ratios analysis

INTRODUCTION

Finance is so indispensable today that it is rightly said to be the lifeblood of an enterprise

without adequate finance, no enterprise can possible accomplish its objectives.

DITM COLLEGE “A study on Financial Performance analysis of Alkem Laboratories Limited.”

“Business finance is that business activity which is concerned with the acquisition

and conservation of capital funds in meeting the financial needs and overall objectives of

the business enterprise.”

-Wheeler

Meaning:

The term ‘business finance’ connotes finance of business activities. It is an activity or a

process, which is concerned with acquisition and use of funds and distribution of profits

by a business firm. Thus, business actually deals with financial planning, acquisition of

funds, use, and allocation of funds and financial controls.

“Corporate finance deals with the financial problems of corporate enterprise. These

problems include the financial aspects of the promotion of new enterprise and their

administration during early development, the accounting problems connected with the

distinction between capital and income, the administrative questions created by growth

and expansion, and finally, the financial adjustments required for the bolstering up or

rehabilitation or a corporation which has come into financial difficulties.”

Encyclopedia of Social Science


To sum up in simple words, we can say that financial management as practiced by

corporate firms can be called corporation finance or business finance. Finance function

has become so important that it has given birth to Financial Management as a separate

subject. It deals with finding out various sources for raising funds for the firm. The

sources must be suitable and economical for the needs of the business. The most

appropriate use of such funds also forms a part of financial management.

Need & importance of business finance:

Finance is life-blood of business. It is one of the basic requirements of a

business. The plans of a business concern would remain mere dreams unless

adequate finance is available to convert them (i.e., the plans) into reality.A

business requires finance at every stage. For example, finance is needed for

bringing a business into existence, (i.e. for starting a business). Finance is

required for financing the fixed capital (i.e. for financing the acquisition of fixed

assets like lands, buildings, plant and machinery, patents etc) Finance is needed

for expansion and modernization of business. Finance is also needed for

financing the working capital (i.e., for financing the acquisition of raw materials,

finished goods, etc., and for the payment of wages and the other day-to-day

running of expenses of the business.

E SCOPE OF FINANCIAL MANAGEMENT : e lands, bui


To expand its liquidation.

To minimize the risk.

It helps in long term and short term investment decisions.

Maximum yield.

Cash receivables.

Liquidity & profitability.

Optimal financing mix.

Make- up of capitalization.

Maximize earnings.

Economic improvements.


FINANCIAL GOALS:

Profit maximization:

Profit earning is the main aim of every economic activity. A business being an

economic institution must earn profit to cover its costs and provide funds for the

growth. No business can survive without earning profit. Profit is a measure of

efficiency of a business enterprise. Profits also serve as a protection against risks,

which cannot be ensured. The accumulated profits enable a business to face risk like

fall in price; competition in other units, adverse government policies etc. thus profit

maximization is concerned as the main objective of the business.

Wealth Maximization:

Wealth maximization is the appropriate objective of an enterprise. Financial

theory asserts that wealth maximization is the single substitute for a stockholder’s utility.

When the firm maximizes the stockholder’s wealth, the individual stockholder can use

this wealth to maximize his individual utility. It means that by maximizing stockholder’s

wealth the firm is operating consistently towards maximizing shareholder’s utility.


FINANCIAL PERFORMANCE

Financial performance is the process of analyzing the performance of financial

activities which can be done by analyzing the financial statements and other financial

reports to know financial strength and weakness of the concern as will as financial

position of the company either by comparing financial statement with previous year of on

the basis of standards prescribed by the various methods of analyzing the financial

statements.

Objective of Financial Performance:

To determine the profitability or earning capacity of the concern.

To judge the financial position (i.e. the liquidity or short-term solvency, and the

long-term solvency) of the concern.

To know the trends of the business, i.e. .the trends in regard to purchase, sales,

profits, liquidity, solvency, etc.

To measure the financial performance of the concern.

To judge managerial performance and efficiency.


To make inter-firm comparison (i.e. comparison of one department of a firm with

other departments of the same firm)

IMPORTANCE OF FINANCIAL PERFORMANCE:

The importance of financial performance is:

Importance of Financial Performance to shareholders:

Financial analysis is of much importance to shareholders or owners of the business

enterprise. It helps the owners of the business to know

The present and future profitability of their concern.

The earning per share and the dividend per share, which have. An impact on the

market prices of their shareholders.

The financial position of the concern.

Importance of Financial Performance to management :

Financial analysis is useful to prospective investors who would like to know the

earning capacity and the financial position of the enterprise before investing their funds

on the shares of the enterprise. Financial analysis helps the prospective investors to know.

What will be the rate of return on their investments?


Whether the concern would be in a position repay its debts.

What will be the future prospects of the concern?

Importance of Financial Performance to Banks and other financial

Institutions.

Whether the concern has liquidity or short-term solvency to pay interest on advances,

and to repay the short-term advances.

Whether the concern has long-term solvency to pay the long-term debts on maturity.

Whether the concern has sufficient assets to offer as security for advances.

Introduction to Ratio Analysis

A ratio : Is the mathematical relationship between two quantities in form of fraction

or ratio.

Ratio analysis: is essentially concerned with the calculation of relationships which

after proper identification and interpretation may provide information about the

operations and state of affairs of a business enterprise.

The analysis is used to provide indicators of past performance in terms of critical

success factors of a business. This assistance in decision-making reduces reliance on

guesswork and intuition and establishes a basis for sound judgement.


Note: A ratio on its own has little or no meaning at all.

Ratios are highly important profit tools in financial analysis that help financial analysts

implement plans that improve profitability, liquidity, financial structure, reordering,

leverage, and interest coverage. Although ratios report mostly on past performances, they

can be predictive too, and provide lead indications of potential problem areas. Ratio

analysis is primarily used to compare a company's financial figures over a period of time,

a method sometimes called trend analysis. Through trend analysis, you can identify

trends, good and bad, and adjust your business practices accordingly. You can also see

how your ratios stack up against other businesses, both in and out of your industry.

