Financial Reporting and Statement Analysis

Unit 8
Contemporary Case Study Analysis of
few Company Balance Sheets
Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

Introduction
This unit is designed to help learners in understanding how to analyse a balance sheet with key indicators. The unit analyses the liquidity
and solvency ratios of three major pharmaceutical companies.

Current ratio, quick ratio, debt to equity ratio and other important parameters have been calculated to understand the liquidity and
solvency conditions of all the three companies.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

Learning Objectives

At the completion of this unit, you will be able to:

• Describe the liquidity and solvency ratios used in balance sheet analysis
• Explain the procedures to conduct balance sheet analysis

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

Table of contents

S.No Details Page No.

1. Case Study 5
2. Balance Sheet of Three Companies 7
3. Ratio Analysis of Balance Sheets of LUPIN, CIPLA & Sun Pharmaceutical Ltd. for the Period 2017-18 11
3.1 - Current Ratio 12
3.2 - Quick Ratio (Acid Test Ratio) 13
3.3 - Working Capital 14
3.4 - Debt – Equity Ratio 15
4. Conclusion 18
5. Summary 19
6. References 20

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

1. Case Study
The growing demand for healthcare products and services and the current phase of the investment world make investing in
pharmaceutical stocks lucrative. However, pharmaceutical companies are exposed to the risk of losing market share in a short span of
time. They may face a sharp decline in the market demand when the same drug is available at cheaper prices. Pharmaceutical
companies spend a huge amount of money on research and development activities, which are considered as long-term financing
activities for the business.

Long testing procedures from the regulatory authorities, possible cancellation of drug productions and uncertainties always pose
challenges for the pharma companies. Generally, a pharmaceutical company performs better, when it has a series of new medicines to
be manufactured with high margin and market share. However, the drug company fails, when the drug loses its market share or when it
fails to produce the desired results on ailments. Hence, the analyst or banker should have a careful look at the financial reports of a
pharmaceutical company while granting loans and advances. In this case study, we will analyse the balance sheets of three major
pharmaceutical companies.

Imagine that you are an employee of a major private sector bank, which receives loan requests from three major pharmaceutical
companies. All companies have expansion plans and need a loan in a month’s time. You are happy because of the Significant loan
proposals from leading pharmaceutical players.

Further, you decide to analyse the loan proposals, systematically, using a few effective balance sheet analysis techniques. In this context,
you wish to do thorough homework before you analyse the balance sheets. So, you decide to quickly refresh your knowledge about the
balance sheet components and classify them under two important categories:

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

• Assets:

i. Current Assets

ii. Non-Current Assets

• Liabilities:

1. Current Liabilities

2. Non-Current Liabilities

Then you look for liquidity and solvency, which are the two critical aspects to be verified in a balance sheet. They give us a fair idea about
the financial health of a business.

• Liquidity Ratios Explain: How quickly the company can repay its short-term financial obligations.

• Solvency Ratios Explain:

i. The company’s ability to meet long-term debt obligations.

ii. The company’s cash flow efficiency to meet all the financial obligations.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

2. Balance Sheet of Three Companies

In this case, we will analyse the balance sheets of the following companies:
• CIPLA
• LUPIN
• SUN PHARMA

in Rs. Cr. (2018 )

Balance Sheet of Three Companies

LUPIN CIPLA SUN PHARMA

EQUITIES AND LIABILITIES
SHAREHOLDER'S FUNDS
Equity Share Capital 90.42 161.02 239.93
Total Share Capital 90.42 161.02 239.93
Reserves and Surplus 15,694.54 13952.5 19,530.17
Total Reserves and Surplus 15,694.54 13952.5 19,530.17
Total Shareholders’ Funds 15,784.96 14113.52 19,770.10

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

in Rs. Cr. (2018 )

