Professional Documents
Culture Documents
Vaibhav Mittal
Gordon Gunn
Table of Contents
Introduction....................................................................................................................3
Liquidity Ratios..............................................................................................................4
Solvency Ratio...............................................................................................................9
Profitability Ratio.........................................................................................................12
Altman-Z Score............................................................................................................16
References....................................................................................................................18
Appendix......................................................................................................................18
3
Introduction
Investors looking to invest in the best pharmaceutical companies have a with a wide
range to choose from among publicly traded companies, to stand out from their competition,
a company should always monitor its financial indicators that are effective in the analysis and
profitability, risk and frame future business plans. Pharmaceutical companies have become
the leading players in the healthcare sector in the era of ageing populations, rising healthcare
costs and the increasing production of innovative and highly lucrative medicines. This paper
analyses the current business and financial performance of India's leading pharmaceutical
report addresses the overall financial performance of the company, its abilities and its
inadequacies by applying various financial indicators, such as the annual report, financial
ratios and financial statements, and by comparing it with its three industry rivals, Sun
Pharmaceutical Industries Limited, Dr. Reddys Laboratories Limited and Lupin Limited
Besides. The study includes an assessment of the financial techniques used in the analysis,
using all the research tools, makes recommendations for the future of the business by
biotechnology, and one of the largest generic medicine producers worldwide (Cipla, 2020). In
India, Cipla has 34 cGMP-compliant development facilities that meet with national
and international standards (Cipla, 2020). The formulas for this drug are distributed in over
170 countries, including America, Canada, Europe, Africa, Australia, Latin America and the
Middle East (Brand India Pharma, 2020, para.2). Cipla's portfolio includes over 2,000
4
products across multiple therapeutic categories, including treatments for acute, chronic and
rare conditions (Edwards, 2018, para. 8). Pharmaceutical companies are distinguished by
high capital spending on research and development (R&D) and a prolonged period between
initial testing and eventually to the distribution of a drug (Kennedy, 2019, para. 7). When a
pharmaceutical product enters the marketplace, the company has to decide how high the price
the company will charge for medicine in order to produce a reasonable return on its
investment in the shortest amount of time (Sullivan, 2019, para. 2). The main financial factors
for pharmaceutical companies are those related to R&D expenses and the capacity of the
company to handle high rates of debt and profitability and their current cash flow (para. 3).
The liquidity, solvency and profitability ratios of Cipla are evaluated and compared to their
Liquidity Ratios
Liquidity ratios help Cipla to determine their ability to repay their current debt
without raising external capital (Bragg, 2018, p. 1). Cipla's Current Ratio (CR) was 2.66 in
2018-2019 (Cipla Limited, 2020), which shows that the company is leveraged enough to pay
its debts by balancing its existing assets to its financial obligations for the next twelve months
(Lumen, 2020, p. 1). The table below shows the comparison of CR between Cipla Limited
and its three competitors. Good pharma companies have ratios of 1.5 to 3 (CFI Education Inc,
2020, para. 4), as their proportions vary by industry and circumstances. Cipla has a very high
5
CR and highest among its competitors in 2019, which also means that a company maintains a
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2019 2018 2017 2016
financial health as in 2019, and Sun Pharma has very high working capital compared to
Cipla, which shows the company's liquidity and operating efficiency is on a higher side.
Cipla also has significant positive WC; it shows that it has the potential to invest and grow. In
2016, Cipla had a negative WC, which indicates that the current assets of the company
might have faced trouble in raising or paying back creditors or even going bankrupt, but it
has bounced back from the situation well. Companies with positive WC may face problems
when they have only enough money to pay for day-to-day operations and not enough funds to
pay for additional expenses (CFI Education Inc, 2020, para. 4). It happens in the
pharmaceutical industry, which can mean that the company has trouble moving goods,
collecting customer receivables too soon, or paying the vendor's debts too early.
6
In the last four years, Cipla's receivables turnover ratio (RTR) has always remained
the highest among the four comparable firms, showing its productivity and effectiveness in
collecting its receivables or money owed by customers (Wood, 2020, para . 1). It also
demonstrates that the business has a high proportion of loyal customers who settle their debts
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2019 2018 2017 2016
100.00
80.00
60.00
40.00
20.00
0.00
2019 2018 2017 2016
Cipla's Average Collection Period (ACP) is comparatively lower than its other three
competitors, although, an increase of 24 percent is seen in 2019, which is not a good sign.