Use and Significance of Ratio Analysis

1) Managerial Uses of Ratio Analysis

a) Helps in decision making.

b) Helps in financial forecasting.

c) Helps in communicating.

d) Helps in co-coordination.

e) Helps in control.

f) Other uses.


2) Utility to Shareholders/Investors

3) Utility to Creditors.

4) Utility to Employees.

5) Utility to Government.

Limitations of Ratio Analysis

1. Quantitative only.

2. Standards of comparison imperfect.

3. Inherent limitation of accounting.

4. Change of accounting procedure.

5. Absolute figures distortive.

6. Personal Bias.

7. Price level changes.

8. Window dressing.


Classification of Ratios :Ratios may be classified in a number of ways

keeping in view the particular purpose.

1) Liquidity Ratios

a) Current Ratio

b) Quick Ratio

c) Absolute Liquid Ratio

2) Long-term Solvency Ratio

a) Debt-Equity Ratio

b) Proprietary Ratio

c) Solvency Ratio

d) Fixed Assets to Net Worth Ratio

e) Current Assets to Net Worth Ratio

3) Turnover or Activity Ratio

a) Stock Turnover Ratio


b) Debtors Turnover Ratio

c) Creditors Turnover Ratio

d) Cash Turnover Ratio

e) Working Capital Turnover Ratio

f) Fixed Assets Turnover Ratio

g) Current Assets Turnover Ratio

h) Total Assets Turnover Ratio

i) Sales to Net Worth Ratio

4) Profitability Ratios

a) Gross Profit Ratio

b) Net Profit Ratio

c) Cash Profit Ratio

d) Operating Profit ratio

e) Total Assets Ratio

f) Return on Equity


Introduction to the Company

Company History

Alkem Laboratories Ltd. was founded in 1974 by one of India's respected

entrepreneurs, ShriSamprada Singh. In the last three and a half decades of its operations,

Alkem has successfully emerged as a leading domestic Pharma major in and is rapidly

multiplying its international footprint.

Alkem has carved out for itself, a special reputation in the field of sales and marketing.

In India, the strength of Alkem's sales and marketing, along with its expertise in brand

buildings are recognized widely and are considered as amongst the very best. Some of

the biggest brands in the Indian Pharma market are the Alkem brands. The Alkem

product portfolio encompasses a wide spectrum of therapeutic groups, ranging from Anti

bacterials, NSAIDS, Gastro Enterology products, Gynaecology products, CNS and CVS

products along with an impressive oncology range. Alkem has shown remarkable

success with new products and converted several of them into market leaders. For a


company with patented new molecules, seeking sales and marketing partners in India,

Alkem emerges as the ideal Indian partner.

Alkem also has to its credit, world class manufacturing facilities approved by several

regulatory authorities. Alkem's formulation facilities for cephalosporins (oral & sterile),

Penicillins (oral & sterile) and General products have been approved by the

regulatory authorities of US FDA, Europe, South Africa and Australia. Thus, Alkem

offers a plethora of product opportunities for companies interested in sourcing products

from India.

Alkem is a financially secure company. Alkem has been conferred for two

consecutive years (2007 and 2008) the P1+ RATING by CRISIL INDIA (SUBSIDIARY

OF STANDARD AND POOR), the best possible rating for a short term debt.

Research and development are its major focus areas and Alkem has undertaken

several initiatives and activities in order to continue a steady process of enhancement in

these areas. Alkem possesses its own CRO, Phoenix Bio Pharma Research Centre in

Mumbai, an unit approved by ANVISA,Brazil


About the founder

ShriSamprada Singh is one of the most respected and successful entrepreneurs of the

Indian Pharmaceutical industry. Currently, ShriSamprada Singh is the Chairman of the

Alkem Group of Companies which produces a turnover of US $ 250 mio. ShriSamprada

Singh's success is noteworthy since he started his enterprise from scratch and through

tremendous dynamism, vision and leadership, he has managed to turn it into a premier

company in the Indian Pharmaceutical Industry. Alkem Laboratories Limited, is today

the No.6 pharmaceutical company in India. In fact, Alkems products are supplied to

approximately 30 countries, worldwide. The credit for this huge success is to be given to

none other than ShriSamprada Singh for seeing Alkem through its various stages of

progress Today,Alkem is a huge corporate house and a name to reckon with in the Indian

pharmaceutical industry.

SHRI SAMPRADA SINGH was born into a family of agriculturists in Bihar. During

his high school days, India's struggle for independence had intensified and he was


instinctively drawn into this historic cataclysm. Mr. Singh drew his inspiration from his

uncle, a freedom fighter, and went onto eschew foreign textiles and choose Khadi, a

symbol of patriotism even at the tender age of 13. Mr. Singh also took an active plunge

in the 1942 QUIT INDIA Movement. His intense patriotism made him decide at that

stage to contribute significantly to his beloved motherland.

Mr. Singh entered Gaya College, Patna University in 1946 to specialize in

Commerce. During his four years as an undergraduate, Mr. Singh exhibited his

dynamism through various student activities

It was understood that after his B.Com. Degree from Patna University in 1950, Mr.

Singh would join his family activities in the agricultural sector and introduce advanced

and modern farming techniques. However, successive draughts in the State of Bihar from

1951 onwards, compelled him to look elsewhere to nourish his entrepreneurial zeal. In

1953, Mr. Singh made a small beginning as a Retail Chemist. In 1960, he started a

business of Pharmaceutical distribution in Patna under the banner of 'MagadhPharma'.

Due to his sincerity, hard work and affablenature, Mr. Singh was able to acquire the

distributorship of several renowned multinationals and soon, successfully built up a

sound distribution network in the eastern region of India. Realizing the limitations of

expanding in the distribution business, in the year 1972, Mr. Singh became the founder

Director of a Bombay based Pharmaceutical company.


