FINANCIAL STATEMENT ANALYSIS OF AUROBINDO PHARMA
Enrolment No. 1311000218
Area of Specialization: Finance
INSTITUTE OF MANAGEMENT TECHNOLOGY
CENTRE FOR DISTANCE LEARNING
Enrollment No: 1311000218
Name: SHIKHA GROVER
Area of Specialisation: Finance
Title of the Project: Financial Analysis of Aurobindo Pharma
Statement of the problem:
Financial statement information is used by both external and internal users, including investors, creditors, managers, and executives. These users must analyze the information in order to make business decisions, so understanding financial statements is of great importance. Several methods of performing financial statement analysis exist. Through a thorough financial analysis, my aim will be to understand that financial factors are influencing the company and its decision making. I will evaluate the company i.e. Aurobindo Pharma using the various ratios to appreciate their impact on company’s performance over the last 3-5 years. The financial statements of last 3-4 years will be identified, studied and interpreted in light of company’s performance.
TOPIC- Evaluation & Comments from Faculty
Modify Title. It should be Financial Statement Analysis of ——-
Objectives of the study:
1. To calculate the important financial ratio of the organisation as a part of the ratio analysis thereby to understand the changes the needs and trends in the firm’s financial position.
2. To assess the performance of Aurobindo Pharma on the basis of earnings and also to evaluate the solvency position of the company.
3. To identify the financial strengths and weaknesses of the organization.
4. To give the appropriate suggestions to the investors. To help them to make more informed decisions.
OBJECTIVE- Evaluation ; Comments from Faculty
Methodology: Secondary Data
METHODOLOGY- Evaluation ; Comments from Faculty
Proceed with latest audited financial statements and attach a copy of the same in the report.
Explanation of the Method:
The study will be limited to analysis of Financial Statement of last 3 years. The Analysis will be limited to ratio analysis.
Company Name: Auobindo Pharma
In less than a decade Aurobindo Pharma today has evolved into a knowledge driven company manufacturing active pharmaceutical ingredients and formulation products. It is R;D focused and has a multi-product portfolio with manufacturing facilities in several countries
Questionnaire (10 to 15 questions)
Number of respondents:
Area of study: Delhi
Method you will use to classify data:
Secondary data will be collected by reviewing different literatures, from published books, management journals, articles published by the other researchers for a particular company and from Internet. The information collected through above methods will be analysed using MS Excel and interpreted.
Method you will use to present data:
Finally an overall assessment of the study will be made towards financial position of the organization.
QUESTIONNAIRE- Evaluation ; Comments from Faculty
2. Company Profile
3. Conceptual Framework
4. Research Objectives and Methodology
5. Findings and analysis
6. Conclusion ; recommendations
7. Limitations of the study
CHAPTERIZATION- Evaluation ; Comments from Faculty
Profile of Project Guide
Name: Neeraj Singh
Educational Qualification: MBA Finance
Years of Experience: 8
Current organisation: Kumon India
Current designation: Officer
House No:. House No:. D-9, Second Floor
Street: D-Block,, Poorvi Marg,
City: Vasant Vihar
State: New Delhi
Phone Number (Residence):
Phone Number (Office):
Email: [email protected]
PROJECT GUIDE- Evaluation ; Comments from Faculty
FINAL COMMENTS FROM FACULTY
Approved with Modification
Faculty Name: Sapna Jain
Email: [email protected]
CERTIFICATE FROM GUIDE
This is to certify that student of IMT-CDL, Ghaziabad has completed project work on “Financial Statement Analysis of Aurobindo Pharma” under my guidance and supervision.
I certify that this is an original work and not been copied from any source.
Signature of Guide
Theoretical knowledge without practical application is incomplete. Therefore, the exposure to practical world gives a new dimension to whatever has been grasped till time and it also gives a chance to understand that where the learned knowledge can be applied.
I would like to express my heartfelt thanks to my project guide
Mr. Neeraj Singh. This study would not been possible without his Guidance and support. I would also like to thanks all the magnificent people who I interviewed, I have learnt immensely while it is not possible to name them individually. I would like to express a deep sense of gratitude toward them.