Overall, Cipla's have a lower ACP, which shows that the firm takes the faster processing time
to convert balances from receivable accounts back into cash flow in comparison to its
competitors (Nolet, 2017, p. 1). The lower that number, the more efficient it is for the
business to collect payment from its clients. Higher numbers show that their clients are not
paying their bills promptly, especially for Sun Pharma and Lupin, which is rising
proportionately (p. 1). However, a high number may also indicate more severe problems or
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2019 2018 2017 2016
Dr. Reddy has the highest Inventory Turnover Ratio (ITR), which states that the
number of times a company's entire inventory has been sold during the accounting period is
high compared to Cipla and its other two rivals. It is a critical factor in the performance of the
pharmaceutical business that keeps an inventory that has an expiry date. Dr. Reddy's
inventory turnover ratio demonstrates how well a company handles its inventory rates and
how often it replenishes its inventories. In general, higher ITR is better because inventories
are the least liquid form of assets (Trade Gecko, 2020, p. 1). Sun Pharma's lower inventory
turnover ratio indicates that the company could be doing over-storage or failures in the
product line or the marketing campaign (p. 1). It is a sign of poor inventory management, as
inventory typically has a zero rate of return and a high cost of storage in the medicine sector.
Higher inventory turnover rates are considered to be a good measure of successful inventory
management.
Lupin Ltd.
Cipla Limited
company, and illustrate how secure the inventory is for investors and shareholders because
existing, expired inventories of generic products are worth less than the latest, new inventory
and stock sales demonstrate how quickly the stock moves (BLI, 2020, p. 1). Cipla has very
high DIN sales, which is not a positive sign in comparison to other rivals (p. 1). Inventory
9
sales by Dr. Reddy show how fast the firm moves its inventory and shows the liquidity of its
inventories. Shorter outstanding DIN means the company is transforming the inventory into
cash more quickly and the product is highly liquid (p. 1).
The Current Cash-Debt Ratio (CCDR) is essential for current and prospective
the company generates enough cash from its operations to keep the company operational and
whether it produces enough cash from its operations to pay dividends on time. In
operations (Assets America, 2020, para. 4). Cipla has the highest CCDR among all its
10
competitors in 2019, but it is still lower and means that the company has inferior liquidity and
Solvency Ratio
Cipla's Debt-To Total Assets Ratio (DTA) is 0.29, which means that creditors finance
29 percent of its assets, and 71 percent is financed by shareholders' equity, in the form of
equity and not by creditors in the form of debt (Bragg, 2018, p. 1). Cipla has enough cash to
meet its current obligations, and the current DTA shows that it is successful enough to pay a
return on its investment. Only Sun Pharma has a marginally better ratio of existing debt to
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2019 2018 2017 2016
Cipla has 29 percent of its Debts-To-Equity, which indicates that its solvency ratio is
better relative to Lupin Ltd, as it has 60 percent of its debts. The Debt-To-Equity allows the
company to understand how to fund the activities of the organization. Cipla, Sun Pharma and
Dr. Reddy have a relatively lower Debt-To-Equity, considering they are highly capital
implies that the business operating cash flow is just 22 percent of its total liabilities, which
suggests that they cannot comfortably meet its debt obligations by using its current operating
12
cash flow (Wealthy Education, 2020, para. 15). However, Cipla and Dr. Reddy had the
highest DCC in 2019, shows their position is more reliable than the other two rivals, given
that pharmaceutical firms have a high debt due to pre-production development costs and pay
The Interest Coverage Ratio (ICR) states how easily a company can pay its fixed
interest charges on both short-term and long-term debts with current earnings before interest
and taxes (EBIT). Cipla's ICR increased and stood at 22 percent in FY19, from 0.20 (20
percent) in FY18. In comparison, Cipla still has a higher ICR Ratio, which explains that they
50.00
40.00
30.00
20.00
10.00
0.00
2019 2018 2017 2016
Profitability Ratio
Profitability ratios measure the relationship a business handles between its expenses
and profits gained by the efficient use of its assets. The Return-On-Equity (ROE) of the
13
company indicates how much after-tax profit a corporation receives in comparison with the
total sum of shareholder equity recorded on the balance sheet (Nasdaq, 2020). Cipla has
reported the highest ROE among its opponents, which suggests that it can better generate
profits with new investments, providing a sense of how effectively the business manages it's
20.00
15.00
10.00
5.00
0.00
2019 2018 2017 2016
10
0
2019 2018 2017 2016
ROA discusses how successful an organization is in using its assets to produce income
(Gallo, 2016, para. 5). Cipla's ROA improved proportionately from 2018 to 2019, by 6.17
14
percent compared to 8.67 percent of Dr. Reddy, which indicates that the company is earning
1.00
0.80
0.60
0.40
0.20
0.00
2019 2018 2017 2016
companies use their assets to produce revenue. Usually, the ATR is calculated on an annual
basis. The higher the ATR, the better the company performs, as higher ratios mean high sales.
