STUDY OF RATIO ANALYSIS

WITH

REFERENCE TO SMS PHARMACEUTICALS LIMITED

PROJECT WORK SUBMITTED TO THE

OSMANIA UNIVERSITY

IN PART FULFILMENT OF THE REQUIREMENTS FOR

THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

By

K. SUVANI

BHARATH P.G. COLLEGE FOR WOMEN,

KACHIGUDA

2002-2004
 C E R T I F I C A T E

This is to certify that the Project Report entitled “STUDY OF RATIO

ANALYSIS” with reference to SMS Pharmaceuticals Limited undertaking was
carried out during April/May 2004 under my guidance and Supervision by K.
Suvani in partial fulfilment of the requirement for the award of M.B.A. Degree
of Osmania University, Hyderabad.

Hyderabad

Date :
 ACKNOWLEDGEMENT

A large number of individuals contributed directly and indirectly in this

project. I am thankful to all of them for their help and encouragement.

I am also thankful to Sri Venkat Yelisetty, Manager (Finance) B.Com.,

A.C.A. who has rendered proper guidance to me from time to time.
 RATIO ANALYSIS

CONTENTS

CHAPTER I 1. Introduction
2. Meaning and Rationale
3. Importance of Ratio Analysis
4. Standards if comparison
5. Users of Ratio Analysis
6. Classification of Ratios
7. Important groups in Ratio Analysis
8. Limitations of Ratio Analysis

CHAPTER II 1. Profile of the Company

2. Board of Directors

CHAPTER III The Period of Study

CHAPTER IV Ratio analysis of the Company under study

CHAPTER V Observations

CHAPTER VI Suggestions and Recommendations

CHAPTER VII Conclusion

CHAPTER VIII Bibliography

 INTRODUCTION

An analysis of financial statements is important aid of financial analysis.

The focus of financial analysis is on key figures in the financial statements and
the significant relationships that exist between them. The analysis of financial
statements is a process of valuating relationships between component parts of
financial statements to obtain a better understanding of the firm’s position and
performance. The first task of the financial analyst is to select the information
relevant to the decision under consideration from the total information
contained in the financial statement. The second step involved in financial
analysis is to arrange the information in a way to highlight significant
relationships. The final step is interpretation and drawing of inferences and
conclusions. In brief, financial analysis is the process of selection, relation
and evaluation.

However, it is to be noticed that there is a basic limitation of the

traditional financial statement comprising the balance sheet and the profit and
loss account i.e. they do not give all the information regarding financial
operation of the firm. Accordingly ratios not only indicate the present position,
they also indicate the causes leading up to the large extent. For instance
accounts ratio may indicate not only the financial position and precautions but
also the past policies and actions they have caused.
 MEANING AND RATIONALE

Ratio analysis is a powerful tool of financial analysis. It is defined as a

systematic use of ratio to interpret the financial statements so that the
strengths and weaknesses of a firm as well as its historical performance and
current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two variables. This relationship
can be expressed as (i) percentages (ii) fraction (iii) proportion of
numbers. These alternative methods of expressing items, which are related to
each other, are, for purpose of financial analysis, referred to as ratio analysis.

An absolute accounting figures reported in the financial statements do

not provide meaningful understanding of the performance and financial
position of a firm. An accounting figure conveys meaning when it is related to
some other relevant information. Thus, the relationship between two
accounting figures, expressed mathematically, is known as financial ratio, or
simply as a ratio.

Ratios help to summarize the large quantities of financial date and to

make qualitative judgement about the firm’s financial performance i.e., a
ratio indicates a quantitative relationship which can be in turn, used to make a
qualitative judgement.
 IMPORTANCE OF RATIO ANALYSIS

Ratio analysis, as a tool of financial management is of crucial

significance. The importance of ratio analysis is in fact that it presents facts on
a comparative basis and enables the drawing of inferences regarding the
performance of a firm. Ratio analysis is relevant in assessing the performance
of a firm in respect of the following aspects.

(i) Liquidity Position: Ratio analysis in drawing the conclusions regarding

the liquidity position or short-term solvency of a firm. The liquidity position
of a firm would be satisfactory if it is able to meet its current obligations when
they become due. A firm can be said to have the ability to meet its short-term
liabilities if it has sufficient liquid funds to pay the interest on its short-
maturing debt usually within a year as well the principal. This ability is
reflected in the liquidity ratios of a firm. The liquidity ratios are particularly
useful in credit analysis by banks and other suppliers of short-term loans.