TABLE OF CONTENTS
? INTRODUCTION 1
? LITERATURE REVIEW 8
? OBJECTIVES OF THE STUDY 16
? SCOPE OF THE STUDY 17
? RESEARCH METHODOLOGY 18
? LIMITATIONS OF THE STUDY 20
? ANALYSIS AND INTERPRETATION 21
? FINDINGS 82
? RECOMMENDATION AND SUGGESTIONS 84
? CONCLUSION 85
? BIBLIOGRAPHY 86
Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Working Capital includes the current assets and current liabilities areas of the balance sheet. Working Capital Management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them. Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Analysis of working capital is of major importance to internal and external analysis because it is closely related to the current day-to-day operations.
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
According to Guthmann & Doughal-
“Excess of current assets over current liabilities”.
According to Park & Gladson-
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.
Need of Working Capital Management
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.
Gross Working Capital and Net Working Capital
There are two concepts of working capital management.
1. Gross Working Capital: Gross working capital refers to the firm’s investment. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.
2. Net Working Capital: Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative.
Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required.
The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ which according to him is nothing but ‘dead labour’. This ‘variable capital’ is nothing wage fund which remains blocked in terms of financial management, in work-in- process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his ‘variable capital’.
Types of Working Capital
The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.
1) Permanent Working Capital
The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital.
2) Temporary Working Capital
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes.
Graph shows that the permanent level is fairly castanet; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal.
This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.
Determinants of Working Capital
The amount of working capital is depends upon a following factors.
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors.
2. Length of Production Cycle
In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high.
3. Size and Growth of Business
In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.
5. Terms of Purchase and Sales
Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.
The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirement of the company.
7. Operating Efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.
Founded in 1986 by Mr. P.V. Ramaprasad Reddy, Mr. K. Nityananda Reddy and a small group of highly committed professionals, Aurobindo Pharma was born off a vision. The company commenced operations in 1988-89 with a single unit manufacturing Semi-Synthetic Penicillin (SSP) at Pondicherry.
Aurobindo Pharma became a public company in 1992 and listed its shares in the Indian stock exchanges in 1995. In addition to being the market leader in Semi-Synthetic Penicillins, it has a presence in key therapeutic segments such as neurosciences, cardiovascular, anti-retrovirals, anti-diabetics, gastroenterology and cephalosporins, among others.
Through cost effective manufacturing capabilities and a few loyal customers, the company entered the high margin specialty generic formulations segment. In less than a decade Aurobindo Pharma today has evolved into a knowledge driven company manufacturing active pharmaceutical ingredients and formulation products. It is R;D focused and has a multi-product portfolio with manufacturing facilities in several countries.
The formulation business is systematically organized with a divisional structure, and has a focused team for key international markets. Leveraging on its large manufacturing infrastructure for APIs and formulations, wide and diversified basket of products and confidence of its customers, it aims to achieve USD 2 billion revenues by 2015-16. Aurobindo’s nine units for APIs / intermediates and seven units for formulations are designed to meet the requirements of both advanced as well as emerging market opportunities.
A well integrated pharma company, Aurobindo Pharma features among the top 10 companies in India in terms of consolidated revenues. Aurobindo exports to over 125 countries across the globe with more than 70% of its revenues derived out of international operations. Our customers include premium multi-national companies.. With multiple facilities approved by leading regulatory agencies such as USFDA, EU GMP, UK MHRA, South Africa-MCC, Health Canada and Brazil ANVISA, Aurobindo makes use of in-house R&D for rapid filing of patents, Drug Master Files (DMFs), Abbreviated New Drug Applications (ANDAs) and formulation dossiers across the world. Aurobindo Pharma is among the largest filers of DMFs and ANDAs from India.
Aurobindo Pharma Limited is a pharmaceutical manufacturing company headquartered in HITEC City, Hyderabad, India. The company manufactures generic pharmaceuticals and active pharmaceutical ingredients. The company’s area of activity includes six major therapeutic/product areas: antibiotics, anti-retrovirals, cardiovascular products, central nervous system products, gastroenterologicals, and anti-allergics. The company markets these products in over 125 countries. Its marketing partners include AstraZeneca and Pfizer.