(Hayes, 2020, p. 1). Pharmaceutical companies have relatively very high asset reserves, but
they have a comparatively smaller sales share because of competitive business and, thus, a
lower ATR. Cipla and Dr. Reddy were having 0.85 and 0.88 ATR in 2019, which means that
slowly turn their assets into sales, whereas Sun Pharma turnover may indicate that the pharma
company was experiencing slow sales or holding obsolete inventory. The firm collection time
25.00
20.00
15.00
10.00
5.00
0.00
2019 2018 2017 2016
receives in each product sold. When a corporation makes more money per sale, it has a
higher profit margin per transaction. The Gross-Profit-Margin (GPM) and the Net-Profit-
Margin (NPM) are two different profitability indicators used in determining the financial
stability and overall health of a business. A high GPM means that a corporation is effectively
generating profits over and above its expenses. Cipla's GPM showed an upward trend since
2017 and was just 10.75 percent, while its competitor Sun Pharma had a 46% higher PM
figure, which is not a positive sign for Cipla. The NPM is a ratio of the net income to the
revenue of a company; it represents how much each dollar of revenue is income. Net
into increased profitability. Lupin has achieved lower NPM in 2019 of 3.62% compared to
Dr. Reddy, who has 12.62% of net profits, whereas Cipla NPM has been remarkably constant
since 2018, which shows that pharma market is very competitive in India. Analysts and
investors generally use both GPM and NPM to gauge the efficiency of the company 's
management in making profit relative to the cost of developing their products and services.
(Maverick, 2020, p. 1)
16
20.00
15.00
10.00
5.00
0.00
2019 2018 2017 2016
Altman-Z Score
Using the results of Altman-Z, which has been a reliable method of predicting
bankruptcy since it was developed in 1967, gives a snapshot of Cipla and its competitor's
position on the market. It uses profitability, liquidity, leverage, solvency, and operations to
Altman Z-Score
8
0
Cipla Limited Sun Pharmaceutical Dr Reddys Lupin Ltd.
Dr. Reddy has the highest Altman Z-Scores of 6.95, followed by Sun Pharma of 6.68
and Cipla of 6.52. That states that all three firms are at least risk of going bankrupt; however,
Lupin Ltd Altman Z-Score is 3.78, which means that the business is also most likely to be
secure based on financial data and there is no possibility of either company going bankrupt as
17
all the companies are in safe zone. Pharmaceuticals Investors use Altman Z-scores to
determine whether to buy or sell a stock if they are worried about the underlying financial
strength of the business. Investors consider buying a stock if its Altman Z-Score value is
closer to 3 and above and sell or shortens a stock if the value is closer to 1.8. Cipla, Dr.
Reddy and Sun Pharma will have the upper hand in the industry as their Altman Z-Score
Cipla's overall financial performance looks brilliant, as the company's liquidity and
operating efficiency are on the higher side. Cipla also has considerable positive working
capital, which shows that it can spend and expand and has grown in recent years. The
company has a high percentage of loyal customers who pay their debts timely, as
demonstrated by its high receivable turnover ratio, and the firm has the highest overall
recovery rate among its rivals, which gives the company a competitive advantage. Cipla has
enough cash to maintain its current obligations, and the current debt-to-total
assets ratio shows that they are profitable enough to pay a return on their investment. Cipla's
profitability looks very strong, despite the competitive pharmaceutical industry in India.
Higher ROE and ROA indicate that the company is making more money on less spending,
which is a good indication with improved gross profit and net profit margins in recent years.
The only issue that a company has to concentrate on would be that they have a very high
inventory ratio, which means that a company holds a high amount of cash and uses their
existing assets inefficiently, which needs change. They do need to focus on turning their
unsold inventory into sales by decreasing their inventory period because higher inventory
turnover in the healthcare market is safer as inventories are the least liquid source of assets
and are a critical factor in the success of the pharmaceutical business. Its debt-coverage cash
is weak and needs to be focused so that it can fulfil its financial obligations by using the
18
existing operating cash flow. Also, Ciplas' Altman-Z score shows that the chances of a
company going bankrupt over the next two years are minimal.
