH
(REFERRING THE TABLE OF FUNDED DEBT RATIO)
 57

0.5
0.45 0.46
0.4
0.35 0.34
0.33
0.3
0.25 FUNDED DEBT
0.2 RATIO
0.15
0.1
0.05
0
2004 2005 2006

ANALYSIS OF FUNDED DEBT TO TOTAL

CAPITALISATION RATIO

 The ratios in the year 2004-.33:1, 2005-.34:1, 2006-.46:1 indicate that

LUPIN has not much relied on the outsiders for taking long-term
funds and tried to raise all the finance from its own working capital.

 The ratio has constantly increased from 2004 to 2006 mainly due to
increase in the long-term borrowings from the outsiders but in a small
amount.
 58

(III) PROPRIETORY RATIO OR EQUITY RATIO

The variant to the debt-equity ratio is the proprietary, which is also known as
Equity Ratio or shareholders to total equities ratio or net worth to total
assets ratio. The ratio establishes the relationship between shareholders
funds to total assets of the firm. The ratio of proprietor’s funds to total funds
is an important ratio for determining long-term solvency of a firm. The
components of this ratio are shareholders funds or proprietor’s funds and
total assets. The shareholders funds are equity share capital, preference share
capital, undistributed profits, reserves and surpluses. Ort of this amount,
accumulated losses should be deducted. The total assets on t he other hand
denote total resources of the concern. The ratio can be calculated as under:

PROPRIETORY RATIO OR EQUITY RATIO=SHAREHOLDERS FUNDS

TOTAL ASSETS

PRACTICAL CALCULATION OF EQUITY OR PROPRIETORY RATIO

 59

EQUITY RATIO = SHAREHOLDERS FUNDS

TOTAL ASSETS

TABLE

YEAR 2005 2006 2004

CONTENTS
SHAREHOLDE 5005 4480.3 6439.5
RS FUNDS

TOTAL ASSETS 11300 9805.5 17820.9

EQUITY .44:1 .46:1 .36:1

RATIO

WORKING NOTES

 TOTAL ASSETS=CURRENT ASSETS+FIXED ASSETS

2004 = 4461.7 + 5343.8 = 6439.5

2005 = 5102.5 + 6287.5 = 5005
2006 = 11144.8 + 6676.1 = 4480.3

 SHARE HOLDERS FUNDS=SHARE CAPITAL+RESERVE AND SURPLUS

 60

2004 = 401.4+4078.9=4480.3
2005 = 401.4+4603.6 = 5005.0
2006 = 401.4+6038.1 = 6439.5

GRAPH
(REFERRING THE EQUITY RATIO TABLE)

0.5
0.45 0.46
0.44
0.4
0.35 0.36
0.3
0.25
EQUITY RATIO
0.2
0.15
0.1
0.05
0
2004 2005 2006

ANALYSIS OF THE PROPRIETORY RATIO OR EQUITY RATIO

 The long-term financial position of LUPIN the company in the year

2004 was not so good but it gradually increased in the year 2005 due to
the decrease of the total assets.
 61

 The ratio in the year 2006 was more than the year 2005 because of the
more decreasing in the assets.

 The more is the equity ratio the more is the liquidity position of the
company.

(IV) SOLVENCY RATIO OR THE RATIO OF TOTAL

LIABILITIES TO TOTAL ASSETS

This ratio is a small variant of equity ratio and can be simply calculated as
100-equity ratio i.e., continuing the example taken for the equity ratio,
solvency ratio = 100-66.7% or say 33.33%. The ratio indicates the
 62

relationship between the total liabilities to outsiders to total assets of a firm

and can be calculated as follows:

SOLVENCY RATIO=TOTAL LIABILITIES TO OUTSIDERS

TOTAL ASSETS

Generally, lower the ratio of total liabilities to total assets, more satisfactory
or stale is the long-term solvency position of a firm.