Later, Mr. Singh went on to launch a new company of his own, under the name of

ALKEM LABORATORIES LIMITED in 1973-74. The sole objective of this venture

was to serve his countrymen with high quality and affordable medicines. His brother,

Mr. B. N. Singh, a post graduate in Political Science, joined him in this new venture as a

Director.

Under the able leadership of Mr.Samprada Singh, ALKEM has shown a spectacular

growth. Today, Alkem enjoys a place of distinct honour and respect in the Indian

Pharmaceutical Sector.

In the year 2004, Mr.Samprada Singh was honoured with the prestigious "Life Time

Contribution Award" by the Express Pharma Excellence Awards, which is reckoned by

many as the Oscar of the Indian Pharmaceutical Industry.

In June 2002, Mr. Singh received yet another award. The 'Medicine Update Lifetime

Achievement - Health Care Award' went onto honour his achievement in the

pharmaceutical industry as one of it's most successful entrepreneurs

In October 2000, Mr. Singh was conferred upon with the 'Life Time Achievement

Award' by Pharma Business and Technology, one of the most distinguished and

respected entrepreneurs of the Indian Pharmaceutical industry.


Managing director

Mr.BasudeoNarain Singh is the Managing Director of Alkem Laboratories ltd. He joined

Mr.Samprada Singh in establishing Alkem Laboratories in 1974 and has since been

integral to the evolution of the organization in every facet.

Mr. B N Singh, a post graduate in political science, has nurtured the organization in

its early days and with dynamic vision and strategic leadership has professionally

managed Alkem's progress in becoming one the leading Pharma companies in India

Mr. B N Singh is the president of Indian Drug Manufacturer's association (IDMA),

the largest Pharma Association in India (with 650 members) representing large, medium

and small scale units manufacturing pharmaceutical dosage forms, active ingredients,

intermediates, biological, vaccines and herbal drugs. In this capacity, Mr Singh leads the


IDMA activities which play an important role in shaping the Indian Pharma Industry's

future in becoming a global player.

Mr. B N Singh, in addition to the professional commitments, is also actively involved

in various capacities with many charitable organizations, prominent among them are:

President - Bihar Association, Mumbai

Indian Red Cross Society

Association for Blind, Mumbai

Research & Development

Alkem has reinforced its focus on R & D and has substantially scaled up on its

investments to build its capabilities in all the areas of generic research as a short to

medium term strategy. Generic drug development encompasses both small and large

molecules. Alkem strongly believes that there are attractive opportunities in the highly

competitive global generic space, not only in vanilla generics but also in value added and

difficult to develop complex generics. The business focus is backed with the building up

of captive manufacturing operations and of complying with the regulatory standards of

the advanced markets. Focus on the generics business strategy will provide the company

with a sustainable model to move up the value chain. Today, the company includes a

group of more than 200 R & D scientists, with performance driven credentials, in all the


disciplines of generic drug development, as their asset to steer forward in its current

aspirations.

Alkem's generic drug development meets the speed and quality attributes, as all the

elements of research have been conducted within the same campus, situated at Taloja,

Navi Mumbai. Alkem can proudly claim its own 40 bed bioavailability and

bioequivalence testing facilities that could meet up to the standards of all the regulatory

agencies, including US FDA, MHRA, TGA and ANVISA Brazil. Backward integration

through in-house API development and front-end efficient marketing/distribution of

products would provide the desired impetus to the generics program from lab scale

development to commercialization.

Alkem has committed a substantial amount of its resources to the development of

Novel Drug Delivery Systems and this shall be the key element in providing momentum

to consolidate its objective of value addition

Alkem has an aspiration to make pioneer within the area of drug discovery, sometime

in the recent future, and is looking into various models and therapeutic segments to carve

out a meaningful space in the arena of medical needs that are not fulfilled. Alkem has in-

licensed a number of novel products for the domestic market, form overseas

collaborators, and continue to do so to provide the most advanced therapy avenues to the

Indian patients.


Alkem is also collaborating with several Indian Universities and Indian companies

for their development of difficult-to-make products and the development of other unique

technologies. Alkem is progressing with leaps and bounds in the Nutraceutical segment

of healthcare and wellness. Nutraceutical R & D efforts are mainly directed towards

providing low fat and low calorie nutritional products for the better management of

health. Commendable success has been achieved in this area of research and

development. Alkem is building its future upon appropriate and timely protection of its R

& D efforts. A number of patent applications are emerging from the in-house innovations

which have gone on to be filed.

Alkem has state of the art manufacturing facility located at Taloja, Mumbai to carry

out most advance research. Research at Alkem is guided a seasoned top team supported

by over 200 scientist working on challenging assignments. Alkem - R&D has inherent

strength in analytical chemistry and specialization in creating high quality formulations

as per the required specifications.

Alkem has MHRA approval of its parenteral cephalosporins, oral cephalosporins and

general category products. Alkem's Group Company has TGA approval for its soft

gelatin capsules facility. Alkem has also built a segregated facility for manufacturing

immunosuppressant drugs and plans to create further facilities for other niche segments


like lyophilized injectables, premixed ready to use Parenterals, steroid and oncology

portfolios. This initiative would make Alkem a formidable India based manufacturing

house. Backed by its internal R & D competence and track record, Alkem would go on to

have a sustainable presence in a variety of dosage form segments across the markets of

the globe.

Manufacturing

AmaliyaManfacturing Facility – I

It comprises two production blocks (General and Cephalosporins), warehouse,

quality assurance cum administrative block, utilities block and an effluent treatment

plant. These production blocks are designed to meet the domestic and export production

requirements. The General block is a three-floor structure having production on ground

and first floors measuring 3025.35 sq. mtrs. and 1596.94 sa. mtrs. respectively. A part of

the first floor and the third floor house the HVAC system etc.


The Cephalosporin block is a three-floor structure having production on ground and

first floors measuring 877.85 sq.mtrs. and 877.85 sq.mtrs. respectively. The third floor

houses the HVAC system etc. The ware housing facility has available area

measuring1893.04 sq. mtrs. on ground floor and 1893.04 sq. mtrs. on first

Amaliya B-Lactam Facility – IIt comprises one production block (for ß-Lactams)

having warehousing, quality assurance, administrative office and a separate utilities

block. This plant is designed to meet the domestic and export production requirements.

