Project Report

On
Financial Statement Analysis- “CIPLA & SUN PHARMA”
Submitted to
IILM Institute for Higher Education, Lodhi Road

In partial fulfillment of the requirements for the award of the degree of

PGDM
By
Somya Aggarwal (PG20181503)
Nancy Gupta (PG20181414)
Avantika Jain(PG20181042)
Nayanika Sharma(PG20181044)
Karanpreet Kaur Bhatia(PG20181352)
Tanya Ganglani(PG20181496)

Under the guidance of

Vinaina Chhabra
Professor

April,2019
 Declaration

I hereby declare that this project report entitled “Financial Statement Analysis-
“CIPLA & SUN PHARMA”” by Avantika Jain, Somya Aggarwal, Nancy
Gupta, Nayanika Sharma, Karanpreet Kaur Bhatia, Tanya Ganglani being
submitted in partial fulfillment of the requirements for the degree of PGDM under
Faculty of Ethics in Management of IILM Institute for Higher Education, Lodhi
Road, during the academic year August,2018, is a bonafide record of our original
work carried out under guidance and supervision of Vinaina Chhabra,
PROFESSOR and has not been presented elsewhere.

Somya Aggarwal (PG20181503)

Nancy Gupta (PG20181414)
Avantika Jain(PG20181042)
Nayanika Sharma(PG20181044)
Karanpreet Kaur Bhatia(PG20181352)
Tanya Ganglani(PG20181496)

Date:
 Acknowledgement

We would like to express our sincere gratitude to our supervisor “Vinaina

Chhabra”, “Professor” (IILM Institute for Higher Education), for giving us the
opportunity to work on this topic. It would never be possible for us to take this
project to this level without their innovative ideas and their relentless support and
encouragement.

We take immense pleasure in thanking Prof. Vishal Bhargava, Head of

Department of Ethics In Management, IILM, Lodhi Road. His tolerances of
having discussions, sacrificing his personal time, are extremely insightful and
greatly appreciated.

We would like to express regards to Prof. Vishal Bhargava, Executive Dean IILM,
LODHI ROAD, for his constant encouragement, hours of sitting together and-
discussing frequently lively discussions, which helped us in understanding the
subject and methodology and completion of project.
Somya Aggarwal (PG20181503)
Nancy Gupta (PG20181414)
Avantika Jain(PG20181042)
Nayanika Sharma(PG20181044)
Karanpreet Kaur Bhatia(PG20181352)
Tanya Ganglani(PG20181496)
PGDM

IILM Institute for Higher Education, Lodhi Road

 INDUSTRY OVERVIEW

India is the largest provider of generic drugs globally. Indian pharmaceutical sector industry

supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in

the US and 25 per cent of all medicine in UK. India enjoys an important position in the global

pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the

potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the

antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are

supplied by Indian pharmaceutical firms.

MARKET SIZE

The pharmaceutical sector was valued at US$ 33 billion in 2017. The country’s pharmaceutical

industry is expected to expand at a CAGR of 22.4 per cent over 2015–20 to reach US$ 55 billion.

India’s pharmaceutical exports stood at US$ 17.27 billion in FY18 and have reached US$ 15.52

billion in FY19 (up to January 2019). Pharmaceutical exports include bulk drugs, intermediates,

drug formulations, biologicals, Ayush & herbal products and surgicals.

ABOUT CIPLA

Cipla Limited is an Indian multinational pharmaceutical and biotechnology company,

headquartered in Mumbai, India. Cipla primarily develops medicines to treat respiratory,

cardiovascular disease, arthritis, diabetes, weight control and depression; other medical conditions.

As of 17 September 2014, its market capitalization was ₹49,611.58 crore (US$6.9 billion), making

it India's 42nd largest publicly traded company by market value. It was founded by Khwaja Abdul

Hamied as 'The Chemical, Industrial & Pharmaceutical Laboratories' in 1935 in Mumbai. The

name of the Company was changed to 'Cipla Limited' on 20 July 1984.