PRACTICAL CALCULATION FOR SOLVENCY RATIO OR THE

RATIO IF TOTAL LIABILITIES TOTOTAL ASSETS

SOLVENCY RAITO= TOTAL LAIBILITIES TO OUTSIDERS / TOTAL ASSETS

TABLE

YEAR 2004 2005 2006

CONTENTS

TOTAL 11404.8 6328 6275.5

LIABILITIES TO
OUTSIDERS
TOTOAL ASSETS 17820 11300 9805.5

SOLVENCY .54 .44 .42

RATIO

GRAPH
(REFERRING THE SOLVENCY RATIO TABLE)
 63

0.6
0.54
0.5
0.44
0.42
0.4

0.3 SOLVENCY
RATIO
0.2

0.1

0
2004 2005 2006

ANALYSIS OF SOLVENCY RATIO OR THE RATIO OF

TOTAL LIABILITIES TO TOTAL ASSETS

 The solvency ratio in the year 2004 was .54 which is not
sufficient for LUPIN to for the long-term solvency position of
the firm.

 The solvency ratio in the year 2005 was less than the year 2004
mainly due to the decrease in the assets. Thus the ratio .44 in
the year 2005 is satisfactory.

 The solvency ratio in the year 2006 was less than 2005 which
indicates the great financial position of LUPIN.

(V) FIXED ASSETS TO NET WORTH RATIO OR FIXED

ASSETS TO PROPRIETORS FUNDS

 64

The ratio establishes the relationship between fixed assets and shareholders
funds, i.e., share capital plus reserves, surpluses and retained earnings. The
ratio f\can be calculated as follows:

FIXED ASSET TO NET WORTH RATIO=FIXED ASSETS

SHAREHOLDERS FUNDS

The ratio of the fixed assets to net worth indicates the extent to which
shareholders funds are sunk into the fixed assets. Generally the purchase of
fixed assets should be financed by shareholders equity including reserves,
surpluses and retained earnings.

PRACTICAL CALCULATIO ON FIXED ASSET TO NET WORTH

RATIO

FIXED ASSET TO NET WORTH RATIO=FIXED ASSET

SHAREHOLDERS FUNDS

TABLE

YEAR 2004 2005 2006

CONTENTS
FIXED ASSET 5343.8 6287.5 6676.1

SHAREHOLDERS 6439.5 5005 4480.3

FUNDS
FIXED ASSET TO .82 1.25 1.49
NET WORTH
RATIO
GRAPH OF THE FIXED ASSET TO NET WORTH RATIO
 65

1.6
1.49
1.4
1.25
1.2
1
0.8 0.82 fixed assets to
net worth ratio
0.6
0.4
0.2
0
2004 2005 2006

INTERPRETATION

 The ratio in the year 2004, 2005 and 2006 indicates that the net worth
ratio of the company is good and that the company has sufficient fixed
assets and that the share holders are less than the fixed assets in the
organization.

 The ratio in 2004 is .82:1 indicates that the there are sufficient fixed
assets with the company.

 The ratio in 2005 is 1.25:1 indicates that the company does not have
the sufficient fixed assets and the company has to depend more on the
public funds for sufficient working capital.

 The ratio in 2006 is 1.45:1 which is not at all satisfactory and thus the
company has to depend totally on the shareholders for sufficient
working capital.
 66

RATIO OF CURRENT ASSETS TO PROPRIETORY’S

FUNDS

The ratio is calculated by dividing the total of current assets by the amount
of shareholders funds.

RATIO OF CURRENT ASSETS TO PROPRIETORY’S FUNDS = CURRENT ASSETS

SHAREHOLDERS FUNDS

The ratio indicates the extent to which proprietor’s funds are invested in
current assets. There is no ‘rule of thumb’ for this ratio and depending upon
the nature of the business there may be different ratios for different firms.

PRACTICAL CALCULATLION ON RATIO OF CURRENT ASSETS

TO PROPRIETORY FUNDS

RATIO OF CURRENT ASSETS TO PROPRIETORY’S FUNDS=CURRENT ASSET

SHAREHOLDERS FUNDS

TABLE

YEAR 2004 2005 2006

CONTENTS
CURRENT 4461.7 5102.5 11144.8
ASSETS

SHAREHOLDERS 6439.5 5005 4480.3

FUNDS

NET WORTH .69 : 1 1.01 : 1 2.48:1

RAITO
 67

GRAPH
(REFERRING THE ABOVE TABLE OF CURRENT ASSETS TO
PROPRIETORY FUNDS)

2.5 2.48

1.5
NET WORTH
1 1.01 RATIO

0.69
0.5

0
2004 2005 2006

INTERPRETATION

 The ratio in the year 2004 and 2005 is satisfactory as the main part of
the proprietor’s funds are invested in the current asserts through which
the production increases and thus the profit also increases.