This plant is a four storeyed structure having production on ground and second floors

measuring 1996 sq.mtrs. and 2072 sq.mtrs. respectively. A part of the first floor and the

third floor house the HVAC, water system etc. The injection facility of this plant is a

modular clean room based design and this is one of the best and most modern

manufacturing facilities in the country

The ware housing facility has the available area measuring 504 sq.mtrs on ground

floor and 428 sq.mtrs. on second floor.

Kachigam Unit

The Kachigam unit is four storeyed structure with available area of 2275 sq.mtrs. and

2450 sq. mtrs. for the ground and the second floor respectively with the first and the

fourth floors mainly housing the HVAC etc. The ware housing facility has an available


area of 875 sq. mtrs. This GMP unit is designed for production of injections, tablets,

capsules and dry syrups for domestic and export markets.

The major equipments installed in this unit are three high-speed dry powder injection

and two high-speed dry syrup filling and packing lines as well as tablets and hard gelatin

capsules production and packing lines. The unit has an independent, well-equipped

quality, assurance department

The new plant at Baddi was commissioned in the year 2005. It is situated in clean,

green & scenic surrounding. The production at Baddi caters to both domestic &

International business. The plant has been designed for Cephalosporins& General

categories products. Tablets, Capsules, Dry Powder Injectables& Oral Suspensions are

he dosage forms that can be manufactured in this facility

Distribution / Logistics

Alkem also has one of the largest logistic networks distribution set up in India

covering each and every state. Alkem distributes its products through 20 depots and 4 C

& F agents and a network of 5500 stockists. Alkem covers almost 40% of retail

pharmacy in India.


Careers

Alkem has always recognized that its greatest strength are its people. Alkem'semployees

strength is 6000. Of this, around 3000 is the sales force itself, covering every nook and

corner of India. "Professionalism" is the guiding principle of every activity in all

departments of Alkem.


People have always been the strength of Alkem Laboratories Ltd and the reason for

its success. Recognizing this, the company gives great importance to providing a work

culture that allows its members the space to learn, innovate, experiment and grow. It

places a premium on innovation and gives its people the freedom to think differently. It

also encourages individuals to take on increased responsibility and thereby contribute to

the growth of the company

In today's demanding world, we believe that if we are to expect people's continued

energy and commitment at work, we must provide the right environment in which they

feel positive and enthusiastic about what they are doing, with a clear sense of purpose,

confidence in their ability to meet the challenges and pride in their individual

contribution to the company's success. This means providing inspiring and effective

leadership, open lines of communication, excellent learning and development

opportunities, a safe and energising workplace, competitive reward and benefits, and a

culture of equal opportunity in which individual success depends solely on personal

merit and performance. We also encourage and support a healthy work/life balance

which we know is essential to the continued wellbeing of our employees.

We provide a desirable and conducive working environment for our employees at

Alkem. We create and maintain an atmosphere of fun to improve the work environment

and sets high level of commitment and involvement from each and every individual. We

believe that people who are cheerful and fun loving are more successful than the others.


They are those who can think more clearly and creatively, who are more relaxed and

spontaneous are likely to be more tolerant. Their sense of humour is their defence.

We hire the best-in-class talent. At Alkem, we have an induction program that

comprises classroom, research, production and sales insights combined with on-the-job

training. This helps the new recruits get acclimatized to the realities of the industry,

company and business unit.

As part of the induction program, we make them familiar with Alkem business

operations, our culture and how we manage our work. We provide an insight into the

company's values, vision, culture and strategy rounded off by training in social

sensitivity, multiple functions, and field sales. This holistic induction enables employees

to understand the realities of the corporate world, learn things faster, and derive the most

benefit from the shortest possible time. Also you will have started up valuable

relationships with colleagues at all levels.

As part of the induction program, we make them familiar with Alkem business

operations, our culture and how we manage our work. We provide an insight into the

company's values, vision, culture and strategy rounded off by training in social

sensitivity, multiple functions, and field sales. This holistic induction enables employees

to understand the realities of the corporate world, learn things faster, and derive the most

benefit from the shortest possible time. Also you will have started up valuable

relationships with colleagues at all levels.


Well-trained employees are the key to any business success. At Alkem we hire the

best people and then we help them get even better. Our training program is designed to

prepare our staff for the next stage in their career.Training is not just something our

people do when they first join the company. We offer more training hours and make

constant investments in our employees development to keep them at the top of their Our

training programs are tailored to individual needs, and the courses people take depend

on their skills, experience and areas of interest. Our people have the opportunity to learn

from and be coached by the best in the business - supportive leaders and colleagues who

can pass on their industry, technical and functional expertise. We use a well-managed

combination of courses, practical experience and feedback to enable our people to

develop specialist skills which help them grow.

Literature Review

The Importance of Financial Ratio and Benchmark Analysis:

Supply House Times; Mar2006, Vol. 49 Issue 1, p68-69, 2p

The article provides reasons why financial ratio and benchmark analysis is important

in the success of a business in the U.S. Financial ratio refers to the comparison of one


performance indicator which when considered becomes useful in relating to how

profitable and productive the firm is. Benchmark analysis can provide important insights

about a company's performance.

Financial ratios:

Financial Management (14719185); Apr2005, p34-35, 2p

Focuses on the use of enterprise stewardship model to bridge the gap of

understanding among financial managers during the presentation of results in the form of

financial ratios. Tips for bridging the gap between the financial ratios and the people who

influence them the most; Importance of mutual trust and understanding for effective

teamwork; Importance of financial managers to understand the financial reports in order

for them to challenge the number

How to Calculate Rate of Return:

Construction Equipment; Jul2007, Vol. 110 Issue 7, p73-74, 2p

The article offers tips on how to calculate the rate of return, particularly in

construction equipment investments. A simple definition of rate of return is that rate


which causes net present value (NPV) of the annual cash flows to be zero. The best way

to do the calculation is to draw a graph showing how NPV of the annual cash flows goes

down as the discount rate increases. The point at which the graph crosses the zero line is,

by definition, the rate of return of the investment.