(ii) Long-term solvency: Ratio analysis is equally useful for assessing the
long-term financial viability of a firm. This aspect of the financial position of
a borrower is of concern to the long-term creditors, security analysts and the
present and potential owners of a business. The long-term solvency is
measured by the leverage/Capital structure and profitability ratios, which focus
on earning power and operating efficiency. Ratio analysis reveals the strength
and weakness of a firm in this respect. The leverage ratios, for instance, will
indicate whether a firm has a reasonable proportion of various sources of
finance or whether heavily loaded with debt in which case its solvency is
exposed to serious strain. Similarly, the various profitability ratios would
reveal whether or not the firm is able to offer adequate return to its owners
consistent with the risk involved.

(iii) Over-all profitability: Unlike the outside parties, which are interested in
one-aspect of the financial position of a firm, the management is constantly
concerned about the over-all profitability of the enterprise. That is, they are
concerned about the ability of the firm to meet its short-term as well as long-
term obligations to its creditors, to ensure a reasonable return to its owners
and secure optimum utilization of the assets of the firm. This is possible if an
integrated view is taken and all the ratios are considered together.
(iv) Operating Efficiency: Another dimension of the usefulness of the ratio
analysis, relevant from the viewpoint of management, is that it throws light on
the degree of efficiency in the management and utilization of its assets. The
various activity ratios measure this kind of operational efficiency. In fact, the
solvency of the firm is, in the ultimate analysis dependent upon the sales
revenues generated by the use of its assets total as well as its components.

(v) Inter-firm Comparison: Ratio analysis not only throws light on the
financial position of a firm but also serves as a stepping stone to remedial
measures. This is made possible due to inter-firm comparison or comparison
with industry averages. A single figure of particular ratio is meaningless unless
it is related to some standard or norm. One of the popular techniques is to
compare the ratios of a firm with the industry average.

(vi) Trend Analysis: Ratio analysis enables a firm to take the dimension into
account. In other words, whether the financial position of a firm is improving
or deteriorating over the years. This is made possible by the use of trend
analysis. The significance of a trend analysis of ratios lies in the fact that the
analyst can know the direction of movement, i.e. whether the movement is
favourable or unfavourable .
 STANDARDS OF COMPARISON

The ratio analysis involves comparison for a useful interpretation of the

financial statements. A single ratio in itself does not indicate favourable or
unfavourable condition. It should be compared with some standard. Standards
of comparison may consists of 4 types:

(1) Time series analysis or trend ratios:

When financial ratios over a period of time, i.e. present ratios are
compared with past ratios of a same firm it is called trend ratios. It gives an
indication of the direction of the change and reflects whether the firm’s
financial performance has improved, deteriorated or remained constant over
time.

(2) Pro-forma analysis or projected ratios:

Sometimes future ratios are used as the standard of comparison. Future

ratios can be developed from the projected, or pro-forma financial statements.
The comparison of current or past ratios with future ratios show the firm’s
relative strengths and weaknesses in the past and the future. If the future ratios
indicate weak financial position, corrective action should be initiated.

(3) Cross-sectional analysis or competitors ratios:

Another way of comparison is to compare ratios of one firm with some

selected firms in the same industry at the same point in time. This kind of
comparison is known as cross-sectional analysis or competitors’ ratios. It is
most useful to compare the firm’s ratios with a few carefully selected
competitors, who have similar operations. This kind of comparison indicates
the relative financial position and the performance of the firm.

(4) Industry analysis or Industry ratios:

To determine the financial condition and performance of a firm, its

ratios may be compared with average ratios of the industry of which the firm is
a member. This sort of analysis is known as the industry analysis. It helps to
ascertain the financial standing and capability of the firm vis-à-vis other firms
in the industry.
 USERS OF RATIO ANALYSIS

Users of the financial ratio analysis are many. They are concerned with
the economic situation of the firm and predicting its future course, basing on
which decision are taken. The major groups of users are:

(a) Management: Management can get an overall view of the financial

operations and condition of the company, which enables them to plan and
control the company’s activities more effectively. They are able to spot
weaknesses in the company’s operations and can take correct action.
Furthermore it tends to restrain management, as they are under pressure to
maintain a favourable financial position.