 The ratio in 2006 indicates that the funds are invested in the current
assets also but a large part of the assets are remaining idle and LUPIN
has to use its own capital more as due to the less amount of public
funds as compared to the current assets.
 68

(VII) DEBT SERVICE RATIO OR INTEREST

COVERAGE RATIO

Net income to debt service ratio or simple debt service ratio is used to test
the debt servicing capacity of a firm. The ratio is also known as interest
coverage ratio or coverage ratio or fixed charges cover or times interest
earned. This ratio is calculated by dividing the net profit before interest and
taxes by fixed interest charges:

DEBT SERVICE RATIO/INTEREST COVERAGE= __NET PROFIT________

FIXED INTEREST CHARGES

PRACTICAL CALCULATION OF DEBT SERVICE

RATIO/INTEREST COVERAGE

DEBT SERVICE RATIO/INTEREST COVERAGE= __NET PROFIT________

FIXED INTEREST CHARGES

TABLE

YEAR 2004 2005 2006

CONTENTS
NET PEOFIT 1481.1 578.9 2299

FIXED 515.1 273.1 303

INTEREST
CHARGES
DEBT SERVICE 2.87 2.11 7.58
RATIO

VALUES ARE FROM THE BALANCE SHEET

 69

GRAPH
(REFERRING THE DEBT SERVICE TABLE)

8
7.58
7
6
5
4 DEBT SERVICE
RATIO
3
2.67
2 2.11

1
0
2004 2005 2006

INTERPRETATION

 In the year 2004 and 2005 the ratio is satisfactory for the company as
well as for the long-term creditors because even if the earnings of the
firm’s earnings fall then also LUPIN will be in the position to pay the
interest.

 In the year 2006 the ratio is not satisfactory for the company as well
for the shareholders as it implies that LUPIN is not using debt as a
source of finance so as to increase the earnings per share.
 70

ANALYSIS OF PROFITABILITY OR PROFITABILITY

RATIOS

The primary objective of the business undertaking is to earn profit. Profit

earning is considered essential for the survival of the business. In the works
of Lord Kenyes, “Profit is the engine that drives the business enterprise”. A
business needs profits not only for its existence but also for expansion and
diversification. The investors want an adequate return on their investments,
workers want higher wages, creditors want higher security for their interest
and loan and so on. A business enterprise can discharge its obligations to the
various segments of the society only through earning of profits. Profits are
thus a useful measure of overall efficiency of a business. Profits to the
management are the test of efficiency and a measurement of control; to
owners, a measure of worth of their investment to the creditors etc.
Generally, the profitability ratios are calculated either in the relation of their
sales or in relation to investment. The various profitability ratios are
discussed.

 GENERAL PROFITABILITY RATIO

1. GROSS PROFIT RATIO

2. OPERATING RATIO
3. OPERATING PROFIT RATIO
4. EXPENSES RATIO
5. NET PROFIT RATIO

 OVERALL PROFITABLITY RATIOS

1. RETURN ON SHAREHOLDERS INVESTMENT OR NET WORTH

RATIO
2. RETURN ON EQUITY CAPITAL RATIO
3. EARNING PER SHARE RATIO
4. RETURN ON CAPITAL EMPLOYED RATIO
5. CAPITAL TURNOVER RATIO
6. DIVIDEND YIELD RATIO
7. DIVIDEND PAYOUT RATIO
8. PRICE EARNING RATIO
 71

GROSS PROFIT RATIO

Gross profit ratio measures the relationship of gross profit to net sales
and is usually represented as percentage. Thus it is calculated by dividing
the gross profit by sales

GROSS PROFIT RATIO =GROSS PROFIT X 100

NET SALES

PRACTICAL CALCULATION ON GROSS PROFIT RATIO

GROSS PROFIT RATIO =GROSS PROFIT X 100

NET SALES

 GROSS PROFIT= SALES – COST OF GOODS SOLD

 NET SALES=SALES – EXISE DUTY

TABLE

2004 2005 2006

YEAR

CONTENTS
1996.2 852 2302
GROSS PROFIT

NET SALES 11192.8 11611.3 16061

GROSS PROFIT 17.83% 7.33% 14.33%

RATIO(%)
 72

GRAPH
(REFERRING THEGROSS PROFIT TABLE)

18 17.83
16
14 14.33
12
10 GROSS
8 PROFIT
7.33 RATIO(% )
6
4
2
0
2004 2005 2006

INTERPRETATION

 The ratio in 2004 and 2006 are satisfactory as the company is in the
position to sell its product at a low price without resulting in losses on
operations of a firm.

