ABSTRACT ANALYSIS OF SHORT-TERM FINANCIAL POSITION A CASE STUDY OF RANBAXY LTD DR.ANSHUJA TIWARI*; FIRDOUS AHMAD PARRAY** *Assistant Professor, Department of Commerce, Barkatullah University, Bhopal. **Barkatullah University, Bhopal. A financial statement is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspect of a business firm. Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, subbusiness or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decision. The present paper explains in detail the analysis of financial statements of Ranbaxy ltd. It provides insights into two widely used financial tools, ratio analysis and common size statements analysis. The objective of this paper is to help the reader understand how these tools should be used to analyze the financial position of a firm. To demonstrate the process of financial analysis, Ranbaxy Limited s balance sheet and income statements are analyzed in this paper. Pinnacle Research Journals 36 KEYWORDS: Financial statement analysis, Ratio Analysis, Liquidity ratios. INTRODUCTION Stockholders, bondholders, creditors, personnel and management, which are called as stakeholders in general, are the interested parties of the companies. The stakeholders want companies, especially listed on stock exchanges, release financial information in order to control how effectively their interests are protected and rely on financial statements to provide necessary information about performance and profitability of the firm.(yusuf and Hakan,2011)The shortterm creditors of a company like suppliers of goods of credit and commercial banks providing short-term loans are primarily interested in knowing the company s ability to meet its current or short-term obligation as and when these become due. The short-term obligation of a firm can be met only when there are sufficient liquid assets. therefore a firm must ensure that it doesn t suffer from lack of liquidity or the capacity to pay its current obligation if a firm fails to meet such current obligations due to lack of good liquidity position,its goodwill in the market is likely to be affected beyond repair. It will result in a loss of creditor s confidence in the firm and may cause even closure of the firm.
REVIEW OF LITERATURE To begin with, the researcher need to explore various sources, especially published data,articles,reports and research work of other researchers etc in order to arrive at research problem. Once the researcher problem is formulated, the researcher need is to prepare a brief summary or synopsis of the topic. For this, the researcher has to undertake the, extensive literature survey connected with problem. Academic journals, conference proceedings, government reports, books etc., are tapped depending upon the nature of the problem. Earlier studies, similar to the stud in hand are carefully reviewed. In order to start with the research process, the literature reviewed for this research topic includes the study of the following:- Analysis of financial statements of local farm supply, marketing cooperatives of U.S.Department of agriculture by E.Eldon Eversull and Beverly L.Rotan in which the researchers had ananlyzed the balance sheet and income statements of local farm supply and marketing cooperatives, comparing 1995 and 1994 and trends over the past 10 years.this review of this report was very much beneficial and supportive for the researcher while conducting his research paper. According to Law on Financial Statements 4.3, financial statements shall present true and fair view on enterprise s assets, liabilities, financial position, profit or loss and cash flow. According to IAS 1.13, financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. Pinnacle Research Journals 37 Both of these standards basically state that financial statements shall be true and fair ; nevertheless, this is not always the case in financial reports. Frequently, companies manipulate with accounting data to show a better financial position than it actually is; this is called windowdressing. As Rees (1995) puts it, Some managers believe that firms can be shown in a better light by judicious choice of accounting policies and by applying bias to the necessary estimation procedures.rees (1995) also describes analysis of Smith and Hannah (1991). Although the research by Smith and Hannah (1991) is a bit outdated, as accounting standards have changed, still, the conclusions they make are important many largest UK quoted firms have these creative accounting procedures. They alsofound that these procedures significantly affect important security market variables price/earnings ratio, annual abnormal return and beta. Feroz et al (1992) analysed source of accounting misstatements according to Securities and Exchange Comission s (SEC) investigations and found that in most cases, trade receivables were the source of misstatements, followed by inventories, investments and long-term assets. Concerning the accounting problems in Latvia, Silins (2003) has found that companies in Latvia have problems in accounting of intangible assets, namely, the distinction between capitalize able costs and costs that should be directly expensed. He used case studies of Latvian companies and interviews with auditors. Another study by Sivare (2004) reveals that companies tend to avoid
making proper provisions for expenses that are hard to estimate, e.g. court cases, warranties. The empirical research was based on reviewing financial statements of Latvian companies and interviews with auditors. These researches are in line with the paper by Gerety and Lehn Causes and Consequences of Accounting Fraud (1997) they investigate cases of firms accused of committing accounting fraud. First conclusion they draw concerns the causes of fraud: they found that external factor - cost of valuing assets - significantly influences choice of committing fraud. They used industry classification to identify cost of valuing assets of a firm, and found positive relationship with fraud. Also, presence of intangible assets positively affects choice of fraud, although this relationship is not statistically significant. However, they found minimal influence on fraud from internal factors, such as compensation schemes, corporate governance structures and auditor reputation. OBJECTIVE OF STUDY The study fulfills the following objectives: 1. To measure short-term financial position or short-term solvency of a company. 2. To test the liquidity of firm. 3. To provide reliable information about changes in net resources arising out of business activities. 4. To provide financial information that assists in estimating the earning potential of business. 5. To disclose, to the extents possible, other information related to the financial statements that is relevant to the needs of the users of these statements. Pinnacle Research Journals 38 FINANCIAL ANALYSIS OF RANBAXY LTD. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. To analyze the profitability, financial soundness and liquidity of Ranbaxy Ltd. Consolidated balance sheet and consolidated profit and loss account and liquidity ratios has been used as tools of analyzing the financial statements. CONSOLIDATED BALANCE SHEET The consolidated balance sheet analysis the study of the same items, group of items in five years balance sheets of the same business or enterprise.