1. Helps in decision-making: Financial statements are prepared primarily

for decision-making. Ratio analysis helps in making decisions from the
information provided in the financial statements.
2. Helps in financial forecasting and planning: Ratio Analysis is of much
help in financial forecasting and planning. Planning is looking ahead and
the ratios calculated for a number of years work as a guide for the future.
Meaningful conclusions can be drawn for future from these ratios and
thus helps in forecasting and planning.
3. Helps in communicating: The financial strength and weakness of a firm
are communicated in a more easy and understandable manner by the use
of ratios. The information contained in the financial statements is
conveyed in a meaningful manner to the one for whom it is meant. Thus,
ratios help in communication and enhance the value of the financial
statements.
4. Helps in co-ordination: Ratios even help in co-ordination, which is of
utmost importance in effective business management. Better
communication of efficiency and weakness of an enterprise results in
better co-ordination in the enterprise.
5. Helps in Control: Ratio analysis even helps in making effective control
of the business. Standard ratios can be based upon proforma financial
statements and variances or deviations, if any, can be found by
comparing the actuals with the standards so as to take a corrective action
at the right time. The weaknesses or otherwise, if any, come to the
knowledge of the management which helps in effective control of the
business.
6. Other Uses: There are so many other uses of the ratio analysis. It is an
essential part of the budgetary control and standard costing. Ratios are of
immense importance in the analysis and interpretation of financial
statements as they bring the strength or weakness of a firm.
(b) Investors: Investors are concerned with the safety of their investment and
the ability of the company to earn profits and in turn the dividend they earn on
their investment. The investors form their own opinion as to the soundness of
investing in a company. One way the investors form their opinion of the
Company’s earning capacity is by computing earning per share.

(c) Creditors: Creditors are interested in the company’s ability to meet its
financial obligations. Those who have lent the money for short period are more
interested in the company’s ability to repay the debt as and when it becomes
due. In other words, they are interested in the liquid position of the company,
which can be broadly measured by computing current ratio and quick ratio.

The long-term creditors are not only interested in company’s ability to

repay but also in the ability of the company to realize profit on the capital
employed.

A creditor will be interested in ascertaining whether the company can

employ the funds loaned to it in such a way that it will able to meet current
interest obligation and repay the loan when it falls due. If a company earns
less than what is paid in the form of interest, it is not safe to lend money to
that company.

(d) Labour : Labour has an interest in the operating results and the financial
strength of a company. The remuneration of the worker must be generated form
the company revenues; thus, the workers wages, to a great extent, depend upon
the success of the firm. Frequently, labour unions use the information
presented in the financial statements as a basis for their demand for increase in
wages. The past operating performance of the firm, as well as its current
financial position, is often studied to measure the ability of the firm to meet
new wage commitments.

(e) Government: Government is interested to know the overall strength of the

industry, Various financial statements published by industrial units are used to
calculate ratios for determining short-term, long-term and overall financial
position of the concerns. Profitability indexes can also be prepared with the
help of ratios. Government may base its future policies on the basis of
industrial information available from various units. The ratios may be used as
indicators of overall financial strength of public as well as private sector. In
the absence of the reliable economic information, governmental plans and
policies may not prove successful.
 CLASSIFICATION OF RATIOS

I. Liquidity Ratios:

1. Current Ratio
2. Liquidity Ratio (acid test or quick ratio)
3. Absolute liquid ratio

II. Long-term solvency or leverage ratios:

1. Debt-equity ratio
2. Debt-total capital ratio
3. Proprietary ratio
4. Capital gearing ratio

III. Activity Ratios:

1. Inventory turnover ratio

2. Debtors turnover ratio
3. Creditors turnover ratio
4. Fixed assets turnover ratio
5. Total assets turnover ratio
6. Working capital turnover ratio
7. Capital employed turnover ratio

IV. Profitability Ratios:

A. In relation to sales:

1. Gross profit Ratio

2. Net profit Ratio
3. Operating Ratio
4. Operating Profit Ratio

B. In relation to investment:

1. Return on investments
2. Return on capital
3. Return on total resource
4. Earning per share
 TYPES OF RATIOS

Several ratios calculated from the accounting data contained in the

financial statements. These ratios can be grouped into various classes.
According to financial activity or function to be evaluated. The parties
interested in financial analysis are short and long-term creditors, owners and
management.