Balance Sheet of Three Companies

LUPIN CIPLA SUN PHARMA

NON-CURRENT LIABILITIES
Long Term Borrowings 4.08 0 1,564.69
Deferred Tax Liabilities [Net] 258.33 0 0
Other Long-Term Liabilities 91.13 125.3 0.91
Long Term Provisions 206.29 124.45 345.18
Total Non-Current Liabilities 559.83 249.75 1,910.78
CURRENT LIABILITIES
Short Term Borrowings 8.21 174.43 5,213.81
Trade Payables 1,427.87 1580.02 2,489.94
Other Current Liabilities 753.09 579.07 2,114.25
Short Term Provisions 147.04 398.18 2,425.49
Total Current Liabilities 2,336.21 2731.7 12,243.49
Total Capital and Liabilities 18,681.00 17094.97 33,924.37
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

in Rs. Cr. (2018 )

Balance Sheet of Three Companies

LUPIN CIPLA SUN PHARMA

ASSETS
NON-CURRENT ASSETS
Tangible Assets 3,027.23 4158.37 4,375.65
Intangible Assets 313.43 161.66 182.88
Capital Work-In-Progress 849.99 435.28 830.39
Intangible Assets Under Development 321.05 27.32 43.74
Other assets 0 0.32 5,432.66
Fixed Assets 4,511.70 4782.95 18,310.50
Non-Current Investments 5,130.26 3597.24 751.7
Long Term Loans and Advances 61.69 46.8 3.42
Other Non-Current Assets 259.9 233.13 2,518.57
Total Non-Current Assets 9,963.55 496.68 27,016.85
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

in Rs. Cr. (2018 )

Balance Sheet of Three Companies

LUPIN CIPLA SUN PHARMA

CURRENT ASSETS

Current Investments 232.59 1039.74 44.76

Inventories 2,180.02 3037.98 2,135.64

Trade Receivables 4,946.31 2336.32 2,846.96

Cash and Cash Equivalents 110.96 227.53 155.27

Short Term Loans and Advances 17.63 17.74 52.05

Other Current Assets 1,229.94 1278.86 1,672.84

Total Current Assets 8,717.45 7938.17 6,907.52

Total Assets 18,681.00 17094.97 33,924.37

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

3. Ratio Analysis of Balance Sheets of LUPIN, CIPLA & Sun Pharmaceutical Ltd. for the Period 2017-18
Bank lending procedures denote the rules and guiding principle adopted by a bank or a financial institution to make its lending process
methodical and disciplined. Banks deal with other’s money.
The banks borrow money from depositors at lower interest and lend money at comparatively higher interest. The difference is the margin
and the fundamental basis for banking business. It is important for the banks to obtain deposits and utilize them in the most profitable
ways. Even a single mistake in a lending process may result in the loss of precious financial resources.
The Indian banking segment has no shortage of defaulters. The industry has witnessed a good number of wilful defaulters who declared
themselves innocent when they have the ability to pay.
Nirav Modi and Vijay Mallya have taught tough lessons for Indian banks by cheating thousands of crores. Considering the track records
of these willful defaulters and growing NPAs the bankers must evaluate the intrinsic worth of the borrowers with due care.
Being younger, you must examine the financial reports with the help of liquidity ratios, solvency ratios, profitability ratios and turnover
ratios. Liquidity ratios help us in understanding how quickly the company can pay off its short-term obligations. Solvency ratio explains
the extent to which assets cover commitments for future payments, the liabilities.
Profitability ratios explain the capacity of the company in generating revenue. Finally, the turnover ratios will help us in understanding the
receivables and debts in the business. In this unit let us understand how banker tests the liquidity and solvency conditions of a company.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