CONSOLIDATED BALANCE SHEET OF RANBAXY LTD TABLE NO: 1 AS ON 31 ST DECEMBER 2006-2010 (RUPEES. IN MILLIONS) Particulars 2006 2007 2008 2009 2010 Liabilities Owners fund: Share capital 1863.43 1865.35 2101.85 2102.09 2105.20 Share warrants and 102.80 107.13 1824.26 1816.15 111.91 application Reserve 21533.90 23411.44 33241.55 37427.81 49106.81 Less: deferred tax (1502.38) (2518.92) 160627.38 4199.08 - Loan fund: Secured loan 2242.90 3650.68 2422.72 1758.27 1953.85 Unsecured loan 29543.10 31379.60 34565.27 31725.53 40653.30 Current liabilities 12459.98 15712.62 42991.69 36948.98 41389 Total liabilities 69248.49 78645.74 106519.99 107597.75 135320.07 Assets : Net block 14340.31 14695.21 14566.78 15934.05 17121.18 Capital work- in- 3018.79 3274.20 36180.28 38336.90 38044.37 progress Investments 26799.94 32375.51 36180.28 3833609 38044.37 Current assets 25089.94 28300.82 51485.24 49159.64 76852.70 Total assets 69248.49 78645.74 106519.99 107597.75 135320.07 Pinnacle Research Journals 39 Table 1 represents consolidated balance sheet, which indicates that share capital in 2006 was 1863.43, in 2007 it has increased up to 1865.35 and it has been consistently increased in 2008, 2009 and2010 i.e.,2101.85, 2102.09 and 2105.20 respectively. Regarding current assets; the figures are 25089.94, 28300.82, 51485.24,49159.64 and 76852.70 in the years 2006, 2007,2008, 2009 and 2010 respectively.company has done well to increase its current assets up to 2010 but a little worry seems to be in 2009.