History ; Present Status
The company commenced operations in 1988-89 with a single unit manufacturing Semi-Synthetic Penicillin (SSP) at Pondicherry. Aurobindo Pharma became a public company in 1992 and listed its shares in the Indian stock exchanges in 1995. In addition to being the market leader in Semi-Synthetic Penicillins it has a presence in key therapeutic segments such as neurosciences, cardiovascular, anti-retrovirals, anti-diabetics, gastroenterology and cephalosporins, among others.
Aurobindo Pharma features among the top 10 companies in India in terms of consolidated revenues. Aurobindo exports to over 125 countries across the globe with more than 70% of its revenues derived out of international operations.
In 2014, Aurobindo purchased the generic operations of Actavis in 7 Western European countries for $41 million.
The working capital management precisely refers to management of current assets. A firm’s working capital consists of its investment in current assets, which include short-term assets such as:
• Cash and bank balance,
• Receivables (including debtors and bills),
• Marketable securities.
Working capital is commonly defined as the difference between current assets and current liabilities.
Working Capital = Current Assets-Current Liabilities
There are two major concepts of working capital:
• Gross working capital
• Net working capital
Gross Working Capital:
It refers to firm’s investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets.
Net Working Capital:
It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
DETERMINANTS OF WORKING CAPITAL
A large number of factors, each having a different importance, influence working capital needs of a firm. Also, the of working capital requirement is a continuous process and must be undertaken on a regular basis in the light of changing situations. Following is the description of factors, which generally influence the working capital requirement of firms.
• Basic Nature of Business
Those organizations, in which most of the transactions are undertaken in cash and where the length of the operating cycle is very small, have smaller needs of working capital. E.g. retail shop. Financial concerns need not to maintain stock of goods but these firms do have to maintain sufficient liquidity at all the times. In case of manufacturing concerns, different types of production processes are involved. One unit of raw material introduced in the production schedule may take a long period before it is available as finished goods for sale i.e. operating cycle is longer, so substantial working capital is required.
• Sales and Demand Conditions
The working capital needs of a firm are related to its sales, but it is difficult to precisely determine the relationship between volume of sales and working capital needs. A growing firm may need large and continuous investment in current assets. Different phases of business cycle i.e. boom, recession, recovery etc also effect the working capital requirement. In the case of boom conditions, inflationary pressure appears and business activities expand. As a result, the overall need for cash, inventories etc increase resulting in more and more funds blocked in current assets. Seasonal fluctuations also effect working capital requirements. During period of peak demand more working capital is required but during slack periods, a firm has to sustain its increased working force and physical facilities without adequate production and sales. A firm may follow a policy of steady production irrespective of seasonal changes.
• Credit policy
The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But the firm has a flexibility of shaping its credit policy within the constraints of Industry’s norms and practices. The firm should evaluate the credit standing of new customers and periodically review the credit worthiness of existing customers. Also it should be prompt in making collections. Slack collection procedures can increase the chance of bad debts so credit sales result in higher book debts which in turn mean more working capital.
• Availability of credit
The working capital requirement of a firm is also affected by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly the availability of credit from banks also influences the working capital needs of the firm. A firm, which can get bank credit easily on favorable conditions, will operate with less working capital than a firm without such a facility.
• Supply conditions
The time taken by a supplier of raw materials, goods etc. after placing an order, also determines the working capital requirement. If goods are received as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory of that good. Otherwise, larger inventories should be kept e.g., in case of imported goods, it is often seen that shopkeepers may not be keeping stock of all items, but whenever there is a demand, they procure from the wholesaler/producer and supply it to their customers.
• Growth and expansion
As a company grows, it is logical to expect that a large amount of working capital is required. The composition of working capital in a growing company also shifts with economic circumstances and corporate practices. Other things being equal growth industries require more working capital than those that are static.
• Degree of competition
In a highly competitive market, in order to win and retain customers, the company may be forced to extend generous credit terms. The investment in book debts will consequently be high, necessitating large working capital.
• Dividend policy
The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital increases and vice-versa.
Thus the working capital requirements of a firm are determined by a host of factors. Every consideration is to be weighted relatively to determine the working capital requirements.