19
References
https://www.accountingtools.com/articles/2017/5/5/debt-to-assets-ratio
https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios
https://www.brandindiapharma.in/pharmaceutical-companies-india/cipla-
pharmaceuticals
literacy.com/financial-concepts/days-in-inventory/
Assets America (2020). Cash coverage ratio, complete guide. Assets America Inc.
https://assetsamerica.com/cash-coverage-ratio-guide/
https://corporatefinanceinstitute.com/resources/knowledge/finance/current-ratio-
formula/
https://corporatefinanceinstitute.com/resources/knowledge/modeling/working-capital-
formula/
https://www.cipla.com/about-us
technology.com/features/pharmaceutical-manufacturing-companies-in-india/
20
Fuhrmann, R. (2019, June 24). How to calculate return on equity – ROE. Investopedia.
https://www.investopedia.com/ask/answers/070914/how-do-you-calculate-return-
equity-roe.asp
Gallo, A. (2016, April 4). A refresher on return on assets and return on equity. Harvard
on-equity
https://www.investopedia.com/terms/a/assetturnover.asp
Kennedy, J. (2019, September 9). The link between drug prices and research on the next
prices-and-research-next-generation-cures
https://courses.lumenlearning.com/boundless-accounting/chapter/reporting-and-
analyzing-current-liabilities/
Maverick, J. (2020, April 4). The difference between gross profit margin and net profit
difference-between-gross-profit-margin-and-net-profit-margin.asp#:~:text=Gross
%20profit%20margin%20is%20shown%20as%20a%20percentage%20while
%20gross,profit%20divided%20by%20total%20revenues.
https://www.nasdaq.com/glossary/r/return-on-equity
Nolet, M. (2017, November 13). What is the average collection period ratio? Bill Gosling
Outsourcing. https://www.billgosling.com/blog/what-is-the-average-collection-
period-ratio
21
Sullivan, T. (2019, March 21). A tough road: Cost to develop one new drug is $2.6 billion;
Approval rate for drugs entering clinical development is less than 12%. Policy &
Medicine. https://www.policymed.com/2014/12/a-tough-road-cost-to-develop-one-
new-drug-is-26-billion-approval-rate-for-drugs-entering-clinical-de.html
https://wealthyeducation.com/cash-debt-coverage-ratio/
Wood. M, (2020, January 30). Accounts receivable turnover: formula, definition, examples.
Fundera.https://www.fundera.com/blog/accounts-receivable-turnover-ratio
22
Appendix
Liquidity Ratio
Current Ratio 2019 2018 2017 2016
Cipla Limited 3.29 2.82 2.61 1.14
Sun Pharmaceutical Industries Ltd 1.79 1.59 1.84 2.28
Dr. Reddys Laboratories Ltd. 1.88 1.52 1.15 1.86
Lupin Ltd. 2.26 2.40 1.95 1.95
Working Capital 2019 2018 2017 2016
Cipla Limited 8655 6982 5431 1065
Sun Pharmaceutical Industries Ltd 13730 11772 15067 16797
Dr. Reddys Laboratories Ltd. 5213 3605 1264 5447
Lupin Ltd. 7724 7114 5832 4826
Cash Current Debt Coverage 2019 2018 2017
Cipla Limited 0.44 0.41 0.43
Sun Pharmaceutical Industries Ltd 0.12 0.21 0.46
Dr. Reddys Laboratories Ltd. 0.24 0.29 0.51
Lupin Ltd. 0.30 0.31 0.74
Quick Ratio 2019 2018 2017 2016
Cipla Limited 2.24 1.77 1.58 0.65
Sun Pharmaceutical Industries Ltd 1.34 1.25 1.46 1.79
Dr. Reddys Laboratories Ltd. 1.31 1.10 0.81 1.46
Lupin Ltd. 1.63 1.68 1.36 1.31
Inventory Turnover 2019 2018 2017 2016
Cipla Limited 4.13 3.75 4.13 3.62
Sun Pharmaceutical Industries Ltd 3.69 3.84 4.58 4.44
Dr. Reddys Laboratories Ltd. 4.60 4.91 4.98 6.09