Short-term creditors main interest is in the liquidity position or the

short-term solvency of the firm. Long-term creditors are more interested in the
long-term solvency and profitability of the firm. Similarly, owners concentrate
on the firm’s profitability and financial condition. Management is interested in
evaluating every aspect of the firm’s performance. They have to protect the
interests of all parties and see that the firm grows profitably. In view of the
requirements of the various users of ratios, they may be classified into four
categories:

(1) Liquidity ratio

(2) Leverage ratio
(3) Activity ratio
(4) Profitability ratio
 LIQUIDITY RATIO

Liquidity refers to the ability of concern to meet its current obligations

as and when these become due. Liquidity ratios measure the ability of the firm
to meet its current obligations. In fact, liquidity is a pre-requisite for the very
survival of a firm. The short-term creditors of the firm are interested in short-
term solvency of the firm. The liquidity ratios measure the ability of the firm
to meet its short-term obligations and reflect the short-term financial strength
or solvency of a firm. A firm should ensure that it does not suffer from lack of
liquidity, and also it does not have excess liquidity. The failure of a company
to meet its obligations due to lack of sufficient liquidity, will result in poor
credit worthiness, loss of creditors confidence or even in legal tangles
resulting in thee closure of the company. A very high degree of liquidity is also
bad, idle assets earn nothing. Therefore, it is necessary to strike a balance
between high liquidity and lack of liquidity.

The most common ratios, which indicate the extent of liquidity or lack
of liquidity are:

(1) Current Ratio

(2) Liquidity Ratio or Acid test or Quick ratio
(3) Absolute Ratio
 CURRENT RATIO

The Current Raito is the ratio of total current to total current liabilities.
It is calculated by dividing current assets by current liabilities.

Current Ratio = Current Assets

Current Liabilities

The Current assets of a firm represent those assets, which in a normal

course of business get converted into cash over a short period of time usually
not exceeding one year. They include cash and bank balances, marketable
securities, inventory of raw materials, semi-finished (work-in-progress) and
finished goods, debtors net of provision for bad and doubtful debts, bills
receivable and pre-paid expenses.

The current liabilities are those liabilities, which are required to be paid
in short period i.e., within a year. They include trade creditors, bills payable,
bank credit, provision for taxation, dividends payable and outstanding
expenses.
 QUICK RATIO

The quick ratio is the ratio between quick current assets and current
liabilities and is calculated by dividing the quick assets by the current
liabilities.

Acid-test Ratio = Quick assets

Current liabilities

The term quick assets refer to current assets, which can be converted
into cash immediately or at a short notice without diminution of value.
Included in category of current assets are: Cash and bank balances, short-term
marketable securities and debtors/receivables. Thus, the current assets, which
are excluded, are: Pre-paid expenses and inventory. The exclusion of
inventory is based on the reasoning that it is not easily and readily convertible
into cash. Pre-paid expenses by their very nature are not available to pay-off
debts. They merely reduce the amount of cash required in one period because
of payment in prior period.
 ABSOLUTE CASH RATIO

The purpose of this ratio is to show how far cash reservoir is sufficient
to meet the current liabilities. Although provisions do not represent current
liabilities, some provisions have the characteristics of current liabilities.
Examples are tax provision and proposed dividend. It is almost certain that
some liability will arise in the near future.

Absolute Cash Ratio = Cash Reservoir

Current Liabilities

Cash Reservoir = Cash in hand + Cash at bank +

marketable non-trade investments.

Current Liabilities = Trade creditors + bills payable +

Outstanding expenses + provision
for taxation + proposed dividend
+ other provisions (against which
liability may arise shortly).

If on the assets side there is ‘advance tax’ item, provision for taxation
should be taken net of advance tax.
 CASH POSITION TO TOTAL ASSETS RATIO

This ratio is a measure of liquid layer of the assets deployed by

business. But too high a cash reservoir is not good because this may reduce the
level of resource deployment for other assets. On the other hand maintaining
too low a ratio is also not good, that may create cash crisis for day-to-day
operations of the business.

Cash Position to Total Assets = Cash Reservoir * 100

Total Assets
 LEVERAGE/CAPITAL STRUCTURE RATIO

The long-term solvency of a firm can be examined by using leverage or

capital structure ratios. The leverage ratio may be defined as financial ratio,
which throws light on the long-tem solvency of a firm reflected in its ability to
assure the long-term creditors with regard to:

(i) Periodic payment of interest during the period of the loan.

(ii) Repayment of principal on maturity or in pre-determined instalments at due

dates.

There are, thus, two aspects of the long-term solvency of a firm:

(i) Ability to repay the Principal when due

(ii) Regular payment of interest.

Accordingly, there are two different, but mutually dependent and inter-
related, types of leverage ratios.