3.1 Current Ratio

Current Ratio = (Current Assets) / (Current Liabilities)
Current Ratio for LUPIN = 8,717.45 / 2,336.21 = 3.73
Current Ratio for CIPLA = 7938.17 / 2731.7 = 2.90
Current Ratio for SUN PHARMA = 6,907.52 / 12,243.49 = 0.56
While calculating current ratios, we exactly try to answer the question - does the business have enough liquidity to meet its short-term
financial obligations? The generally accepted current ratio is 2:1 which means the company should have two current assets for every
liability it owes.
In LUPIN’s case, the current ratio is more than two (3.73), which shows that the liquidity condition of the company is good. In fact, it
shows that the company has excess liquidity in the system. When a company has excess liquidity, it blocks precious financial resources.
The company simply cannot use these resources to invest in profitable business opportunities. The level of requirement again depends
on the business cycle. Business cycles show how quickly the company can convert invested financial resources back into cash. Since
the business cycle of pharmaceutical companies is comparatively longer, there is no point in sparing excess financial resources to take
care of current liabilities. Excess liquidity in the company gives the unfavourable picture to investors and lenders.
Further, the current ratio of CIPLA is close to three (2.90) which is not a good sign. Though it looks like a healthy liquidity ratio, the
company needs to maintain liquidity ratio at 2:1 and divert rest of the amount for profitable business opportunities. Keeping track of
current ratio is utmost important for a pharmaceutical company. If the company does not have enough current assets to pay its short-term
obligations, the company may default on the borrowings. This directly impacts the goodwill of the business.
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

Though the current ratio of CIPLA is little excessive than the industry requirements, the ratio is still under control. There is nothing for the
investors and lenders to panic about the current liquidity condition.
The current ratio of Sun Pharmaceutical Ltd. is less than one (0.56), which is not a good sign for the business. It doesn’t mean that the
company may go bankrupt overnight, but it is something that the company should look at immediately.
The reason for this unhealthy liquidity ratio may be:
• The company was focusing on the repayment of its long-term debts.
• The company was converting its current assets to long-term assets.
• The company was spending a substantial amount on R&D activities.
• The company’s operating cycle would be in trouble.
3.2 Quick Ratio (Acid Test Ratio)
The quick ratio is a ratio calculated to know the liquidity condition of the business. In other words, a company can use its cash and near
cash assets to repay its short-term financial obligations. The quick ratio can be calculated by adding cash and cash equivalents, account
receivables and short-term investments.
Another way to calculate the quick ratio is by excluding inventory from current assets and then dividing by current liabilities. However, a
banker can calculate the quick ratio of a company using the equation below:
Quick Ratio = (Current Assets - Inventory+Prepaymens)) / (Current Liabilities)
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

Quick Ratio:
UPIN 8717.45 – (2180.02 + 17.63)/2336.21 =2.79
CIPLA 7938.17 – (3037.98 + 17.74)/2731.7 = 1.78
SUN PHARMA 6907.52 – (2135.64 + 52.05)/12243.49 = 0.39
From the above calculations, the quick ratio of Sun Pharmaceutical Ltd., (which is less than one (0.39)) shows that the company is facing
a serious shortage of quick assets to repay its short-term obligations. So, bankers or lenders must be careful while dealing with Sun
Pharmaceutical Ltd.
3.3 Working Capital
Working capital is an important measure of understanding the financial performance of a company. It explains whether the company has
excess current assets over its current liabilities. The working capital must be positive. It is calculated as shown below:
Working Capital = Current assets – Current liabilities
For LUPIN 8717.45-2336.21 = 6381.24
For CIPLA 7938.17-2731.7 = 5206.47
For SUN PHARMA 6,907.52-12,243.49 = -5335.97