Key Financial Ratios For The Credit Department:

Dennis, Michael [email protected]

The article focuses on the importance of financial ratio analysis to credit department

of several businesses in the U.S. Financial ratios are important because of its usefulness

for determining and comparing the financial status of a company. These financial

determinants include liquidity ratios, leverage ratios, profitability ratios, and efficiency

ratios. All of these ratios are indicative for customer's ability to pay debts and applicant's

long-term viability.

The Effect of Financial Ratios on Returns from Initial Public Offerings: An

Application of Principal Components Analysis:

International Journal of Management; Mar2006, Vol. 23 Issue 1, p187-194, 8p


This paper applies principal component analysis (PCA) to investigate the effects of

fundamental financial ratios on returns of initial public offerings (IPOs) from electronics

firms listed on the Taiwan Stock Exchange. It eliminates high multicollinearities among

independent variables and transforms original variables into independent variables in the

regression model. The empirical findings show that returns of IPOs were significantly

affected by the eight selected financial ratios, including liquid ratio and cash flow ratio.

The fact that the increase in the coefficient estimates of variables was significant

suggests that the model has considerable explanatory power.

How Well Do We Understand Ratios and Spreads?:

Journal of Portfolio Management; Winter2005, Vol. 31 Issue 2, p1-1, 1p

The article presents information about double-numbers like ratios or spreads. Ratios

and spreads measure relatives, not absolutes. Investors are also reluctant to make

objective judgments about corporate bond yields without reference to the spreads

between corporate and the yield on government bonds of similar maturity. Saving is the

difference between income and spending. The savings rate is low not because spending

has gone through the roof, but because household incomes have grown unusually

slowly..

NEED FOR THE STUDY


Changes in the financial performance of the company could be due to several reasons,

changes in profit, changes in operating efficiency, changes in quality of debtors and

many more other reasons. The financial position of the company cannot be stationary,

but it is dynamic owing to the shift in its financial position with regard to various

financial parameters.

Analysis of the financial performance tries to find out the reasons for shit in position

and tries to establish a trend of the direction in which the business is moving in.

Therefore using general terminology, the statement of the problem could be general

terminology; the statement of the problem could be generalized as a detection of various

reasons for variation in the financial position of the company.

By analyzing systematically the identified financial ratios, which reflect financial

performance well and adequately, the company could understand its own position over

time. Such a broad understanding will be of great relevance to the managers of the

company, investors (present potential) as well as to any other party/parties interested in

the company.

In other words financial performance evaluation will serve as an eye opener to any

company in question is no exception to this study.

OBJECTIVES OF THE STUDY

To analysis the financial performance of the company from last 5 years.


To gain a working knowledge of the financial aspects of the company.

To understand the drawback prevalent in the functioning of the firm.

To form conclusions and suggest solution’s and remedies for correcting the

drawbacks, if found necessary.

To evaluate the financial statement by which financial position of the company can

be obtained which helps to strength the profitability of the concern in future by

avoiding the losses.

The company wants to know their financial position based on which the company

can try to improve financial position in future.

The company wants to know their financial soundness.

To evaluate the financial performance of the company for better understanding of

various aspects of financial statements.

The company wants to know their profitability position so that it can strengthen its

profitability in future etc.

METHODOLOGY


Financial statements provide a solid base for making decision at all levels of

management especially at the top level. Through the figures of financial statements,

one can analyze and interpret information for making decisions relating to various

aspects in the organization. One of the ways in which financial statements can be put to

work is through ratio analysis, ratio are simply one number divided by another; as

such they may or not be meaningful. In finance, ratios are usually two financial

statements items that may be related to one another and may provide the prudent user a

good deal of information. In these reports, ratios are used to analyze.

The trick is in the way ratio analyzed and used by the decision maker. A good

strategy is to compare the ratios to some sort of bench mark, such as industry averages

or to what the company has done in past or both.

Once ratios are calculated, an analyst needs some bench marks to find out where

the company stands at that particular point. Useful bench marks are industry

comparisons and company trends.

Data Collection Methods


The main sources of data were primary sources and secondary sources.

Primary Sources

Information as obtained from primary sources through management..

The data was provided with sufficient guidance from the employees of the concern

o Study of secondary data (Desk Work to collect all relevant information)

o Unstructured in-depth personal interviews through direct communication.

o Content Analysis

Secondary Sources

Data taken is taken from Alkem Laboratories limited.

Internal Secondary Sources

Financial accounts

Discussion, opinions and views of experts.

Miscellaneous Records.

External Secondary Sources


Books

Subject Literature

Internet

Tools Used

Ratios

Graphical Presentation


1)Current Ratio: Current Ratio is the ratio, which expresses the relationship between

Current Assets and Current Liabilities.

Expression of Current Ratio:

Current Assets (CA)

Current Ratio =

Current Liabilities (CL)

# 1 Table showing the calculation of Current Ratio from 2005-2006 to 2009-2010:

YearCurrent Assets

(Rs. Cr.)

Current Liabilities

(Rs.Cr.)Current Ratio

2005-2006 21.77 4.65 4.69

2006-2007 27.10 5.06 5.36

2007-2008 25.79 5.11 5.05

2008-2009 32.18 10.47 3.07

2009-2010 36.31 8.58 4.23


# 1 Diagram showing increase or decrease in current assets, current liabilities, and

Current Ratio from 2005-2006 to 2009-2010 .

Analysis and Interpretation:

The standard or ideal Current Ratio is 2:1.The rule of thumb says that the current ratio

should be at least 2, that is the current assets should meet current liabilities at least twice

In the year 2005-2006 to 2009-2010 Current Ratio is above than the expected standard

or ideal current ratio. Hence, it can be inferred that the liquidity or the short- term

solvency of the concern is sound.