MANAGEMENT OF WORKING CAPITAL
Working capital management is the process of planning and controlling the level and mix of the current assets of the firm as well as financing these assets. Specifically, working capital management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivable, and inventories the firm will hold at any point in time. in addition, financial managers must decide how there current assets are to be finance. Financing choices include the mix of current as well as long term liabilities.
The second implication of divisibility, which follows logically from the first, concerns the appropriate methods for financing working capital investments. The fact that working capital only amounts to a few months supply means that the working capital cycle, a cycle running from cash to inventories, inventories to receivables, and receivables to cash, is measured in months rather than in years. This liquidity of working capital allows the management a corresponding flexibility in its financing decisions. Whereas fixed capital should generally be financed with long term sources of funds, working capital can be appropriately financed with either long term funds, or to fall. Unless the firm takes relatively costly action, such as raising new external funds, reducing dividend outflows, or postponing capital expenditures, the resources will all drain out, the firm will be unable to pay bills, and financial embarrassment will occur. It is clear that the working capital cycle is the lifeblood of the firm.
Working capital, in general practice, refers to the excess of current assets over current liabilities. Management of working capital therefore is concerned with the problems that arise in attempting to mange the current assets, the current liabilities and the inter relationship that exits between them. In other words it refers to all aspects of administration of both current assets and current liabilities.
There are many aspects of working capital management which make it an important function of the financial manager:
Time:- Working capital management requires much of the financial manager’s time
Investment:- Working capital represents a large portion of the total investment in assets.
Criticality:- Working capital management has great significance for all firms but it is very critical for all small firms.
Growth:- The need for working capital is directly related to the firm’s growth.
The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained. i.e., it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lea the firm to insolvency and excessive working capital implies idle funds which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. in this context working capital management is three dimensional in nature:
i. Dimension I is concerned with the formulation of policies with regard to profitability, risk and liquidity.
ii. Dimension II is concerned with the decision about the composition and level of current assets.
iii. Dimension III is concerned with the decision about the compost ions and level of current liabilities.
OBJECTIVES OF THE STUDY
? To calculate the important financial ratio of the organisation as a part of the ratio analysis thereby to understand the changes the needs and trends in the firm’s financial position.
? To assess the performance of Aurobindo Pharma on the basis of earnings and also to evaluate the solvency position of the company.
? To identify the financial strengths and weaknesses of the organization.
? To give the appropriate suggestions to the investors. To help them to make more informed decisions.
SCOPE OF THE STUDY
? The analysis was limited to Ratio Analysis for evaluating effectiveness of Working Capital Management at Aurobindo Pharma.
? By “Financial Statement Analysis of Aurobindo Pharma” we were able to get a fair picture of the financial position of Aurobindo Pharma.
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. So, the research methodology not only talks about the research methods but also considers the logic behind the method used in the context of the research study.
Descriptive research is used in this study because it will ensure the minimization of bias and maximization of reliability of data collected. The researcher had to use fact and information already available through financial statements of earlier years and analyse these to make critical evaluation of the available material. Hence by making the type of the research conducted to be both Descriptive and Analytical in nature.
From the study, the type of data to be collected and the procedure to be used for this purpose were decided.
The required data for the study are basically secondary in nature and the data are collected from the audited reports of the company.
SOURCES OF DATA:
The sources of data are from the annual reports of the company from the year 2011-2015.
METHODS OF DATA ANALYSIS:
The data collected were edited, classified and tabulated for analysis. The analytical tools used in this study are:
ANALYTICAL TOOLS APPLIED:
The study employs the following analytical tools:
1. Ratio Analysis.
LIMITATIONS OF THE STUDY
? The analysis and interpretation are based on secondary data contained in the published annual reports of Aurobindo Pharma for the study period.
? Due to the limited time available at the disposable of the researcher the study has been confined for a period of 5 years (2011-2015).
? Ratio itself will not completely show the company’s good or bad financial position.
? The study of financial performance can be only a means to know about the financial condition of the company and cannot show a through picture of the activities of the company.
ANALYSIS AND INTERPRETATION
Financial statement is an organized collection of data according to logical and consistent accounting procedures. It purposes is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment of time as in the case of a balance sheet, or may reveal a series of activities over a given period of time, as in the case of an Income Statement. Thus the term “Financial Statement “generally refers to two basic statements: (i) the Income Statement and (ii) the Balance sheet.