 But the ratio in 2005 is not at all satisfactory for LUPIN and a low
ratio indicates that the high cost of goods sold due to unfavorable
purchasing policies, lesser sales, lower selling prices, excessive
competition, over-investment in plant and machinery, etc.

OPERATING RATIO
 73

Operating ratio establishes the relationship between cost of goods sold and
other operating expenses on the one hand and the sales on the other. In other
words, it measures the cost of the operating per rupee of sales. The ratio is
calculated by dividing operating costs with the net sales and its generally
represented as a percentage.

OPERATING RATIO= OPERATING COST X 100

NET SALES

The two basic elements of this ratio are operating cost and net sales.
Operating cost can be founded by adding operating expenses to the cost of
goods.

PRACTICAL CALCULATION ON OPERATING RATIO

OPERATING RATIO= OPERATING COST X 100

NET SALES

 OPERATING COST= OPERATING EXPENSES+COST OF GOODS

SOLD

 NET SALES=GROSS SALES-EXISE DUTY

TABLE

YEAR 2004 2005 2006

CONTENTS
OPERATING 10196.4 10522.6 14263.1
COST

NET SALES 11648.3 11799 16061.0

OPERATING 87.53% 89.18% 88.80%

 74

RATIO(%)

GRAPH
(PREFERRING THE TABLE OF OPERATING RATIO)

89.5
89.18
89
88.8
88.5

88 OPERATING
RATIO (% )
87.5 87.53

87

86.5
2004 2005 2006

INTERPRETATION

 The ratios in 2004, 2005 and 2006 are satisfactory as the favorable
rations are considered between 80 to 90%. This shows that the
operating efficiency of LUPIN in these three years is good and that it
has the margin to cover the interest, income tax, dividend and
reserves.

 The ratio in 2004 is the most favorable operating ratio in all the three
years.
 75

OPERATING PROFIT RATIO

This ratio is calculated by dividing the operating profit by sales. Operating
profit is calculated as:

OPERATING PROFIT=NET SALES-OPERATING COST

OPERATING PROFIT RATIO=OPERATING PROFIT X 100

NET SALES

PRACTICAL CALCULATION ON OPERATING PROFIT RATIO

OPERATING PROFIT RATIO=OPERATING PROFIT X 100

NET SALES

TABLE

YEAR 2004 2005 2006

CONTENTS
OPERATING 987.1 843.6 1827.2
PROFIT

SALES 11192.8 11611.3 16061.0

 76

OPERATING 8.81% 7.26% 11.37%

PROFIT
RATIO(%)

GRAPH
(REFERRING TO THE TABLE OF OPERATING RATIO)

12
11.37
10
8.81
8
7.26
OPERATING
6
PROFIT RATIO
(% )
4

0
2004 2005 2006

INTERPRETATION

 The operating profit ratio is considered as a yardstick for measuring

profits. The more the ratio the more favorable it is for LUPIN.

 In the year 2004 and 2005 the ratios are satisfactory but in 2006 the
ratio is good and indicates that LUPIN is in a profitable position and
can face adverse economic conditions.
 77

EXPENSES RATIO

Expenses ratio indicate the relationship on various expenses to net sales. The
operating ratio reveals the average total variations in expenses. But some of
the expenses may be increasing while some may be falling. Hence expense
ratios are calculated by dividing each item of expenses or groups of
expenses with the net sales to analyses the causes of variation of the
operating ratio. The ratio can be calculated for each individual expense ratio,
selling expense ratio, material consumed ratio, and etc.the lower the ratio the
greater is the profitability and higher the ratio, lower is the profitability.
While interpreting the ratio, it must be remembered that for a fixed expense
like rent, the ratio will fall if the sales increase and for a variable expense,
the ratio in proportion to sales shall remain nearly the same.