2.) Quick Ratio / Acid Test Ratio: Quick ratio is the index of the financial liquidity or

the short - term solvency of a concern (i.e., the ability of a concern to meet its short –

term obligations out of its quickly realizable assets). It also indicates whether there is

over – stocking or under – stocking. If the current ratio is good, but the quick ratio is

poor, it indicates that the finance has huge inventories.

Expression of Quick Ratio:

Quick Assets (QA)

Quick Ratio =

Quick Liabilities (QL)

# 2 Table showing the calculation of Quick Ratio from 2005-2006 to 2009-2010:

YearQuick

Assets (Rs.Cr.)

Quick

Liabilities

(Rs.Cr.)

Quick Ratio

2005-2006 15.16 4.65 3.26

2006-2007 20.17 5.06 3.99

2007-2008 20.99 5.11 4.11

2008-2009 25.90 10.47 2.47

2009-2010 29.67 8.58 3.46


# 2 Diagram showing increase or decrease in quick assets, quick liabilities and

Quick Ratio from 2005-2006 to 2009-2010:


The standard or ideal Quick Ratio is 1:1. A high acid-test ratio is an indication that

the firm is liquid and has the ability to meet its current or liquid liabilities in time. Since

the firm’s quick ratio is more than the normal standard it can be inferred that it has good

liquidity position.


3) Inventory Turnover Ratio: The inventory turnover ratio services the following

purposes:

This ratio indicates the velocity or speed with which goods move out of the business.

In other words, it indicates the number of times the average stock of finished goods is

turned over or sold during a year. In short, it indicates how efficiently stocks are being

sold.

Expression of Inventory Turnover Ratio:

Net Sales

Inventory Turnover Ratio =

Inventory

# 3 Table showing the calculation of Inventory Turnover Ratio from 2005-2006 to

2009-2010:

Year Net Sales InventoryInventory

Turnover Ratio

2005-2006 28.82 6.63 4.35

2006-2007 44.96 6.97 6.45

2007-2008 29.35 4.81 6.10

2008-2009 30.87 6.27 4.92

2009-2010 30.21 6.64 4.54


# 3 Diagram showing increase or decrease in Inventory Turnover Ratio from

2005-2006 to 2009-2010:


A high inventory turnover ratio indicates efficient management because more

frequently the stocks are sold; the lower amount of money is required to the inventory.

The inventory turnover ratio during the year 2006-07 and 2007-08 was better than the

rest of the years. It can be inferred that the company should take steps to in order to

improve the inventory turnover ratio and make the business more prosperous.


4)Fixed Assets Turnover Ratio: The Fixed Assets Turnover Ratio indicates the

proportionate of utilization fixed assets over total turnover of the company. This ratio

indicates as to what extent the fixed assets of a concern have contributed to sales. In

other words, it indicates as to what extent the fixed assets have been utilized. Fixed

Assets, here, mean net fixed assets, i.e., fixed assets less depreciation. Turnover means

net sales, i.e., total sales less sales returns.

Expression of Fixed Assets Turnover Ratio:

Net Sales

Fixed Assets Turnover Ratio =

Fixed Assets

# 4 Table showing the calculation of Fixed Assets Turnover Ratio from 2005-

2006 to 2009-2010:

Year Net SalesFixed

Assets

Fixed Asset

Turnover Ratio

2005-2006 28.82 22.81 1.26

2006-2007 44.96 24.51 1.84

2007-2008 29.35 23.46 1.25

2008-2009 30.87 23.41 1.32


2009-2010 30.21 25.51 1.18

# 4 Diagram showing increase or decrease in Fixed Assets Turnover Ratio from 2005-2006 to 2009-2010:


The standard or Ideal Fixed Assets Turnover Ratio is 5 times.

By seeing the fixed assets turnover ratio it can be inferred that it is less than the

standard ratio and there is no effective utilization of fixed assests.


5) Total Assets Turnover Ratio: Asset turnover is the relationship between sales and

assets.

The firm should manage its assets efficiently to maximize sales.

The total asset turnover indicates the efficiency with which the firm uses all its

assets to generate sales.

It is calculated by dividing the firm’s sales by its total assets.

Generally, the higher the firm’s total asset turnover, the more efficiently its assets

have been utilized.

Expression of Total Assets Turnover Ratio:

Net Sales

Total Assets Turnover Ratio =

Total Assets

# 5 Table showing the calculation of Total Assets Turnover Ratio from 2005-2006

to 2009-2010:

Year Net Sales Total AssetsTotal Assets

Turnover Ratio


2005-2006 28.82 47.30 0.61

2006-2007 44.96 51.68 0.87

2007-2008 29.35 49.10 0.60

2008-2009 30.87 55.99 0.55

2009-2010 30.21 64.23 0.47

# 5 Diagram showing increase or decrease in Total Assets Turnover Ratio from

2005-2006 to 2009-2010:



The year 2006-2007 shows effective utilization of total assets. But it has decreased from

that year. Therefore the company has to take steps for effective utilization of its assets

6.) Debt -Equity Ratio: This ratio indicates the extent to which debt is covered by

shareholders’ funds. It reflects the relative position of the equity holders and the lenders

and indicates the company’s policy on the mix of capital funds.

Expression of Debt Equity Ratio:

Debt

Debt Equity Ratio =

Equity

# 6. Table showing the calculation of Debt-Equity Ratio from 2005-2006 to 2009-

2010:

Year Debt EquityDebt-Equity

Ratio

2005-2006 17.67 29.63 0.59

2006-2007 20.16 31.52 0.63

2007-2008 16.95 32.15 0.52


2008-2009 23.2 32.79 0.70

2009-2010 27.49 36.74 0.74

# 6 Diagram showing increase or decrease in the Debt-Equity Ratio from 2005-

2006 to 2009-2010:



The standard or ideal Debt-Equity Ratio is 1:1Since the debt-equity ratio is less than the

standard throughout the 5 years it can be inferred that the financial structure of the

undertaking is not strong and so the stake of the long- term creditors is relatively more.