Cipla's portfolio includes 2000+ products across multiple therapeutic categories,

including treatment for acute, chronic and rare conditions. The company makes affordable

medicines and has played a pioneering role in HIV/AIDS treatment. It is among

the leading manufacturers of ARV (anti-retroviral) drugs in the world, and was the world’s

first pharmaceutical company (in 2001) to supply ARVs to countries at less than a dollar a day. In

the financial year 2014-15 (according to company sources), its ARV formulations were used by

more than 2 million HIV patients in 100 countries.

ABOUT SUN PHARMA

Sun Pharmaceutical Industries Limited is an Indian multinational pharmaceutical company

headquartered in Mumbai, Maharashtra that manufactures and sells pharmaceutical formulations

and active pharmaceutical ingredients (APIs) primarily in India and the United States. The

company offers formulations in various therapeutic areas, such as cardiology, psychiatry,

neurology, gastroenterology and diabetology. It also provides APIs such as warfarin,

carbamazepine, etodolac, and clorazepate, as well as anti cancers, steroids, peptides, sex hormones,

and controlled substances.

1. LIQUIDITY RATIOS

Liquidity ratio analysis refers to the use of several ratios to determine the ability of an

organization to pay its bills in a timely manner. This analysis is especially important

for lenders and creditors, who want to gain some idea of the financial situation of a borrower or

customer before granting them credit. There are several ratios available for this analysis, all of

which use the same concept of comparing liquid assets to short-term liabilities.

Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are most

useful when they are used in comparative form. This analysis may be internal or external.

Liquidity Ratios are:

1. Current Ratio

The current ratio measures a company's ability to pay off its current liabilities (payable within

one year) with its current assets such as cash, accounts receivable and inventories.

Current Ratio = Current Assets

Current Liabilities
 The higher the ratio, the better the company's liquidity position

2. Quick Ratio

The quick ratio measures a company's ability to meet its short-term obligations with its most

liquid assets and therefore excludes inventories from its current assets. It is also known as the

"acid-test ratio":

Quick ratio = (Cash + Short-term marketable investments + accounts receivable)

Current Liabilities

3. Cash Ratio

The Cash Ratio tells us how much liquid assets we have which are convertible to cash that can

cover the liabilities. The Cash Ratio does not include accounts receivables as they have no

guarantee whether they can be convertible into cash or not.

Cash ratio = (Cash + Short-term marketable investments)

Current Liabilities
4. Cash conversion cycle or Working capital days

The cash conversion cycle is a metric that expresses the time (measured in days) it takes for a

company to convert its investments in inventory and other resources into cash flows from sales.

It is also called the Net Operating Cycle.

Cash conversion cycle = DSO + DOH - Payable Days

where,

DSO = Days sales outstanding

DOH = Days of inventory on hand

 CROSS SECTIONAL ANALYSIS

CIPLA SUN PHARMACEUTICALS

LIQUIDITY RATIOS 2017-18 LIQUIDITY RATIOS 2017-18

Current Ratio 2.82 Current Ratio 1.60

Quick Ratio 1.06 Quick Ratio 0.89
Cash Ratio 0.25 Cash Ratio 0.50
Cash Conversion Cycle 225.10 Cash conversion Cycle 289.62

 INTERPRETATION OF THE RESULTS:

1. Current Ratio:

 The current Ratio of Cipla Ltd (2.82) is higher than that of Sun Pharmaceuticals Industries

Ltd (1.60).

 But, in terms of current ratio Sun Pharma holds a better position than Cipla because Cipla's

assets are used inefficiently which means that its assets (Cash and Inventories) are lying

idle.

 Also, the ideal current ratio should be 2:1 and Sun pharma's current ratio is closer to the

Ideal ratio.
2. Quick Ratio:

 A quick ratio higher than 1:1 indicates that the business can meet its current financial

obligations with the available quick funds on hand.

 In terms of Quick ratio, Cipla holds a better position than Sun Pharma as the quick ratio of

Cipla (1.06) is higher than that of Sun Pharma (0.89). It shows that Cipla's liquid assets are

better off in quickly covering up its liabilities.