EXPENSE RATIO = TOTAL EXPENSES X 100

NET SALES

PRACTICAL CALCULATION ON PARTICULAR RATIO

EXPENSE RATIO = TOTAL EXPENSES X 100

NET SALES

 TOTAL EXPENSES=COST OF GOODS SOLD+ADMINISTRATIVE AND

OFFICE EXPENSE+SELLING AND DISTRIBUTION EXPENSE+NON
OPERAING EXPENSE
 78

TABLE
YEAR 2004 2005 2006
CONTENTS
PARTICULAR 9652.1 8946.3 10484.1
EXPENSE

NET SALES 11192.8 11611.3 16061.0

EXPENSE 86% 77.08% 65.27%

RATIO(%)

GRAPH
(REFERRING THE TABLE OF EXPENSE RATIO)

90
80
70
60
50
EXPENSES
40
RATIO(% )
30
20
10
0
2004 2005 2006

INTERPRETATION
 The percentage of expense ratios in the year 2004, 2005, 2006 are
satisfactory as the expense ratios should be between 70 to 80%.
 79

 The ratio in the year 2006 is better than the ratios in 2004 and 2005
because the lower the expense ratio, the greater is the profitability.

 Thus the ratio in the year 2006 is good as well as profitable to LUPIN.

NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit and sales and
indicates the efficiency of the management in manufacturing, selling,
administration and other activities of the firm. This ratio is the overall
measure of firm’s profitability and is calculated.

NET PROFIT RATIO = NET PROFIT AFTER TAX X 100

NET SALES

OR

NET PROFIT RATIO = NET OPRATING PROFIT X 100

NET SALES

PRACTICAL CALCULATION ON NET PROFIT RATIO

NET PROFIT RATIO = NET PROFIT AFTER TAX X 100

NET SALES

TABLE
YEAR 2004 2005 2006

CONTENTS
NET PROFIT 843.6 987.1 1827.2
AFTER TAX
 80

NET SALES 11192.8 11611.3 16061.0

NET PROFIT 7.53 8.50 11.37

RATIO(%)

GRAPH
(REFERRING TO THE TABLE OF NET PROFIT RATIO)

12
11.37
10
8.5
8
7.53
6 NET PROFIT
RATIO(% )
4

0
2004 2005 2006

INTERPRETATION

 The ratios in the year 2004, 2005 are satisfactory as the ratios are low
and thus LUPIN’S profitability and return on investment are also low.

 The ratio in the year 2006 is good and better than the years 2004 and
2005 as the firm has more capacity to face adverse economic
conditions such as price competitions, low demand, etc.

 The higher the ratio the better is the profitability.

 81

CASH PROFIT RATIO

The net profit of the firm is affected by the amount of depreciation charged.
Further depreciation being a non-cash expense it is better to calculate cash
profit ratio. This ratio measures the relationship between cash generated
from operation and the net sales. Thus:

CASH PROFIT RATIO = CASH PROFIT X 100

NET SALES

PRACTICAL CALCULATION ON CASH PROFIT RATIO

CASH PROFIT RATIO = CASH PROFIT X 100

NET SALES

 CASH PROFIT= NET PROFIT+DEPRICIATION

TABLE

YEAR 2004 2005 2006

CONTENTS
CASH PROFIT 987.1 843.6 1827.2

NET SALES 11192.8 11611.3 16061.0

 82

CASH PROFIT 8.81% 7.26% 11.37%

RATIO(%)

GRAPH
(REFERRING TO THE TABLE OF CASH PROFIT RATIO)

12
11.37
10
8.81
8
7.26
6 CASH PROFIT
RATIO (% )
4

0
2004 2005 2006

INTERPRETATION
 The cash profit ratio in the years 2004, 2005 and 2006 are satisfactory
as it shows that the condition of LUPIN is in a satisfactory position
and that the depreciation is also less.
 83

WHAT WOULD BE LUPIN IN 2007?