Lupin Ltd. 4.36 4.31 4.77 4.32
Receivables Turnover 2019 2018 2017 2016
Cipla Limited 4.51 5.35 5.85 6.33
Sun Pharmaceutical Industries Ltd 3.48 3.52 4.48 4.71
Dr. Reddys Laboratories Ltd. 3.84 3.64 3.56 3.79
Lupin Ltd. 3.23 3.33 3.95 3.92
Average Collection Period 2019 2018 2017 2016
Cipla Limited 81 68 62 58
Sun Pharmaceutical Industries Ltd 105 104 81 77
Dr. Reddys Laboratories Ltd. 95 100 103 96
Lupin Ltd. 113 110 92 93
Days In Inventory 2019 2018 2017 2016
Cipla Limited 88 97 88 101
Sun Pharmaceutical Industries Ltd 99 95 80 82
Dr. Reddys Laboratories Ltd. 79 74 73 60
Lupin Ltd. 84 85 77 84
Solvency Ratio
Debt-To-Total Assets 2019 2018 2017 2016
Cipla Limited 0.36 0.36 0.38 0.44
23
Profitability
Return On Equity 2019 2018 2017 2016
Cipla Limited 10.17 9.91 8.02 11.80
Sun Pharmaceutical Industries Ltd 6.43 5.67 19.00 13.78
Dr. Reddys Laboratories Ltd. 0.24 0.40 0.40 0.27
Lupin Ltd. 4.47 1.85 18.94 20.25
Return On Assets 2019 2018 2017 2016
Cipla Limited 6.37 6.17 4.78 6.43
Sun Pharmaceutical Industries Ltd 4.12 3.36 11.34 8.18
Dr. Reddys Laboratories Ltd. 8.67 4.19 5.92 10.45
Lupin Ltd. 2.20 0.95 9.61 9.99
Asset Turnover 2019 2018 2017 2016
Cipla Limited 0.85 0.85 0.84 0.93
Sun Pharmaceutical Industries Ltd 0.55 0.53 0.67 0.70
Dr. Reddys Laboratories Ltd. 0.88 0.82 0.86 1.06
Lupin Ltd. 0.79 0.75 0.87 1.02
Gross Profit Margin 2019 2018 2017 2016
Cipla Limited 10.82 9.92 8.00 12.51
Sun Pharmaceutical Industries Ltd 15.66 15.55 28.18 24.99
Dr. Reddys Laboratories Ltd. 13.22 8.92 10.18 16.99
Lupin Ltd. 10.75 13.04 20.46 22.63
Profit Margin 2019 2018 2017 2016
Cipla Limited 9.33 9.30 6.99 9.86
Sun Pharmaceutical Industries Ltd 9.17 8.18 22.24 15.95
Dr. Reddys Laboratories Ltd. 12.62 6.62 9.10 13.68
Lupin Ltd. 3.62 1.59 14.72 15.99
Earnings Per Share 2019 2018 2017 2016
Cipla Limited 18.97 17.53 12.52 16.93
24
Cipla Sun
Altman Z-Score Dr. Reddys Lupin Ltd.
Limited Pharmaceutical
Working Capital 8655 13730 5213 7724
Total Assets 23963 64694 22466 27949
Retained Earnings 10829 12037 9625 10707
EBIT 2248 4365 2381 1821
Market Value of Equity 42376 114940 46352 34666
Total Liabilities 8619 19971 8442 14160
Revenue 16839 30091 15786 17082
Factor
Cipla Limited
First Factor = 1.2 * ( 8655.12 / 23963.32 ) = 0.36
Second Factor = 1.4 * (10828.56 / 23963.32 ) = 0.45
Thrid Factor = 3.3 * (2247.57 / 23963.32 ) = 0.09
Fouth Factor = 0.6 * (42375.85 / 8619.07 ) = 4.91
Fifth Factor = 0.999 * (16838.98 / 23963.32 ) = 0.70
Altman Z-Score = 6.52
Sun Pharmaceutical
First Factor = 1.2 * ( 13729.57 / 64693.81 ) = 0.21
Second Factor = 1.4 * (12037 / 64693.81 ) = 0.18
Thrid Factor = 3.3 * (4365.45 / 64693.81 ) = 0.06
Fouth Factor = 0.6 * (114940.14 / 19971.21 ) = 5.75
Fifth Factor = 0.999 * (30091.4 / 64693.81 ) = 0.46
Altman Z-Score = 6.68
25
Dr. Reddys
First Factor = 1.2 * ( 5212.8 / 22465.6 ) = 0.23
Second Factor = 1.4 * (9624.7 / 22465.6 ) = 0.42
Thrid Factor = 3.3 * (2380.9 / 22465.6 ) = 0.10
Fouth Factor = 0.6 * (46352.32 / 8442 ) = 5.49
Fifth Factor = 0.999 * (15785.7 / 22465.6 ) = 0.70
Altman Z-Score = 6.95
Lupin Ltd.
First Factor = 1.2 * ( 7723.71 / 27949.37 ) = 0.27
Second Factor = 1.4 * (10706.73 / 27949.37 ) = 0.38
Thrid Factor = 3.3 * (1821.25 / 27949.37 ) = 0.065
Fouth Factor = 0.6 * (34665.54 / 14160.28 ) = 2.44
Fifth Factor = 0.999 * (17082.2 / 27949.37 ) = 0.61
Altman Z-Score = 3.78