 A quick Ratio less than 1:1 ratio like Sun pharma's quick ratio indicates that this company

relies too much on Inventory to pay its liabilities.

3. Cash Ratio:

 Cash Ratio does not include accounts receivables as they have no guarantee where they

can be converted into cash.

 The results shows that Cipla (0.25) and Sun Pharma (0.50) does not have enough cash and

can only pay off 25% and 50% of their current liabilities respectively.

 Cash ratio of Sun Pharma (0.50) is higher and hence better than Cipla's (0.25) as Sun

Pharma has more ability to pay off its current liabilities with cash and cash equivalents and

have more funds left over than Cipla.

 HORIZONTAL ANALYSIS

CIPLA
LIQUIDITY RATIOS 2015-16 2016-17 2017-18

Current Ratio 1.14 2.64 2.82

Quick Ratio 0.42 0.94 1.06
Cash Ratio 0.11 0.19 0.25
Cash Conversion Cycle 261.14 243.40 225.10

 INTERPRETATION OF THE RESULTS:

 The current ratio of Cipla Ltd has increased from 1.14 in 2016 to 2.82 in 2018 and the it

performed best in terms of current ratio in the year 2017 where its ratio (2.64) was the

closest to the Ideal current ratio of 2:1 and it means that is assets are efficiently covering

up its liabilities in the year 2017.

 The quick ratio has increased from 0.42 in 2016 to 1.06 in 2018 which means the company

has improved gradually and now it can cover its liabilities with its liquid assets and relies

less on Inventory

 Cash ratio of the company has not improved much over the years maybe because they do

not have enough cash to pay off its financial obligations.

 SUN PHARMACEUTICALS

LIQUIDITY RATIOS 2015-16 2016-17 2017-18

Current Ratio 2.27 1.84 1.60

Quick Ratio 1.50 1.24 0.89
Cash Ratio 1.00 0.85 0.50
Cash Conversion Cycle 305.75 268.71 289.62

 INTERPRETATION OF THE RESULTS:

 The current ratio of Sun Pharmaceuticals Industry Ltd has decreased from 2.27 in 2016 to

1.60 in 2018 and the it performed best in terms of current ratio in the year 2017 where its

ratio (1.84) was the closest to the Ideal current ratio of 2:1 it means that is assets are

efficiently covering up its liabilities in the year 2017.

 The quick ratio of Sun Pharma has decreased gradually from 1.50 in 2016 to 0.89 in 2018

which means the company has not improved much over the years and has difficulty paying

off its financial obligations with its liquid assets and relies more on Inventory

 Cash ratio of the company has declined from 1.00 in 2016 to 0.82 in 2017 and then

increases to 0.50 in 2018 which is not good for the company as now it they have lesser

funds and cash to pay its liabilities as compared to their position in 2016.
2. ACTIVITY RATIOS

Activity ratios are a category of financial ratios that measure a firm's ability to convert different

accounts within its balance sheets into cash or sales. Activity ratios measure the relative efficiency

of a firm based on its use of its assets, leverage, or other similar balance sheet items and are

important in determining whether a company's management is doing a good enough job of

generating revenues and cash from its resources.

Activity ratios are also commonly known as efficiency ratios. Activity ratios gauge an

organization's operational efficiency and profitability. These ratios are most useful when compared

to a competitor or industry to establish whether an entity's processes are favorable or unfavorable.

Activity ratios can form a basis of comparison across multiple reporting periods to determine

changes over time.

Activity ratios are:

1. Receivables Turnover Ratio

Receivables turnover ratio measures the number of times in a year a company is able to

receive cash on credit sales. Receivable days measures the number of days in a year in

which a company is able to receive cash on credit sales.

Receivables Turnover ratio = Annual Sales

Average Receivables

Receivable Days = 365

Receivable turnover ratio
2. Inventory Turnover Ratio

Inventory turnover ratio measures the number of times in a year a company is able to

convert inventory into sales and receive cash. Inventory days measures the number of days

in a year in which a company is able to inventory into sales and receive cash.