7.) Proprietary Ratio: The proprietary ratio serves the following purposes:

It indicates the proportion of total assets financed by the proprietors.

It indicates the proportion between owned capital (i.e., proprietor’s funds) and

loaned capital (i.e., borrowed funds).

It indicates the general financial strength of the concern.

It indicates the long-term solvency of the concern.

It indicates the relative risk of the owners and the creditors of the enterprise.

It is a test of the long-term credit strength of the concern.

Expression of Proprietary Ratio:

Net Worth

Proprietary Ratio =


Total assets

#7 Table showing the calculation of Proprietary Ratio from 2005-2006 to 2009-

2010:

Year Net WorthTotal

AssetsRatio

2005-2006 29.63 47.30 0.63

2006-2007 31.52 51.68 0.61

2007-2008 32.15 49.10 0.65

2008-2009 32.79 55.99 0.58

2009-2010 36.74 64.23 0.57

# 7 Diagram showing increase or decrease in net worth, total assets and the

Proprietary Ratio from 2005-2006 to 2009-2010:


Analysis and interpretation:

There is no standard or ideal Proprietary Ratio.

In the year 2007-2008 Proprietary Ratio was 0.65 times, which decreased to 0.57 times

in the year 2009-2010, Thus as the Proprietary ratio has decreased during the year, it

can be inferred the company has to take steps to make the financial position of the

concern strong.

8.) Interest Coverage Ratio: The Interest Coverage Ratio indicates as to how many

times the net profit of a concern covers its fixed charges. If indicates whether the business

would earn sufficient profits to pay the interest charges periodically.


Expression of Interest Coverage Ratio:

Interest Coverage Ratio = N/P before deducting fixed charges and

income tax

Fixed Charges

# 8 Table showing the calculation of Interest Coverage Ratio from 2005-2006 to

2009-2010:

Year

PBIT

(Rs.Cr.)

Interest

(Rs.Cr.)

Interest

coverage Ratio

2005-20061.40 1.28 1.09

2006-20071.68 1.45 1.16

2007-20081.95 1.75 1.11

2008-20091.88 1.89 0.99

2009-20102.67 2.67 1.15

# 8 Diagrams showing increase or decrease in Interest Coverage Ratio from 2005-

2006 to 2009-2010:



The standard or ideal Interest Coverage Ratio is 6 times.

In the year 2005-2006 Interest Coverage Ratio was 1.09 times. 0.53 which increased to

1.16 times in the year 2006-2007 which afterwards decreased. Thus it can be inferred to

ensure greater margin of safety for long term creditors and so there will not be any

difficulty for the concern to obtain long term funds it has to improve its performance.


9) Return on Net Worth: It expresses the relationship between net profits (after

interest and tax) and the proprietor’s funds.

Expression of Return on Net Worth

Net Profit

Return on Net Worth=

Shareholder’s Funds

# 9 Table showing the calculation of Return on Net Worth from 2005-2006 to 2009-

2010:

Year Net Profit(Rs.Cr.)Shareholder’s

funds(Rs.Cr.)Return on net

Worth

2005-20060.18 29.63 0.61

2006-20070.33 31.52 1.05

2007-20080.25 32.15 0.78

2008-20090.17 32.79 0.52

2009-20100.26 36.74 0.70


# 9 Diagrams showing increase or decrease in Return on Net Worth from 2005-2006

to 2009-2010:


The ratio measures the overall efficiency of a firm. As this ratio reveals how well the

resources are being used, higher the ratio, better are the results. So the concern has to

work upon improving its efficiency for the coming years.


10). Gross Profit Ratio: Gross Profit Ratio measures the relationship between gross

profit to net sales and is usually represented as a percentage. The two basic components

of the gross profit ratio are sales and cost of goods sold since gross profit is simply the

excess of net sales over cost of goods sold. Net sale scan be found by deducting sales

returns or returns inwards, if any, out of the sales.

It reflects the efficiency with which a firm produces its products or acquires

them. There is no standard norm for Gross profit ratio and hence it may vary from

business to business..

Expression of Gross Profit Ratio:

Gross Profit Gross Profit Ratio = * 100

Net Sales

# 10 Table showing the calculation of Gross Profit Ratio from 2005-2006 to 2009-

2010:

YearGross Profit

(Rs.Cr.)

Net Sales

(Rs.Cr.)

Gross Profit

Ratio

2005-2006 2.38 28.82 8.26 %

2006-2007 2.93 44.96 6.52 %

2007-2008 3.01 29.35 10.26 %

2008-2009 2.73 30.87 8.84 %

2009-2010 2.72 30.21 9 %


# 10 Diagram showing increase or decrease in Gross Profit Ratio from 2005-2006

to 2009-2010:


The Gross Profit Ratio indicates the extent to which selling prices of goods per unit

may decline without resulting in loses on operations of a firm. The higher the Gross

Profit Ratio, better the result. A low Gross profit ratio, generally indicates high cost of

goods sold due to unfavourable purchasing policies, lesser sales, lower selling prices,

excessive competition, over investment in plant and machinery, etc .It seems that the

concern is in good position.


11). Net Profit Ratio: Net Profit Ratio measures the relationship between Net

profit (after taxes) to net sales and is usually represented as a percentage

Expression of Net Profit Ratio:

Net Profit after tax

Net Profit Ratio = *100

Net Sales

# 11 Table showing the calculation of Net Profit Ratio from 2005-2006 to 2009-

2010:

Year

Net Profit

(Rs.Cr.)

Net Sales

(Rs.Cr.)

Net Profit

Ratio

2005-2006 0.18 28.82 0.62 %

2006-2007 0.33 44.96 0.73 %

2007-2008 0.25 29.35 0.85 %

2008-2009 0.17 30.87 0.55 %

2009-2010 0.26 30.21 0.86 %


# 11 Diagram showing increase or decrease in Net Profit Ratio from 2005-2006 to

2009-2010:


The Net Profit Ratio indicates the efficiency of the management in manufacturing,

selling, administrative, and other activities of the firm. Obviously higher the ratio, the

better is the profitability. It can be inferred that the profitability of the firm is good.