CONSOLIDATED PROFIT AND LOSS ACCOUNT CONSOLIDATED PROFIT & LOSS ACCOUNT OF RANBAXY LTD AS ON 31 ST DECEMBER2006-2010. TABLE NO: 2 (RUPEES. IN MILLIONS) Pinnacle Research Journals 40 Particulars 2006 2007 2008 2009 2010 Gross sales 40841.51 41864.96 45031.48 47974.89 56873.25 Less: excise 538.61 506.25 328.70 172.03 177.82 (A)Net sales 40302.90 41358.71 44702.78 47802.86 56695.43 Less: expenses: Raw material 15066.84 16374.94 18776.85 18505.22 20191.64 consumed Other 6760.31 7299.18 4630.88 4205.51 4885.97 manuf.expenses Power & fuel 866.95 970.69 1406.76 1367.98 1642.43 Employee cost 3177.75 3903.79 5810.58 7018.10 7643.01 General & adm. 3411098 3928.07 4907.29 5737.95 5388.24 expenses Selling & 3973.25 4438.66 5153 4364.48 4765.03 distt.expenses Miscel. expenses 1911.47 1342.06 20534.79 740.84 5101.48 (B) Total expend. 35168.55 38257.39 61220.15 41940.08 49617.8 Operating profit 5134.35 3101.32 (16517.37) 5862.78 7077.63 (A-B) Add: other 500.36 6365.16 2086.64 6047.40 10017.82 incomes Adjusted PBDIT 5634.71 9466.48 (14430.73) 11910.18 17095.45 Less depreciation 1067.50 1187.31 1544.69 1482.03 2283.53 Adjusted PBIT 4567.21 8279.17 (15975.42) 10428.15 14811.92 Less: interest 584.44 934.26 1458.28 394.66 541.94 Adjusted PBT 3982.77 7344.91 (17433.7) 10034.15 114269.98 Less: tax 624.33 1566.86 (5742.79) 4899.33 4165.19 Adjusted PAT 3358.44 5778.05 (11689.91) 5134.82 10104.79 Table 2 represents profit and loss account, which shows a satisfactory progress in Net sales; which are as 40302.90 in 2006, 41358.71 in 2007, 44702.78 in 2008, 47802.86 in 2009 and 56695.43 in 2010.Regarding profit company has done well to maintain its level of profit despite
of huge loss in 2008 where expenses has increased to a great deal due to which the company has to suffer loss. But afterwards the company has managed a satisfactory level of profit. LIQUIDITY RATIOS CURRENT RATIO Formula: Current ratio TABLE 5 (RUPEES IN MILLIONS) Year Current assets Current liabilities ratios 2006 25089.94 7233.30 3.46 2007 28300.82 8331.20 3.39 2008 51485.24 35414.02 1.45 2009 49159.64 26558.44 1.85 2010 76852.70 24910.82 3.08 The above table is indicating the ratio of current assets and current liabilities. By analyzing the result of this table, it seems that the position of the company is satisfactory at present. The current ratios from 2006 to 2010 are 3.46, 3.39, 1.45, 1.85 and 3.08 In 2007 and 2008, some sort of declining has been occurred in current assets.but after wards the company has progressed well and as the rule of thumb of current assets and current liabilities is 2:1, then company is doing well in this regard. Pinnacle Research Journals 41 LIQUID RATIOS FORMULA Liquid ratio = L C TABLE 6 (RUPEES IN MILLIONS) Year liquid assets Current liabilities Ratios 2006 10848.96 7233.30 1.49 2007 10633.57 8331.20 1.27 2008 29594.74 35414.02 0.83 2009 22887.72 26558.44 0.86 2010 40085.14 24910.82 1.60
Table number 6 shows the liquid ratio i.e., liquid assets and current liabilities ratio. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. This table indicates that the company is having a satisfactory proportion of quick assets.only a little concern is in 2008 and 2009, but in2010 the company has managed a satisfactory level of quick assets. 3 CASH RATIO FORMULA Absolute quick ratio = TABLE 7 (RUPEES IN MILLIONS) Year Absolute quick assets Current liabilities ratios 2006 711.51 7233.30 0.09 2007 1804.50 8331.20 0.21 2008 19349.39 35414.02 0.54 2009 7541.24 26558.44 0.28 2010 27122.82 24910.82 1.08 This table indicates Absolute liquid assets and current liabilities ratio. The acceptable rule of thumb for this year is 0.5:1.This table indicates that in 2006, 2007, 2009 the company is not in a satisfactory position regarding absolute quick asses.but in 2008 and in 2010, the company has got a good amount of absolute liquid assets. In 2010, absolute quick ratio is satisfactory. Pinnacle Research Journals 42 ACTIVITY RATIOS (1) INVENTORY TURNOVER RATIO (ITR) MEANING ITR refers to the number of times the inventory is sold and replaced during the accounting period. ITR reflects the efficiency of inventory management. The higher the ratio, the more efficient is the management of inventories, and vice versa. However, a high inventory turnover may also result from a low level of inventory, which may lead to frequent stock outs and loss of sales and customer goodwill. For calculating ITR, the average of inventories at the beginning and the end of the year is taken. In general, averages may be used when a flow figure (in this case, cost of goods sold) is related to a stock figure (inventories). FORMULA:
Stock Turnover Ratio = TABLE 8 (RUPEES IN MILLIONS) Year Net sales Inventory Ratio (in times) 2006 40302.90 9549.12 4.22 2007 41358.71 9760.71 4.23 2008 44702.78 11985.19 3.72 2009 47802.86 12304.82 3.88 2010 56695.43 14899.06 3.80 Table.8 indicates inventory turnover ratio. In 2006 and 2007 the inventory turnover ratio is satisfactory. But in 2008 the inventory turnover ratio is 3.27 times, which is not good for company. The ITR is continuously decreasing from 2008 to 2010. (2) INVENTORY CONVERSION PERIOD MEANING This period is calculated by dividing the number of days by inventory turnover. The formula may be as: Inventory Conversion period = Pinnacle Research Journals 43 TABLE 9 (RUPEES IN MILLIONS) Year Days in a year Inventory turnover ratio Ratio(in days) 2006 365 4.22 87 2007 365 4.23 86 2008 365 3.72 98 2009 365 3.88 94 2010 365 3.80 96
Table.9 indicates inventory conversion period. This table shows a satisfactory inventory conversion period from 2008 to 2010, a little concern seems to be in 2006 and 2007.However the company has managed a good inventory conversion period which is a favorable situation for the company. (3) DEBTORS TURNOVER RATIO (DTO) MEANING FORMULA Debtors turnover ratio = T D TABLE 10 (RUPEES IN MILLIONS) Year Total sales debtors Ratio(in times) 2006 40841.51 10137.45 4.02 2007 41864.96 8829.07 4.74 2008 45031.48 10245.35 4.39 2009 47974.89 15346.48 3.12 2010 56873.25 12926.32 4.39 Pinnacle Research Journals 44 Table.10 shows debtors turnover ratio. As there is no rule of thumb for this ratio, the company is likely to be having a good debtor s turnover ratio. In 2009 DTR has decreased to some extend which is not good for the company. In 2010 the company has managed a good ratio of DTR. (4) AVERAGE COLLECTION PERIOD FORMULA Average collection period = N D
TABLE 11 (RUPEES IN MILLIONS) Year Days in a year debtors turnover ratio Ratio(in days) 2006 365 4.02 90 2007 365 4.74 77 2008 365 4.39 83 2009 365 3.12 116 2010 365 4.39 83 Table.11 indicates average collection period. The average collection period represents the average number of days for which a firm has to wait before its receivables are converted into cash. The average collection period is good in 2007, but in 2009 it has been increased which is not a good sign for a company. However the company has managed a satisfactory average collection period in 2010. (5) WORKING CAPITAL TURNOVER RATIO Working capital of a concern is directly related to sales. The current assets like debtors, bills receivables, cash, stock etc. change with the increase or decrease in sales.the working capital is taken as: Working capital = Current assets-current liabilities Pinnacle Research Journals 45 Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of time. This ratio measures the efficiency with which the capital is being used by a firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. FORMULA Working capital turnover ratio =
TABLE 12 (RUPEES IN MILLIONS) Year Cost of sales Net working capital Ratio(in times) 2006 35168.55 17856.64 1.96 2007 38257.39 19969.62 1.91 2008 61220.15 16071.22 3.80 2009 41940.08 22901.20 1.83 2010 49617.80 51941.88 0.95 Table.12 indicates working capital turnover ratio. In 2008 working capital turnover ratio is satisfactory. In 2010 it does not indicate an efficient utilization of working capital. The company must utilize its working capital efficiently so that it may overcome this problem. FINDINGS 1. The net block of the company has continuously inclined continuously from 2006 to 2010, but in 2008 it has declined to some extent. 2. Current assets in 2009 also shows the concerning figure, it has decreased almost 4.51% in this year. Pinnacle Research Journals 46 3. The figure of other incomes has been satisfactory up to 2007, but in 2008 it has decreased to a great extent in 2008 and has almost declined 67% from the income figure of 2007.however the company has managed to improve its income after 2008 4. In 2008 the company has suffered loss.the reason for the loss is that the expenses have been more than net sales. In 2010 the company has managed a good proportion of profit. 5. Regarding current ratio, the findings have been quite satisfactory in years 2006, 2007, 2009 and 2010, but a little worry seems in 2008. 6. While analyzing liquid ratio it has been found that the position of liquid assets of the company has been satisfactory but not good, because in 2008 and 2010 a little decline has been occurred in liquid asset. 7. Absolute quick assets to current assets ratio is not balanced because the proportion of absolute quick assets has been low in every year, but a sudden increase has been occurred in 2010.