Inventory Turnover ratio = Cost of goods sold

Average Inventory

Inventory Days = 365

Inventory turnover ratio

3. Payables Turnover

Payables turnover ratio measures the number of times in a year a company is paying for its

credit purchases. Payable days measures the number of days in a year in which a company

is paying for its credit purchases.

Payables Turnover ratio = Purchases

Average Trade Payables

Payable Days = 365

Payables turnover ratio
4. Total Asset Turnover Ratio

Total asset turnover ratio measures how much revenue is generated per unit total assets of

a company.

Total Asset Turnover ratio = Revenue

Average Total Assets

5. Fixed Asset Turnover Ratio

Fixed asset turnover ratio measures how much revenue is generated per unit fixed assets of

a company.

Fixed Asset Turnover ratio = Revenue

Average Fixed Assets
 CROSS SECTIONAL ANALYSIS

CIPLA SUN PHARMACEUTICALS

ACTIVITY RATIOS 2017-18 ACTIVITY RATIOS 2017-18

Receivables Turnover 5.27 Receivables Turnover 3.53

Inventory Turnover 1.19 Inventory Turnover 0.65
Payables Turnover 2.44 Payables Turnover 0.97
Total Asset Turnover 0.67 Total Asset Turnover 0.42
Fixed Asset Turnover 1.22 Fixed Asset Turnover 0.87

Receivable Days 69.28 Receivable Days 103.47

Inventory Days 305.58 Inventory Days 560.82
Payable Days 149.76 Payable Days 374.67
Working Capital Days 225.10 Working Capital Days 289.62

 INTERPRETATION OF THE RESULTS:

1. Receivables turnover ratio:

 The receivables turnover ratio of Cipla (5.27) is higher than that of Sun

Pharmaceuticals (3.53).

 This means that Cipla receives cash on its credit sales more number of times in a year

as compared to Sun Pharma and hence is in a better position in this aspect.

 Now, since the receivable days of Cipla (69.28) is lesser than that of Sun Pharma

(103.47), Sun Pharma is better as it receives cash on credit sales on more number of

days in a year compared to Cipla.

2. Inventory turnover ratio:

 The inventory turnover ratio of Cipla (1.19) is higher than that of Sun Pharmaceuticals

(0.65).

 This means that Cipla is able to convert its inventory into sales and receive cash more

number of times in a year as compared to Sun Pharma and hence is in a better position

in this aspect.

 Now, since the inventory days of Cipla (305.58) is lesser than that of Sun Pharma

(560.82), Sun Pharma is better as it is able to convert inventory into sales and receive

cash on more number of days in a year compared to Cipla.

3. Payables turnover ratio:

 The payables turnover ratio of Cipla (2.44) is higher than that of Sun Pharmaceuticals

(0.97).

 This means that Cipla has to pay for its credit purchases more number of times in a

year as compared to Sun Pharma and hence Sun Pharma is in a better position as it has

to pay less number of times.

 Now, since the payable days of Cipla (149.76) is lesser than that of Sun Pharma

(374.67), Cipla is better as it has more number of days to pay back in a year compared

to Sun Pharma.

4. Total asset turnover ratio:

 The total asset turnover ratio of Cipla (0.67) is higher than that of Sun Pharmaceuticals

(0.42).
 This means that Cipla generates more revenue per unit total assets compared to Sun

Pharma and hence is in a better position in this aspect.

5. Fixed asset turnover ratio:

 The fixed asset turnover ratio of Cipla (1.22) is higher than that of Sun Pharmaceuticals

(0.87).

 This means that Cipla generates more revenue per unit fixed assets compared to Sun

Pharma and hence is in a better position in this aspect.