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT:
The financial statements are indicators of the two significant factors:
1. Profitability and
2. Financial soundness
Analysis and interpretation of financial statement therefore, refers to such a treatment of the information contained in the Income Statement and Balance Sheet so as to afford full diagnosis of the profitability and financial soundness of the business.
Classification of Balance Sheet of Aurobindo Pharma from 2011 to 2015
Mar ’15 Mar ’14 Mar ’13 Mar ’12 Mar ’11
Sources Of Funds in Rs. Cr.
Total Share Capital 29.20 29.15 29.12 29.11 29.11
Equity Share Capital 29.20 29.15 29.12 29.11 29.11
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 5,330.34 3,983.24 2,909.98 2,464.06 2,540.50
Networth 5,359.54 4,012.39 2,939.10 2,493.17 2,569.61
Secured Loans 1,509.01 1,970.20 1,875.72 1,493.03 1,038.00
Unsecured Loans 1,387.52 844.66 899.24 948.92 657.85
Total Debt 2,896.53 2,814.86 2,774.96 2,441.95 1,695.85
Total Liabilities 8,256.07 6,827.25 5,714.06 4,935.12 4,265.46
Application Of Funds
Gross Block 3,503.58 3,004.86 2,903.53 2,359.40 1,951.38
Less: Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Less: Accum. Depreciation 1,313.57 1,066.92 891.62 732.66 601.49
Net Block 2,190.01 1,937.94 2,011.91 1,626.74 1,349.89
Capital Work in Progress 227.19 203.89 166.34 558.08 536.73
Investments 1,012.75 872.62 707.98 629.00 493.08
Inventories 2,145.05 1,711.81 1,431.73 1,219.26 1,261.02
Sundry Debtors 3,708.94 2,970.12 1,730.59 1,426.28 1,480.29
Cash and Bank Balance 11.13 9.72 114.57 14.01 122.21
Total Current Assets 5,865.12 4,691.65 3,276.89 2,659.55 2,863.52
Loans and Advances 930.81 869.43 661.45 517.84 597.95
Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Total CA, Loans ; Advances 6,795.93 5,561.08 3,938.34 3,177.39 3,461.47
Deferred Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 1,861.14 1,633.80 1,037.26 994.42 1,518.29
Provisions 108.67 114.48 73.25 61.67 57.42
Total CL ; Provisions 1,969.81 1,748.28 1,110.51 1,056.09 1,575.71
Net Current Assets 4,826.12 3,812.80 2,827.83 2,121.30 1,885.76
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 8,256.07 6,827.25 5,714.06 4,935.12 4,265.46
Contingent Liabilities 912.72 358.37 474.51 272.76 253.25
Book Value (Rs) 183.56 137.67 100.93 85.64 88.27
Classification of Profit and Loss Statement of Aurobindo Pharma from 2011 to 2015
Mar ’15 Mar ’14 Mar ’13 Mar ’12 Mar ’11
Income in Rs. Cr.