Particulars 2001 2002 2003 2004 2005 2006

Fixed Assets 4371.5 4617.6 4963.7 5343.8 6287.5 6676.1

Net Current Assets 5769.0 6427.3 6179.7 3760.2 3964.6 9750.5
Gross Sales 7500.3 8062.0 9683.9 11679.3 12122.7 16610.4

Net Sales 6855.0 7505.4 9168.8 11192.8 11611.3 16061.0

Total Income 6965.1 7612.5 9298.9 11648.3 11799.0 16786.1

Total Expenses 5508.6 5773.1 7444.7 8846.6 10341.1 13777.6

PBIT 1456.5 1839.4 1854.2 2801.7 1457.9 3008.5

PBT 650.2 963.8 970.6 1996.2 852.7 2302.0

Net Profit 600.2 721.8 766.8 987.1 843.6 1827.2

TREND LINES FOR LUPIN’S PHARMACEUTICALS

FIXED ASSETS-: The fixed assets of lupin pharmaceuticals was Rs. 4371.5
ml. in 2001 and it is increasing from 2001 to 2006 at the
end of financial year 2006 it was Rs. 6676.1 ml. so the fixed assets of the
company is increasing continuously. If we predict the fixed assets of the
company for 2007 then it will be more than Rs.7000 ml. according to the
 84

trend line of fixed assets it is going up from the fixed assets of 2006. So the
fixed assets will increase in 2007.

8000
7000
6000
5000
fixed assets
4000
3000 Linear (fixed
assets)
2000
1000
0
2001 2002 2003 2004 2005 2006 2007

NET CURRENT ASSETS-: The net current assets of lupin was Rs.5769.0
ml. In 2001 but after three year at the end of
financial year 2004 it diminished at Rs. 3760.2 ml. so the graph line for net
current assets is not constant line. It goes up for the year 2001, 2002 and
2003 but for the year 2004 and 2005 it goes down then again it increases
from Rs. 3964.6 ml. to Rs. 9750.5 ml. at the end of financial year 2006. So
the trend line shows that it will decrease at the end of financial year 2007
and it will be Rs. 7500 ml. approximately it can be increase but due to some
up and down in the graph line of net current assets it will be decrease. At the
end of financial year 2007 may net current assets decrease because the net
current assets increased so randomly at the end of FY 2006 from Rs. 3964.6
ml. to Rs. 9750.5 ml. It increased Rs.5785.9 ml. from FY 2005.
 85

12000

10000

8000
net current
assets
6000
Linear (net
current assets)
4000

2000

0
2001 2002 2003 2004 2005 2006 2007

GROSS SALES-: Gross sales of lupin pharmaceutical was Rs. 7500.3 ml.
at the end of financial year 2001. the graph line of gross
sales is increasing continuously it was Rs.7500.3 ml in 2001 and in 2002 it
was Rs. 8062.0 ml. but from the FY 2005 to FY 2006 it increases so quickly
from Rs. 12122.7 ml. to Rs. 16610.4 ml. It increased Rs. 4487.8 ml. So we
can predict that the gross sales of lupin pharmaceutical will increase for the
year 2007 and it will be around Rs. 17100 ml. So the gross sales of Lupin
pharmaceutical will increase it will be good symbol for the Lupin that the
profit will also increase.

The trend line of gross sales of Lupin pharmaceutical shows

improvement in gross sales because the gross sales is increasing
continuously. It was increasing during the years 2001 to 2006.
 86

18000
16000
14000
12000
10000 gross sales
8000
Linear (gross
6000 sales)
4000
2000
0
2001 2002 2003 2004 2005 2006 2007

NET SALES-: The net sales of the company is also high at the end of FY
2006. The net sales is Rs. 16061.0 ml. The company net
sales graph is also progressive because excise duty is decreasing regularly
and a gross sale is increasing year per year. So the graph of net sales is
progressive. Net sales in the end financial year 2001 was Rs. 6855.0 ml. in
these five year from 2001 to 2005 it was increasing slowly but in the end of
2006 company recorded good increment in net sales. At the end of FY 2005
it was Rs. 11192.8 ml. and in the end of FY 2006 it is Rs 16061.0 ml. so the
difference is Rs. 4868.2 ml.
So the trend line of net sales shows that in the year of 2007 it
will record good net sales. The net sales will increase in the end of financial
year 2007 and it will be Rs.16500 ml. (aprx) because the net sales is
increasing year by year and on the basis of past experience it may be
possible that the net sales can be more than Rs.16500 ml. as it recorded Rs.
4868.2 ml. hike in the end of year 2006.
 87