6. Working Capital days:

 Cipla (225.10) has lower working capital days compared to Sun Pharma (289.62)

 This implies that Sun Pharma takes more days to convert its investments in inventory

and other resources into cash compared to Cipla. Hence, Cipla is better off in this arena.
 HORIZONTAL ANALYSIS

CIPLA

ACTIVITY RATIOS 2015-16 2016-17 2017-18

Receivables Turnover 6.30 5.88 5.27

Inventory Turnover 1.10 1.17 1.19
Payables Turnover 2.85 2.80 2.44
Total Asset Turnover 0.73 0.68 0.67
Fixed Asset Turnover 1.32 1.17 1.22

Receivable Days 57.94 62.03 69.28

Inventory Days 331.47 311.52 305.58
Payable Days 128.28 130.15 149.76
Working Capital Days 261.14 243.40 225.10

 INTERPRETATION OF THE RESULTS:

 Receivables turnover ratio of Cipla has decreased continuously from 6.30 in 2015-16 to

5.27 in 2017-18. This is not a good sign as it gets cash back on credit sales lesser number

of times in each consecutive year. Similarly, the receivable days has increased from 2015-

16 to 2017-18 meaning that it takes more days to receive cash.

 Inventory turnover ratio for Cipla shows a positive trend as it has increase from 1.10 in

2015-16 to 1.19 in 2017-18. Cipla is able to convert inventory into sales and receive cash

more and more in consecutive years. Similarly, the inventory days have decreased as it

takes less number of days to receive cash on sales of inventory.

 Payables turnover ratio shows a declining trend from 2015-16 to 2017-18 which is a

positive sign as it has to pay for its credit purchases less number of times in a year.
 Similarly, the positive trend in payable days in these consecutive years shows that Cipla

has more number of days to pay back for its credit purchases every year.

 The total asset turnover has declined from 0.73 in 2015-16 to 0.68 in 2016-17 to 0.67 in

2017-18. This is not a positive trend as it means that lesser and lesser revenue is generated

per unit total asset in these three years.

 The fixed asset turnover ratio has also declined from 1.32 in 2015-16 to 1.17 in 2016-17

and rose slightly to 1.22 in 2017-18. It shows a negative trend firstly and then rises back

which shows a positive trend.

 Working capital days decreases from 2015-16 to 2017-18 which shows a positive trend as

it means that Cipla needs lesser days every consecutive year to convert its resources into

cash.
 SUN PHARMACEUTICALS

ACTIVITY RATIOS 2015-16 2016-17 2017-18

Receivables Turnover 4.80 4.52 3.53

Inventory Turnover 0.69 0.77 0.65
Payables Turnover 1.23 1.28 0.97
Total Asset Turnover 0.54 0.54 0.42
Fixed Asset Turnover 1.22 1.17 0.87

Receivable Days 76.03 80.78 103.47

Inventory Days 527.62 472.06 560.82
Payable Days 297.91 284.13 374.67
Working Capital Days 305.75 268.71 289.62

 INTERPRETATION OF THE RESULTS:

 Receivables turnover ratio of Sun Pharma has decreased continuously from 4.80 in 2015-

16 to 3.53 in 2017-18. This is not a good sign as it gets cash back on credit sales lesser

number of times in each consecutive year. Similarly, the receivable days has increased

from 2015-16 to 2017-18 meaning that it takes more days to receive cash.

 Inventory turnover ratio for Sun Pharma shows a positive trend initially as it has increased

from 0.69 in 2015-16 to 0.77 in 2016-17 but then declines to a low of 0.65 in 2017-18. Sun

Pharma is able to convert inventory into sales and receive cash more and more from 2015-

17 but it shows a negative trend in 2017-18. Similarly, the inventory days have decreased

as it takes less number of days to receive cash on sales of inventory in the first two years

and then goes to a high point of 560.82 which means it takes more days to convert inventory

to cash.
 Payables turnover ratio shows a declining trend from 2015-16 to 2017-18 which is a

positive sign as it has to pay for its credit purchases less number of times in a year.

Similarly, the positive trend in payable days in these consecutive years shows that Sun

Pharma has more number of days to pay back for its credit purchases every year.