12) Fixed Assets to Net Worth Ratio: The ratio establishes the relationship between

fixed assets and shareholder’s funds.

Expression of Fixed Assets to Net Worth Ratio

Net Fixed Assets

Fixed Assets to Net Worth Ratio =

Shareholder’s Funds

# 12 Table showing the calculation of Fixed Assets to Net Worth Ratio from 2005-

2006 to 2009-2010:

Year

Net Fixed

Assets

(Rs.Cr.)

Shareholders

Funds

(Rs.Cr.)

FA to Net

Worth Ratio

2005-2006 27.20 29.63 0.92

2006-2007 28.81 31.52 0.91

2007-2008 27.67 32.15 0.86

2008-2009 27.55 32.79 0.84

2009-2010 25.51 36.74 0.69


# 12 Diagram showing increase or decrease in Fixed Assets to Net Worth Ratio

from 2005-2006 to 2009-2010:


The ratio indicates the extent to which the shareholder’s funds are sunk into fixed

assets. It can be inferred that ratio is decreasing from 2005-06 and so it is satisfactory

and the company is in good position.


FINDINGS AND CONCLUSION

1. Current Ratio: In the year 2005-2006 to 2009-2010 Current Ratio is above than

the expected standard or ideal current ratio. Hence, it can be inferred that the liquidity

or the short- term solvency of the concern is sound.

2. Quick Ratio: The firm’s quick ratio is more than the normal standard it can be

inferred that it has good liquidity position.

3. Inventory Turnover Ratio: The inventory turnover ratio during the year 2006-07

and 2007-08 was better than the rest of the years. It can be inferred that the company

should take steps to in order to improve the inventory turnover ratio and make the

business more prosperous

4. Fixed Assets Turnover Ratio: By seeing the fixed assets turnover ratio it can be

inferred that it is less than the standard and so there is no effective utilization of fixed

assets


5. Total Assets Turnover Ratio: The year 2005-2006 shows effective utilization of

total assets. But it has decreased from that year. Therefore the company has to take steps

for effective utilization of its assets

6. Debt-Equity Ratio: The debt-equity ratio is less than the standard through out the

5 years it can be inferred that the financial structure of the undertaking is not strong and

so the stake of the long- term creditors is relatively more

7. Proprietary Ratio: In the year 2005-2006 Proprietary Ratio was 0.65 times, which

decreased to 0.57 times in the year 2007-2008, Thus as the Proprietary ratio has

decreased during the year, it can be inferred the company has to take steps to make the

financial position of the concern strong.

8. Interest Coverage Ratio: In the year 2005-2006 Interest Coverage Ratio was 1.09

times. which increased to 1.16 times in the year 2006-2007 which afterwards decreased.

Thus it can be inferred to ensure greater margin of safety for long term creditors and so

there will not be any difficulty for the concern to obtain long term funds it has to improve

its performance.

9. Return on Net Worth: The ratio measures the overall efficiency of a firm. As this

ratio reveals how well the resources are being used, higher the ratio, better are the

results. So the concern has to work upon improving its efficiency for the coming years.


10. Gross Profit Ratio: The Gross Profit Ratio indicates the extent to which selling

prices of goods per unit may decline without resulting in loses on operations of a firm.

The higher the Gross Profit Ratio, better the result. .It seems that the concern is in good

position.

11. Net Profit Ratio: It indicates the efficiency of the management in

manufacturing, selling, administrative, and other activities of the firm. Obviously higher

the ratio, the better is the profitability. It can be inferred that the profitability of the firm

is good.

12. Fixed Assets to Net Worth Ratio: Ratio is decreasing from 2005-06 and so it is

satisfactory and the company is in good position.

Thus, it can be concluded that the financial position of the Alkem Laboratories Limited,

is strong and the risk for creditors is relatively less. The liquidity position of, Alkem

Laboratories is also sound and it is in a position to pay off its short-term liabilities out

of its quickly realizable assets without any difficulty. The concern also has sufficient

funds to meet its day-to-day expenditure and there is also high productivity of assets.

But there should be effective utilization of fixed and current assets. The firm’s

profitability position is good. Thus the performance of Alkem Laboratories Limited

and the future prospects is better.


Suggestions The company should concentrate on improving the overall efficiency of the

concern by increasing its return on net worth so as to attract more investors

and to increase the market value of the shares.

The company should finance its long term funds through public issue and thus

achieve a balance between equity and debt

Sales should be improved through various measures which would help to

improve the turnover ratios and proper utilization of assets and better return to

shareholders.

The company should finance its long term funds by debt and thus achieve a

balance between debt and equity.


The company should try to minimize excessive investment in inventories as it

reduces profitability.

The concern is paying higher interest on some of its liabilities and therefore

interest coverage ratio is low. Therefore the concern should take some

measures regarding it.

LIMITATIONS

Restriction to enter in the plant area.

Scarcity of monetary fund.

The vast, vague and controversial topic of the study, i.e. Financial performance

analysis.

Paucity of time.

Due to the busy schedule of the employees, I was unable to get better responses

from them.


BIBLIOGRAPHY

Books:

1.) Pandey, Prof. I.M.; Financial Management; Vikas Publishing House pvt ltd;

2002

2.) Chandra, Prasanna; Tata McGraw Hill Publishing Co. ltd; Financial Management

Theory and Practice; 2002

3.) Khan & Jain; Financial Management; United Publishers; 2002

4.) Reddy and Appannaih; Management Accountancy; Himalaya Publication House;

2001

5.) Gupta, Shashi K. & Sharma, P.K; Management Accounting; Kalyani Publishers;

2000

Websites:DITM COLLEGE “A study on Financial Performance analysis of Alkem Laboratories Limited.”

Wikipedia.com

Investopedia.com

www.alkemlabs.com


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