18000
16000
14000
12000
10000 net sales
8000 Linear (net sales)
6000
4000
2000
0
2001 2002 2003 2004 2005 2006 2007

TOTAL INCOME -: The total income of the company was Rs.5508.6 ml.
in the end of financial year 2001. The graph of total
income is shows that total income is increasing. In the end of FY 2006 it is
Rs.16786.1 ml. So the total income for Lupin pharmaceutical is good. Other
income is also included in the total income and the other income is also
increasing from the 2001 to 2006. So the total income is also increasing. The
graph shows that in the year of 2001 it starts and during the year of 2005 it
increases constantly. But at the end of FY 2006 it increased Rs 4987.1 ml.
which is very high in comparison with other years.
Trend line of the total income shows that the total income will
increase because it is increasing from the last six years. So the total income
of Lupin pharmaceutical will be Rs 17000 ml. in the end of FY 2007.
18000
16000
14000
12000 total income
10000
8000 Linear (total
6000 income)
4000
2000
0
2001 2002 2003 2004 2005 2006 2007

TOTAL EXPENSES-: The graph shows that total expenses is increasing

 88

year by year from the year 2001 to 2006. It was

Rs.5508.6 mn. in the end of financial year 2001. In this total expenses cost
of material, personnel expenses and manufacturing expenses are including.
These expenses are also increasing year by year. So the Lupin
pharmaceutical is being expensive but the profit is also increasing
comparatively. The year 2006 was much expensive in comparison of other
years. At the end of year 2005 total expenses were Rs.10341.1 mn. but at the
end of financial year 2006 it is Rs.13777.6 mn. it is Rs. 3436.5mn.
difference between the years which is largest difference during the years
2001 to 2006.
The trend line of total expenses shows that total expenses will
increase in the coming years. It will be around Rs.14500mn. because it is
increasing regularly from the last six years. So it is good indication for
Lupin that the profit will also increase. But it would be better for Lupin
pharmaceutical that they should decrease total expenses in this way the total
profit would be increase.

16000
14000
12000
10000 Total expenses
8000
Linear (Total
6000
expenses)
4000
2000
0
2001 2002 2003 2004 2005 2006 2007

PROFIT BEFORE TAX AND INTREST (PBIT)

The graph of PBIT is very zigzag. The PBIT was increasing constantly in
the years 2001 to 2003 but in the end of year 2004 it increased Rs.947.5 mn.
this is more than other years PBIT. In the end of FY 2003 it was Rs.1854.2
mn. and it became Rs.2801.1 mn in the end of year 2004. If we take a look
of year 2005 then we find that it diminished in the end of FY 2005. In the
year 2004 it was Rs.2801.1 mn but at the end of FY 2005 it became
 89

Rs.1457.9 mn. So it decreased Rs.1343.2 mn. this is huge difference in

PBIT. But it increased so quickly in the end of financial year 2006. It is
Rs.3008.5 mn. in the end of FY 2006. So it increased Rs.1550.6 mn.
So if we analysis the graph then it is clear that the year 2006 is
good for Lupin pharmaceuticals. In the year 2006 Lupin pharmaceuticals
performed well.
The trend line of PBIT shows that it will decrease in the year
2007 because the past performance is not constantly for PBIT. The PBIT can
be increase or can be decrease. Trend line shows that the PBIT of lupin
would be Rs.2700 mn.

3500
3000
2500
2000 PBIT
1500 Linear (PBIT)
1000
500
0
2001 2002 2003 2004 2005 2006 2007

PROFIT BEFORE TAX (PBT)-; Lupin is getting more profit in 2006 as

compare to other FY. It is Rs. 2302 mn
which is very high in comparison 2005 profit. At the end of FY 2005 it was
Rs. 852.7 mn. and suddenly it increased Rs 1449.3mn. The profit before tax
in the end of FY 2002 and 2003 it was very constant near about Rs 970 mn.
and again one more time it increased from Rs 970 mn to Rs 1996.2 mn.
If we take a look of trend line graph then it is similar as PBIT
trend line graph. So it is predicted that if the PBT will increase in 2007 then
it would be not more because in 2005 the PBT is very low. In the year 2005
it was too less that’s why trend line is showing little increment in PBT. So it
would be near about Rs 2500 mn.
So it is clear from the graph that the PBT will decrease in 2007
because of the past performance of the company in 2005. But we know that
 90

company have earned already very huge profit in 2006 so it will be possible
that Lupin will again gain more profit.