 The total asset turnover has declined from 0.54 in 2015-16 to 0.42 in 2017-18. This is not

a positive trend as it means that lesser and lesser revenue is generated per unit total asset

in these three years.

 The fixed asset turnover ratio has also declined from 1.22 in 2015-16 to 1.17 in 2016-17 to

0.87 in 2017-18. It shows a negative trend as it is able to generate lesser and lesser revenue

per unit fixed asset each year.

 Working capital days decreases from 2015-16 to 2017-18 which shows a positive trend as

it means that Sun Pharma needs lesser days every consecutive year to convert its resources

into cash.
 3. PROFITABILITY RATIOS

Profitability ratios show a company's overall efficiency and performance. Profitability ratios are

divided into two types: margins and returns. Ratios that show margins represent the firm's ability

to translate sales dollars into profits at various stages of measurement. Ratios that show returns

represent the firm's ability to measure the overall efficiency of the firm in generating returns for

its shareholders.

Margin Ratios

1. GROSS PROFIT MARGIN

The gross profit margin looks at the cost of goods sold as a percentage of sales. This ratio looks at

how well a company controls the cost of its inventory and the manufacturing of its products and

subsequently pass on the costs to its customers.

The larger the gross profit margin, the better for the company.

The calculation is as follows:

Gross Profit Margin = Gross Profit x 100

Net Sales/ Revenue

Both terms of the formula come from the company's income statement.
 2. OPERATING PROFIT MARGIN

 Operating profit is also known as EBIT and is found on the company's income

statement. EBIT is earnings before interest and taxes.

 The operating profit margin looks at EBIT as a percentage of sales.

 The operating profit margin ratio is a measure of overall operating efficiency,

incorporating all of the expenses of ordinary, daily business activity.

 The calculation is as follows:

Operating Profit Margin = EBIT x 100

Net Sales/ Revenue

 Both terms of the equation come from the company's income statement.

3. Net Profit Margin

 When doing a simple profitability ratio analysis, the net profit margin is the most often

margin ratio used.

 The net profit margin shows how much of each sales dollar shows up as net income

after all expenses are paid. For example, if the net profit margin is 5 percent, that means

that 5 cents of every dollar are profit.

 The net profit margin measures profitability after consideration of all expenses inclu

 ding taxes, interest, and depreciation.

 Net Profit Margin = Net Income x 100
Net Sales/ Revenue

 Both terms of the equation come from the income statement.

RETURN RATIOS

1. Return on Assets

 The Return on Assets ratio is an important profitability ratio because it measures the

efficiency with which the company is managing its investment in assets and using them

to generate profit.

 It measures the amount of profit earned relative to the firm's level of investment in total

assets.

 The return on assets ratio is related to the asset management category of financial ratios.

 The calculation is as follows:

Return on Assets = Net Income x 100

Total Assets

 Net Income is taken from the income statement, and total assets are taken from the

balance sheet.

 The higher the percentage, the better, because that means the company is doing a good

job using its assets to generate sales.

2. Return on Equity

 The Return on Equity ratio is perhaps the most important of all the financial ratios to

investors in the company. It measures the return on the money the investors have put

into the company.

 It is the ratio potential investors look at when deciding whether or not to invest in the

company.

 The calculation is as follows:

Return on Equity = Net Income x 100

Shareholders’ Equity

 Net income comes from the income statement, and stockholder's equity comes from

the balance sheet.

 In general, the higher the percentage, the better, with some exceptions, as it shows

that the company is doing a good job using the investors' money.

s
 CROSS SECTIONAL ANALYSIS

CIPLA SUN PHARMACEUTICALS

PROFITABILITY 2017-18 PROFITABILITY 2017-18

Gross Profit Margin 70% Gross Profit Margin 83.15%

Operating Profit Operating Profit
Margin 12% Margin 14.73%
Pre-tax margin 11% Pre-tax margin 13.13%
Net Profit Margin 10% Net Profit Margin 9.85%
Operating ROA 8% Operating ROA 6.21%
ROA 6% ROA 4.15%
Return on Total Return on Total 6.07%
Capital 8% Capital
ROE 10% ROE 6.85%

 INTERPRETATION OF THE RESULTS:

1. Gross Profit Margin:

 The Gross Profit Margin of Sun Pharmaceuticals Industries Ltd (83.15%) is higher than

that of Cipla Ltd. (70%).