First, ratios, which are based on the relationship between, borrowed

funds and owner ’s capital. These ratios are computed from balance sheet and
have many variations such as:

(i) Debt-equity ratio

(ii) Debt-asset ratio
(iii) Equity-asset ratio

The second type of leverage ratios are calculated form profit and loss
account. Included in this category are:

(i) Interest coverage ratio

(ii) Dividend coverage ratio
(iii)Total fixed charges coverage ratio
(iv) Cash flow coverage ratio
(v) Debt-service coverage ratio
 DEBT-EQUITY RATIO

The Debt-Equity Ratio is the measure of the relative claims of creditors

and owners against the firm’s assets. The ratio is calculated in various ways.

One view is to calculate the debt-equity ratio as long-term debts (non-

current liabilities) divided by shareholders’ equity (common shareholders’
equity plus preference shareholders’ equity.)

i) Debt-Equity Ratio = Long - term Debt

Shareholder ’s Equity

Another variation of the ratio is to divide the total debt (total liabilities)
by the shareholders’ equity.

ii) Debt-Equity Ratio = Total Debt

Shareholder ’s Equity

The Debt-Equity Ratio is an important tool of financial analysis to

appraise the financial structure of a firm. It has important implications from
the viewpoint of the creditors, owners, and the firm itself. The ratio reflects
the relative contribution of creditors and owners of business in its financing.

If the Debt-Equity Ratio is high, the owners are putting up relatively

less money of their own. It is a danger signal for the creditors. A high debt-
equity ratio has equally serious implications from the firm’s point of view
also. A high proportion of debt in the capital structure would lead to
inflexibility in the operations of the firm as creditors would exercise pressure
ad interfere in management. The shareholders of the firm would, however,
stand to gain in two ways:

i) with a limited stake, they would be able to retain control of the firm
and

ii) the return to them would be magnified.

A low debt-equity ratio has just the opposite implications. To the

creditors, a relatively high stake of the owners implies sufficient safety of
margin and substantial protection against shrinkage in assets. For the company
also, the servicing of debt is less burdensome and consequently its credit
standing is not adversely affected, its operational flexibility is
not in jeopardy and it will be able to raise additional funds. The shareholders
of the firm are deprived of the benefits of trading on equity or leverage.

The reasonable relationship between debt and equity will depend upon
the circumstances, prevailing practices and so on. The general proposition is:
others’ money should be in reasonable proportion to the owners’ capital and
the owners should have sufficient stake in the fortunes of the enterprise. For
instance, in a capital-rich country, the practice is to use as little debt as
possible. A debt-equity ratio of 1:3 is regarded as indicative of a fairly heavy
debt; a ratio of 1:1 would indicate an extremely heavy and unsatisfactory debt
situation. In under-developed countries such standards cannot be expected. It
is not unusual to find firms having a debt-equity ratio of 2:1 or even 3:1 in the
case of joint stock enterprises in India.

The debt-equity ratio cannot be applied mechanically without regard to

the circumstances of each case, such as type and size of business, the nature of
the industry and the degree of risk involved.

In computing the Debt-Equity Ratio of SMS Pharmaceuticals Ltd., Debt

is taken as the total of secured, unsecured loans and Equity consists of equity
share capital plus reserves and surplus.
 DEBT TO TOTAL CAPITAL RATIO

This ratio is a variation of the debt-equity ratio and gives similar

indications.

Debt to Total Capital Ratio is calculated by dividing the total debt by

permanent capital + current liabilities.

It measures the portion of the firm’s assets that are financed by

creditors. A very high ratio indicates a greater risk to the creditors. A low ratio
of debt to total capital is favourable to the creditors. A very low ratio is a
source of worry to the shareholders, as the company is not using debt to their
best advantage. A firm should have neither a high ratio nor a very low ratio.

In computing the Debt to Total Capital Ratio of SMS Pharmaceuticals

Ltd., Total Debt is taken as total of secured loans, unsecured loans and current
liabilities and permanent capital consists of shareholders’ equity, secured
loans, unsecured loans, current liabilities and Reserves and surplus.
 PROPRIETARY RATIO

It is a variant of debt equity ratio. It relates the proprietors’ or

shareholder ’s funds to the total assets. It is calculated as follows:

Proprietary Ratio = Proprietary Fund

Total Assets

Proprietary ratio reflects the general financial strength and the

proportion of Shareholder ’s funds in total assets employed in the business. A
high proprietary ratio indicates a relatively low degree of risk to creditors.
Conversely a low proprietary ratio indicates a greater degree of risk to
creditors.
 CAPITAL GEARING RATIO

This ratio helps in determining the future financial structure of the

business. It is calculated as follows:

Capital Gearing Ratio = Funds bearing fixed interest and fixed dividend
Equity shareholder ’s funds

= Debentures + Term Loans + Preference Share Capital

Equity Share Capital + Reserves – Fictitious Assets

A company is said to be highly geared if it has a high capital gearing

ratio, and lowly geared if the capital gearing ratio is low. The extent of gearing
determines the future financial structure of the business. A company which is
highly geared will have to raise funds by issuing fresh equity shares, where as
a lowly geared company would find it attractive to raise, funds by way of term
loans and debentures.