2500

2000

1500
PBT
1000
Linear
(PBT)
500

0
2001 2002 2003 2004 2005 2006 2007

NET PROFIT-: The net profit of the Lupin pharmaceutical is good enough
at the end of FY 2006. It is 1827.2 mn raised from Rs 843
mn last year. So the net profit increased Rs 983.6 mn in the year 2006. From
the year 2001 to 2004 it was constantly increasing but at the end of FY 2005
it decreased. The net profit of the Lupin at the end of FY 2006 is very high
in compare with other financial year.
So if we analysis the graph then it is clear that the net profit of
the Lupin will increase but due to past performance trend line is not showing
good increment in net profit but it will increase. On the other hand the profit
of the Lupin in 2006 is very high so it could be possible that the profit
decrease because the distance between profit in 2005 and 2006 is very high
so it would be possible that Lupin would not able to increase its profit.

2000

1500

Net profit
1000
Linear (Net profit)

500

0
2001 2002 2003 2004 2005 2006 2007
 91

SUGGESTIONS

There are certain ratios which are unsatisfactory in the year 2006 which
should be improved for the year 2006-2007. There are certain suggestions
after studying the ratios of LUPIN LTD for the ratios which need
improvement. The suggestions are as follows:-

 THE CURRENT RATIO: the current ratio in 2006 is 3.72:1 which

is very high and indicates that the funds are lying idle so the company
should decrease the public raising of funds and first utilize the idle
lying funds so as to prevent the loss due to them in business.

 WEIGHTED CURRENT RATIO: The weighted current assets

ratio being 4.40:1 in 2006 being the double of standard ratio thus the
company should try to utilize the current assets efficiently and not
make the assets to remain idle.

 LIQUID RATIO: The liquid ratio being 2.68:1 in 2006 the company
should try to increase the use of the current assets remaining idle so as
to avoid the loss from them to the business.

 INVENTORY TURNOVER RAITO: The ratio being 5.75:1 in

2006 the company should try to decrease this ratio to 5:1 by
increasing the stock reserve for sales.

 FUNDED DEBT TO TOTAL CAPITALISATION RATIO:

Due to the ratio .46:1 in 2006 the company has enough scope for the
more long-term borrowings from the outsiders as its current ratio is
also good and has a sufficient amount of current assets.

 CURRENT ASSETS TO PROPRIETORY FUNDS RATIO: Due

to the ratio 2.48:1 in 2006 which is not satisfactory, the company
should try to increase the shareholders funds so that his capital could
remain safe and due to the increase in the rate of shares the goodwill
of the shares would also increase.
 92

 DEBT SERVICE RATIO: The ratio 7.58:1 in 2006 is not good for
the company so the company should try to decrease this ratio by using
debt as the source of finance.

 GROSS PROFIT RATIO: the ratio 14.33:1 in 2006 can be

improved by increasing the gross profit and the factors decreasing the
gross profit ratio should be thoroughly checked timely whither they
are operating factors or any misleading factors.

OBJECTIVES OF THE STUDY

 The basic objective of studying the ratios of the company is to

know the financial position of the company.

 Another reason is to study that the company is going in profit or

loss.

 To know the borrowings of the company as well as the liquidity

position of the company.

 To study the current assets and current liabilities so as to know

weather the shareholders could invest in Lupin Ltd or not.

 To study the profits of the business and net sales of the business
and to know the stock reserve for sales of the business.

 To know the solvency of the business and the capacity to give

interest to the long term loan lenders (debenture holders) and dividend
to the share holders.

 To study the balance of cash and credit in the organization.

 93

CONCLUSION
LUPIN Ltd has been able to maintain optimal cost positioning. Despite price
drops in various products, the company has been able to maintain and grow
its market share to make strong margins in market, contributing to the strong
financial position of the company. The company was able to meet its entire
requirements for capital expenditures and higher level of working capital
commitment with higher volume of operations and from its operating cash
flows.