 In terms of Gross Profit Margin Sun Pharma holds a better position than Cipla because it

has a higher Gross profit margin.

2. Operating Profit Margin:

 In terms of Operating Profit Margin, Sun Pharma holds a better position than Cipla as the

Operating Profit Margin of Sun Pharma (14.73%) is higher than that of Cipla (12%).
3. Net Profit Margin:

 In terms of Net Profit Margin, Cipla holds a better position than Sun Pharma as the Net

Profit Margin of Cipla (10%) is higher than that of Sun Pharma (9.85%).

3. Return on Assets:

 In terms of Return on Assets, Cipla holds a better position as compared to Sun Pharma as

Cipla earns higher return on its total assets (6%) than Sun Pharma (4.15%).

4. Return on Equity:

 In terms of Return on Equity, Cipla holds a better position as compared to Sun Pharma as

Cipla earns higher returns on its shareholders’ funds (10%) than Sun Pharma (6.85%).
 HORIZONTAL ANALYSIS

CIPLA
PROFITABILIY RATIOS 2015-16 2016-17 2017-18

Gross Profit Margin 69% 70% 70%

Operating Profit Margin 14% 9% 12%
Pre-tax margin 13% 9% 11%
Net Profit Margin 10% 7% 10%
Operating ROA 10% 6% 8%
ROA 8% 5% 6%
ROE 12% 8% 10%

 INTERPRETATION OF THE RESULTS:

 Gross Profit Margin of Cipla has improved from 2015-16 to the year 2017-18.

 Operating Profit Margin of Cipla Ltd. has initially decreased from 2015-16 to 2016-17 and

then improved from the year 2016-17 to 2017-18.

 Pre- Tax Margin has shown the similar trend as Operating Profit Margin.

 Net Profit Margin of Cipla Ltd. has first decreased and then improved from 2016-17 to

2017-18, i.e. 7% to 10%.

 Operating ROA, ROA and ROE all three show a similar trend i.e. initially decreased from

2015-16 to the year 2016-17 and then improved from 2016-17 to the year 2017-18.
 SUN PHARMACEUTICALS

PROFITABILIY RATIOS 2015-16 2016-17 2017-18

Gross Profit Margin 84.61% 83.77% 83.15%

Operating Profit Margin 24.57% 29.56% 14.73%
Pre-tax margin 23.72% 28.65% 13.13%
Net Profit Margin 16.54% 22.05% 9.85%
Operating ROA 13.60% 16.14% 6.21%
ROA 9.16% 12.05% 4.15%
ROE 15.02% 19.01% 6.85%

 INTERPRETATION OF THE RESULTS:

 Gross Profit Margin of Sun Pharma has decreased from 2015-16 to the year 2017-18.

 Operating Profit Margin of Sun Pharma Ltd. has initially increased from 2015-16 to 2016-

17 and then declined from the year 2016-17 to 2017-18.

 Pre- Tax Margin has shown the similar trend as Operating Profit Margin.

 Net Profit Margin of Sun Pharma Ltd. has first increased and then decreased from 2016-

17 to 2017-18.

 Operating ROA, ROA and ROE all three show a similar trend i.e. initially improved from

2015-16 to the year 2016-17 and then declined from 2016-17 to the year 2017-18.
 VERTICAL ANALYSIS- COMMON SIZE STATEMENTS

 Vertical analysis is a method of financial statement analysis in which each line item is

listed as a percentage of a base figure within the statement. Thus, line items on an income

statement can be stated as a percentage of gross sales, while line items on a balance sheet

can be stated as a percentage of total assets or liabilities.