8. While analyzing inventory turnover ratio it has been found that ITR has been satisfactory in 2006 and 2007, but afterwards the ITR has decreased quite a bit, which is not a good sign for any company. 9. Regarding inventory conversion period it also seems satisfactory in 2006 and 2007, but in next three years i.e. in 2008, 2009 and 2010 it has also lengthen to some extent. 10. Debtor s turnover ratio has been overall satisfactory excluding 2009, where DTO has dropped to a great deal which is a concerning signs for company. 11. The average collection period ratio represents the average number of days in which the company has to wait before its receivables are converts into cash. The average collection period ratio seems good but not satisfactory because it has been fluctuating year after year. 12. Working capital turnover ratio indicates efficient utilization of working capital in 2008 and an inefficient utilization of working capital in 2010. SUGGESTIONS 1. The company should try to make sure that its net block does not reduce from now. For this purpose the company has to manage a good proportion of its assets so that it is able to cover its liabilities effectively. 2. In order to make efficient utilization of working capital, the company should improve its current assets. As working capital of a company is directly related to current assets.to perform day to day activities of the business the company should try to increase its working capital, which is possible by increasing its current assets. Pinnacle Research Journals 47 3. To increase the figure of net profit (PAT), the company should try to maximize its other incomes. 4. The company should try to reduce its cost of sales so that it does not exceed net sales. This will help the company to maximize its profit. The company should make sure that miscellaneous expenses does not exceed to a great deal as it does in 2008. 5. A relatively high current ratio is an indication that the company is liquid and has the ability to pay its current obligations in time as and when they become due. Keeping these points in view, company should try to increase its current assets. 6. Usually, 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 and on the other hand a low quick ratio represents that the firm s liquidity position is not good. Keeping the company s liquidity position good, the company should try to manage a satisfactory level of quick assets. 7. Regarding cash ratio, the company should make sure that it keeps a good proportion of absolute quick assets.
8. Every firm has to maintain a certain level of finished goods so as to able to meet the requirements of the business. Regarding ITR the company should take necessary steps to improve the management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. 9. The inventory conversion period has been satisfactory in all years.the Company should try to reduce the inventory conversion period as for as possible. 10. Regarding debtors turnover ratio, the company has done well to manage its debtor s velocity. The company should try to make sure that it does not repeat the performance of 2009 regarding DTO. 11. The Company should take necessary steps to overcome the problem of average collection period, so that the fluctuation does not occur again in this regard. 12. The company should try to make effective utilization of working capital so that it may be able to improve its working capital turnover that has reduced in 2010. CONCLUSION Pinnacle Research Journals 48 The net block of the company has continuously inclined continuously from 2006 to 2010, but in 2008 it has declined to some extent. In order to overcome this issue the company should try to make sure that its net block does not reduce from now. For this purpose the company has to manage a good proportion of its assets so that it is able to cover its liabilities effectively. Regarding Current assets in 2009 also shows the figure, which do not reflect good condition of the firm; it has decreased almost 4.51% in this year. As working capital of a company is directly related to current assets.to perform day to day activities of the business the company should try to increase its working capital, which is possible by increasing its current assets. While analyzing inventory turnover ratio it has been found that ITR has been satisfactory in 2006 and 2007, but afterwards the ITR has decreased quite a bit, which is not a good sign for any company Every firm has to maintain a certain level of finished goods so as to able to meet the requirements of the business. Regarding ITR the company should take necessary steps to improve the management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. Analysis and interpretation of financial statements is an important tool in assessing company s performance. It reveals the strengths and weaknesses of a firm. It helps the clients to decide in which firm the risk is less or in which one they should invest so that maximum benefit can be earned. It is known that investing in any company involves a lot of risk. So before putting up money in any company one must have thorough knowledge about its past records and performances. Based on the data available the trend of the company can be predicted in near future. This project mainly focuses on the basics of different types of financial statements. Balance Sheet and Profit & Loss statements of Ranbaxy ltd. have been studied.
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17. Williams. J, Nguyen N., Financial liberalisation, crisis, and restructuring: A comparative study of bank performance and bank governance in South East Asia, Journal of Banking & Finance 29 (2005) 2119 2154. INTERNET www.ranbaxy.com www.jccc-ugcinfonet.in www.en.wikipedia.org http://ssrn.com/abstract=992212 Pinnacle Research Journals 50