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

The above analysis explains that LUPIN possesses enough working capital compared to its peers. However, holding too much cash or
cash equivalents is not good for the company. The company should strike the right balance in maintaining working capital. The level of
working capital possessed by Sun Pharmaceutical Ltd. is subject to concern. The management must focus on improving the liquidity
condition of the business.
3.4 Debt – Equity Ratio
It is a leverage ratio, which explains the proportion of debt and equity in the capital structure of a company. In other words, the degree to
which the assets of the company are financed by other sources.
The debt-equity ratio can be calculated using the equation below:
Debt Equity Ratio = (The total value of debt) / (Shareholders Equity)
Debt Equity Ratio for three companies:
The Total value of Debt = Short-term borrowings + Long-term Borrowings
• LUPIN = 8.21 + 4.08 + 91.13 / 15,784.96 = 0.00655
• CIPLA = 174.43 + 125.3 / 14113.52 = 0.0212
• SUN PHARMA = 5,213.81 + 1464.69 + 0.91 / 19,770.10 = 0.3378
From the above results, the D/E ratios of all three companies fall below one, which indicates that the credit default risk for all three
companies is lower. None of the three companies has a D/E ratio closer to one.
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

This clearly explains that only a few assets are financed by the debt component. An increasing trend of D/E ratio is an alarming signal
and must be given higher importance. Because the chances of bankruptcy are greater with a D/E ratio that is trending upwards. The
higher the portion of equity in comparison to debt in the capital structure indicates that the company is financially more autonomous. To
identify such signals, a banker must verify the D/E ratio of a company for at least five consecutive years. Out of the three companies, the
D/E ratio of Sun Pharma is slightly better than the other two companies.
General Researches on Balance Sheet
It is not tough to analyse and understand the balance sheet of a business. Other than ratio analysis, some of the general procedures
should be carried out to understand more on the balance sheet of a business.
The procedures are:
• The basic procedure contains adding up paid up equity share capital and liabilities. The total must be equal to the sum of total assets.
If the amounts are tallied, differentiate the number of total assets with the total value of liabilities. This evaluation doesn’t include the
value of issued capital in liabilities side. In case the total value of assets exceeds the total value of liabilities, the financial condition of
the business may be good.
• Check whether the business has more unsecured liabilities. Higher the unsecured loans, safer the business.
• Check the ratio between the amount spent on research and the subsequent returns.
• Check the debt ratio by dividing total assets by total liabilities. A lower debt ratio indicates better performance by the company.
• Check the inventory turnover ratio.
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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

• Check the company’s goodwill, credit rating, potential business projects etc.
• Check whether the owner’s equity is higher than the debt components. Higher owner’s equity indicates that the company is financially
autonomous hence, lesser risk of insolvency.
• Check how the working capital requirements have been financed by the company. If the company is financing working capital
requirements by using liabilities that indicates negative treasury. If the company is looking for a bank loan to take care of liquid
liabilities that indicates the business is running the risk of liquidity.
• Be careful with the business firms with negative working capital and excess working capital. Both are running the risk of lesser
liquidity and higher liquidity respectively.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

4. Conclusion
From the above analysis, CIPLA and LUPIN have an excellent liquidity condition.
These companies have fewer chances to default on their short-term obligations. The liquidity condition of these companies is more than
two, which is an excess requirement in the industry. However, excess liquidity may block the precious financial resources of the company.
Sun Pharma has less liquidity, which is a cause for concern. The company must focus on its short-term solvency. However, the debt-
equity ratio of Sun Pharma is better than that of CIPLA and LUPIN.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

5. Summary
Here are the key points what we learnt in this unit.
• Balance sheet analysis is a basic step done before accepting loan proposal.
• Liquidity ratios are calculated to gauge the short-term financial conditions of a company.
• Solvency ratios are calculated to analyse the long-term solvency of a company.

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Unit 8 - Contemporary Case Study Analysis of Few Company Balance Sheets

6. References
1. Narayanaswamy, R. (2005). Financial accounting a managerial perspective. New Delhi: Prentice-Hall of India.
2. S. Maheshwari - S. Maheshwari - D. Maheshwari – Vikas (2010) Financial Accounting. Publishing House Pvt. Ltd.
3. Rawat, D. S. (2013). Students' guide to accounting standards. New Delhi: Taxmann Allied Services.
4. Tulsian, P. C. (2010). Tulsian's financial accounting. S.l.: S Chand & Co.

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