 Vertical analysis makes it much easier to compare the financial statements of one company

with another, and across industries. This is because one can see the relative proportions of

account balances.

 It also makes it easier to compare previous periods for time series analysis, in which

quarterly and annual figures are compared over a number of years, in order to gain a picture

of whether performance metrics are improving or deteriorating.

Common Size Income Statement

 The income statement (also referred to as the profit and loss (P&L) statement) provides an

overview of flows of sales, expenses, and net income during the reporting period.

 The income statement equation is sales, minus expenses and adjustments, equals net

income. This is why the common size income statement defines all items as a percentage

of sales.
Common Size Balance Sheet Statement

 The balance sheet provides a snapshot overview of the firm's assets, liabilities and

shareholders' equity for the reporting period. A common size balance sheet is set up with

the same logic as the common size income statement. The balance sheet equation is assets

equals liabilities plus stockholders' equity.

 As a result, analysts define the balance sheet as a percentage of assets. Another version of

the common size balance sheet shows asset line items as a percentage of total assets,

liabilities as a percentage of total liabilities and stockholders' equity as a percentage of total

stockholders' equity.

CIPLA
 The company’s net sales have grown over the period of three years.

 Purchases as percentage of net sales has also increased every year.

 The highest percentage of net sales is spent on the other expenses of the company Cipla

Ltd.

 The total assets/ total equity and liabilities have initially decreased from the year 2015-16

to 2016-17, and then has increased from 2016-17 to the year 2017-18.

 The property, plant and equipment has the largest share as percentage of the total assets of

the company.

 The equity capital, on the other hand is the largest share of percentage of total equity and

liabilities of the company, being 62%.

 SUN PHARMA
 The company’s net sales have grown from 2015-16 to the year 2016-17, and then decreased

from the year 2016-17 to 2017-18.

 Purchases as percentage of net sales has also increased from the year 2015-16 to 1016-17,

and then remained constant in the year 2017-18.

 The highest percentage of net sales is spent on the other expenses of the company Sun

Pharma Ltd.

 The total assets/ total equity and liabilities have continuously improved over the period of

three years from 2015-16 to 2017-18.

 The property, plant and equipment has the largest share as percentage of the total assets of

the company, i.e. 14%.

 The equity capital, on the other hand is the largest share of percentage of total equity and

liabilities of the company, being 59%.

 DU PONT ANALYSIS

The Du Pont Identity provides a way to breakdown Return on Equity (ROE) into three

parts:

 Operating Efficiency (measured by Profit Margin)

 Asset use efficiency (measured by Assets Turnover Ratio)

 Financial Leverage (measured by Equity Multiplier)

Return On Equity = Net Income

Average Shareholder’s Equity

Which can be broken into 3 parts as follows:

= Net Income x Revenue x Average Total Assets

Revenue Average Total Assets Average Shareholder’s Equity

= Profit Margin * Total Assets Turnover * Equity Multiplier

The primary advantage of Du Pont Analysis is that it gives a fuller picture of a company’s

overall financial health and performance compared to other valuation tools.

Given below is the DU Pont Chart for two pharmaceutical companies namely; Cipla and

Sun Pharma, the Return on Equity of which is 10% and 6.85%.

Higher Return on Equity of Cipla shows a better financial health and performance of the

company as compared to Sun Pharma.

However, the companies aiming to improve their Return on Equity can undertake the

following steps:

 A decrease in inventories will reduce the total assets of the company which will

increase the Asset Turnover Ratio, in turn improving the Return on assets, finally

resulting in an increase in the Return on Equity.

 A decrease in the Cost of Goods Sold will decrease the Total costs of the company

thereby increasing the Profit Margin, in turn improving the Return on Assets of the

company, finally resulting in an increase in the Return on Equity.

The equity multiplier shows the amount of total assets that are financed or owed by the

shareholders of the company, which is depicted by comparing total assets with total

shareholder’s equity, hence, it remains constant. So, in order to improve the Return on

Equity, the company has to improve its Return on Assets.