Sales Turnover 8,244.84 7,269.53 5,425.10 4,281.45 4,133.12
Excise Duty 149.74 158.82 0.00 0.00 0.00
Net Sales 8,095.10 7,110.71 5,425.10 4,281.45 4,133.12
Other Income 67.22 74.80 26.51 -300.80 28.30
Stock Adjustments 159.09 35.75 121.08 -89.87 136.38
Total Income 8,321.41 7,221.26 5,572.69 3,890.78 4,297.80
Raw Materials 4,166.99 3,689.05 3,273.04 2,493.27 2,391.66
Power & Fuel Cost 340.13 335.71 316.34 225.54 184.55
Employee Cost 668.75 514.21 431.42 364.10 303.60
Other Manufacturing Expenses 0.00 0.00 0.00 0.00 0.00
Selling and Admin Expenses 0.00 0.00 0.00 0.00 0.00
Miscellaneous Expenses 827.90 688.02 567.32 535.17 432.48
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Total Expenses 6,003.77 5,226.99 4,588.12 3,618.08 3,312.29
Operating Profit 2,250.42 1,919.47 958.06 573.50 957.21
PBDIT 2,317.64 1,994.27 984.57 272.70 985.51
Interest 132.14 288.84 250.06 267.58 55.02
PBDT 2,185.50 1,705.43 734.51 5.12 930.49
Depreciation 245.15 185.97 171.39 142.94 125.04
Other Written Off 0.00 0.00 0.00 0.00 0.00
Profit Before Tax 1,940.35 1,519.46 563.12 -137.82 805.45
Extra-ordinary items 0.00 0.00 0.00 0.00 0.00
PBT (Post Extra-ord Items) 1,940.35 1,519.46 563.12 -137.82 805.45
Tax 424.00 347.37 67.13 -95.21 211.65
Reported Net Profit 1,516.35 1,172.09 495.99 -42.61 593.80
Total Value Addition 1,836.78 1,537.94 1,315.08 1,124.81 920.63
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 131.28 87.41 43.68 29.11 58.72
Corporate Dividend Tax 25.04 14.85 7.20 4.72 9.64
Per share data (annualised)
Shares in issue (lakhs) 2,919.82 2,914.57 2,912.11 2,911.21 2,911.21
Earning Per Share (Rs) 51.93 40.21 17.03 -1.46 20.40
Equity Dividend (%) 450.00 300.00 150.00 100.00 200.00
Book Value (Rs) 183.56 137.67 100.93 85.64 88.27
Year Wise (2011-2015) Sales Figures
CHART SHOWING SALES
Year wise (2011-2015) Profit Figures:
CHART SHOWING NET PROFIT
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment.
Financial ratios are calculated from one or more pieces of information from a company’s financial statements. For example, the “gross margin” is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company’s situation and the trends that are developing.
A ratio gains utility by comparison to other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company’s competitors have profit margins of 10%, we know that it is more profitable than its industry peers which are quite favorable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favorable sign that management is implementing effective business policies and strategies.
CLASSIFICATION OF RATIOS:
Financial ratio analysis involves the calculation and comparison of ratios which are derived from the information given in the company’s financial statements. The historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and its investment attractiveness.
Financial ratio analysis groups the ratios into categories that tell us about the different facets of a company’s financial state of affairs. Some of the categories of ratios are described below:
Liquidity Ratios give a picture of a company’s short term financial situation or solvency.
Turnover Ratios show how efficient a company’s operations and how well it is using its assets.
Profitability Ratios show the quantum of debt in a company’s capital structure.
Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the liquidity of the company as on a particular day i.e. the day that the Balance Sheet was prepared. These ratios are important in measuring the ability of a company to meet both its short term and long term obligations.
1. Current Ratio
2. Liquid Ratio
3. Net working capital ratio
1. CURRENT RATIO:
An indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITY
Table SHOWING CURRENT RATIO
Year Current Ratio
An ideal solvency ratio is 2. The ratio of 2 is considered as a safe margin of solvency due to the fact that if current assets are reduced to half (i.e.) 1 instead of 2, then also the creditors will be able to get their payments in full.
Here, the current ratio in the year 2015 is 1.35 which is better than previous years.
CURRENT RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
Liquid ratio is also known as ‘quick’ or ‘Acid test ‘ratio. Liquid assets refer to assets which are quickly convertible into cash. Current Assets other stock and prepaid expenses are considered as quick assets. The ideal liquid ratio accepted ‘norm’ for liquid ratio ‘1’.
Quick Ratio = Total Quick Assets/ Total Current Liabilities
Quick Assets = Total Current Assets (minus) Inventory
Table Showing Quick Ratio
Year Quick Ratio
The liquid ratio denotes the concern had achieved more than the ideal ratio of 1:1. If inventories do not sell and the company has to meet its current obligations
LIQUID RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
The turnover ratio is also known as activity or efficiency ratios. They indicates the efficiency with which the capital employed is rotated in the business (i.e.) the speed at which capital employed in the business rotates. Higher the rate of rotation, the greater will be the profitability. Turnover ratios indicate the number of times the capital has been rotated in the process of doing business.
? Fixed Asset Turnover Ratio
? Working Capital Turnover Ratio
? Debtor Turnover Ratio
? Stock Turnover Ratio
1. FIXED ASSETS TURNOVER RATIO:
Fixed asset turnover is the ratio of sales (on your Profit and loss account) to the value of your fixed assets (on your balance sheet). It indicates how well your business is using its fixed assets to generate sales.
FIXED ASSETS TURNOVER RATIO = NET SALES / NET FIXED ASSETS
Generally speaking, the higher the ratio, the better, because a high ratio indicates your business has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may indicate that you’ve over-invested in plant, equipment, or other fixed assets.
Table Showing Fixed Asset Turnover Ratio
Year Fixed Asset Turnover Ratio
Here, the value of fixed assets employed in the business shows a reducing trend which implies that company did not occurred any more fixed asset.
There has been a rising trend there onwards favorably which indicates that the net fixed assets is used more effectively to increase the sales without additional investment in the period of study.
FIXED ASSETS RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
DEBTORS TURNOVER RATIO:
Debtor’s turnover ratio measures the efficiency with which the debtors are converted into cash. This ratio indicates both the quality of debtors and the collection efforts of the business enterprise. This ratio is calculated as follows:
I. Debtors’ turnover ratio
II. Debt collection period.
DEBTOR’S TURNOVER RATIO = CREDIT SALES / AVERAGE ACCOUNTS RECEIVABLES
The numerator of this ratio should preferably be credit sales. This is so because the denominator is logically related to credit sales as it arises from credit sales only. Cash sales do not generate debtors. However, as the information related to credit sales is not separately available in corporate accounts, so total sales could be taken in the numerator. Average debtors are calculated by dividing the sum of beginning-of-year and end-of-year balance of debtors by 2.
Table Showing Debtors’ Turnover Ratio
Year Debtors’ turnover ratio
There has been decrease in the turnover ratio which shows the inefficiency of the collection department
DEBTOR’S TURNOVER RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
Debt collection period:
The ratio indicates the extent to which the debt has been collected in time. It gives the average debt collection period. The ratio is very helpful to lenders because it explains to them whether their borrowers are collecting money within a reasonable time. An increase in the period will result in greater blockage of funds in debtors.
Debt collection period = Months/Days in a year/ Debtor’s turnover ratio
Table Showing Debt Collection Period
Year Collection Period
Debtors’ collection period measures the quality of debtors since it measures the rapidity or slowness with which money is collected from them
Here, there has been decreasing trend in the debt collection period which is favorable for the company. Because, the quicker the collection period. Then more the utilization of cash collected from debtors. It moves from 32 days in 2011 to 21 days in 2015.
DEBTOR’S COLLECTION PERIOD OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
STOCK TURNOVER RATIO:
This ratio indicates whether investment in inventory is efficiently used or not. It is therefore explains whether investment in inventories is within proper limits or not. This ratio is calculated as follows.
Stock Turnover Ratio = Net Sales / Average Inventory
Table Showing Stock Turnover Ratio
Year Stock Turnover Ratio
The Inventory turnover ratio signifies the liquidity of the Inventory. A high inventory turnover ratio indicates brisk sales. The ratio is, therefore a measure to discover the possible trouble in the form of over stocking or over valuation.
It is difficult to establish a standard ratio of inventory because it will differ from industry to industry.
Here, there has been a rising trend in the Inventory turnover ratio which implies that the inventories are efficiently managed and utilized which directly contributes to companies’ productivity. The stock position is known as the graveyard of the balance sheet. A low inventory turnover ratio results in blocking of funds in Inventory which may ultimately result in heavy losses due to inventory becoming obsolete or deteriorate in quality.
STOCK TURNOVER RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
Profitability is an indication of the efficiency with which the operation of the business is carried on. Poor operational performance may indicate poor sales and hence poor profits. A lower profitability may arise due to lack of control over the expenses. Bankers, financial institutions and other creditors look at the profitability ratios as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds.
? Return on Investment
? Return on Shareholders’ fund
? Return on total asset
? Earning per Share
? Net profit Ratio
? Operating ratio
? Payout ratio
? Dividend yield ratio
RETURN ON INVESTMENT:
It is also called as “Return on Capital Employed”. It indicates the percentage of return on the total capital employed in the business.
RETURN ON INVESTMENT ——————————- X 100
The term ‘operating profit ‘ means ‘profit before interest and tax’ and the term ‘ capital employed ‘ means sum-total of long term funds employed in the business. i.e.
Share capital + Reserve and surplus + long term loans – non business assets + fictitious assets
Table showing Investment Turnover ratio
Year Investment Turnover Ratio
INVESTMENT TURNOVER RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
RETURN ON TOTAL ASSETS:
This ratio is computed to know the productivity of the total assets.
Net profit after Tax
Return on Total Assets = ——————————— X 100
Table showing return on Total Assets
YEAR RETURN ON TOTAL ASSETS (In %)
The term ‘Total Assets’ includes the fixed asset, current asset and capital work in progress of the company. The above table clearly reveals the relationship between the net profit and Total Assets employed in the business.
Here the Return on Total Assets shows the positive points due to net profit on the corresponding year.
RETURN ON TOTAL ASSETS OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
EARNING PER SHARE:
In order to avoid confusion on account of the varied meanings of the term capital employed, the overall profitability can also be judged by calculating earning per share with the help of the following formula:
Earning Per Equity Share = Net Profit after Tax / Number of Equity Shares X 100
The earning per share of the company helps in determining the market price of the equity shares of the company. A comparison of earning per share of the company with another will also help in deciding whether the equity share capital is being effectively used or not. It also helps in estimating the company’s capacity to pay dividend to its equity shareholders.
Table showing Earning per Share
YEAR EARNING PER SHARE
Here the Earning per Share is the result of Net Profit after Tax. It shows the positive correlation during the period of study.
EARNING PER SHARE OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
This ratio is a complementary of Net Profit ratio. In case the net profit ratio is 20%. It means that the operating profit ratio is 80%. It is calculated as follows:
Operating Ratio = —————————————– X 100
The operating cost include the cost of direct materials, direct labour and other overheads, viz., factory, office or selling.
Direct Material cost to sales = ———————————– X 100
Table showing Operating Ratio
YEAR OPERATING RATIO (In %)
This ratio is the test of the operational efficiency with which the business is being carried. The operating ratio should be low enough to leave a portion of sales to give a fair to the investors.
A comparison of operating ratio or expenses ratio will indicate whether the cost components is high or low in the figure of sales. In case comparison shows that there is increase in this ratio, the reason for such increase should be found out and management be advised to check the increase.
OPERATING RATIO OF AUROBINDO PHARMA FOR THE PERIOD OF 2011-2015
This study is carried out with the objective of analyzing the financial performance of Aurobindo Pharma to examine and understand the role of finance in the growth of the company. This chapter attempts to highlight the findings of the study.
1. Return on Investment fluctuates more due to the charges in the operating profit of the company.
2. Net Profit ratio shows increasing trend. It depicts that the efficiency is maintained in sales value and operating expenses.
3. Fixed Assets turnover ratio shows the increasing trend. It depicts that the company’s fixed assets are utilized properly in relation to the sales.
4. Debtor turnover ratio and debt collection period shows increasing trend. It depicts the higher performance of debt collection department of the company.
5. Stock turnover ratio depicts the efficiency of the inventory utilization in relation to the corresponding sales value.
6. The ideal current ratio is 2 which the firm obtains only after the year 2011 it shows the positive impact.
RECOMMENDATION AND SUGGESTIONS
1. The company may increase the performance by reducing the borrowed capital, so that the interest an finance charges will be less.
2. The company may increase the sales if it attempts to move into export market.
3. The company may reduce the operating inefficiencies through effective utilization of all the resources.
4. The company may strike a balance between the current assets and current liabilities to maintain the solvency position.
5. Optimum utilization of Working Capital can be planned so as to result in sound financial position.
6. There is an urgent need to upgrade and modernize the plants for improving the profitability of Aurobindo Pharma.
Finance is the life blood of every business. Without effective financial management a company cannot in this competitive world. A Prudent financial Manager has to measure the working capital policy followed by the company.
Aurobindo Pharma continues to play an important role in the industrial development of country. There is every possibility that Aurobindo Pharma would establish for itself a permanent and unshakable position in the industrial map of India and also in the emerging international market for steel.
? I.M. Pandey, Financial Management, 8th Edition
? Khan, M.Y., (1998) “Financial Services, “Tata McGraw Hill, New Delhi.
? Annual Reports of Aurobindo Pharma Inc.