In computing the Capital Gearing Ratio of SMS Pharmaceuticals Ltd.,

Funds bearing fixed interest is taken as secured and unsecured loans and
Equity Shareholder ’s funds consists of Equity Share Capital and Reserves and
Surplus.
 FIXED ASSETS RATIO

The ratio establishes the relationship between fixed assets and

shareholder ’s funds i.e., share capital plus reserves, surpluses and retained
earnings. The ratio can be calculated as follows:

Fixed Assets Ratio = Fixed Asset (After depreciation)

Capital Employed

Capital Employed = Equity Share Capital + Preference Share Capital

+ Reserves + Long-term liabilities – Fictitious
Assets

This ratio indicates the mode of financing the fixed asset. A financially
well managed Company will have its fixed assets financed by long-term funds.
Therefore, the Fixed Assets Ratio should never be more than 1. A ratio of 0.67
is considered ideal.
 ACTIVITY RATIOS

Activity Ratios are concerned with measuring the efficiency in assets

management. Sometimes, these ratios are called efficiency ratios or asset
utilisation ratios. Since the efficiency of a firm is reflected in the speed and
volume of business, the activity ratios are calculated with reference to sales
and expressed in number of times. A firm’s efficiency in utilising its assets is
measured by comparing its sales with investment in various assets including
inventories, bills receivables, fixed assets, etc. The greater the rate of turnover
or rotation of assets, the more efficient will be utilisation or management of
assets. Following are some of the more important and widely used activity
ratios.
 INVENTORY TURNOVER RATIO

This ratio shows the number of times the investment in inventories is

turned over or replaced during the year. It measures the relationship between
goods sold and the inventory level. There are two approaches of measuring
inventory turnover. First, it is calculated by dividing the cost of goods sold by
the average inventories. According to this approach.

Inventory Turnover Ratio = Cost of Goods sold

Average inventories

Cost of Goods sold = Opening Stock + Manufacturing Cost +

Purchases – Closing Stock

Average Inventory = Opening Stock + Closing Stock

2

The second approach of measuring inventory turnover is based on

inventories at the end of the financial year as shown in balance sheet. It is
calculated by dividing total sales by the closing inventory. Thus,

Inventory turnover = Total sales

Closing inventory

The inventory turnover shows how rapidly the inventory is turning into
receivable through sales. Generally a high inventory turnover is indicative of
good inventory management and a lower inventory turnover suggests an
inefficient inventory management. A low inventory turnover implies excessive
inventory levels than warranted by production and sales activities, or a slow-
moving or obsolete inventory. A high level of sluggish inventory amounts to
unnecessary tie-up of funds, impairment of profit and increased costs. Thus,
too high and too low inventory turnover ratios are not desirable.

A very high inventory turnover may be the result of very low level of
inventory, which results in frequent stock outs the turnover, will also be high
if the firm replenishes its inventory in too many small lot sizes. The situations
of frequent stock outs and too many small inventory replacements can prove
costly for the firm.
 DEBTORS TURNOVER RATIO AND COLLECTION PERIOD

A firm sells goods on credit and cash basis when the firm extends credits
to its customers; book debts (debtors) are created in the firm’s accounts.
Debtors are expected to be converted into cash over a short period and,
therefore, are included in current assets. The liquidity position of the firm
depends on the quality of debtors to a great extent. Financial analysts employ
two ratios to judge the quality or liquidity of debtors. The debtors turnover
ratio is found out by dividing sales by debtors.

Debtors turnover ratio = Sales

Average Debtors

The average collection period of debtors is calculated as:

Average collection period for Debtors = Days in year/months in a year

Debtors turnover ratio

The debtors turnover ratio indicates the number of times on the average
that debtors turnover each year. A high ratio is indicative of shorter time lag
between credit sales and cash collection. A low ratio shows that debts are
being collected rapidly.

The average collection period ratio measures the quality of debtors since
it indicates the rapidity or slowness of their collect ability . The shorter the
collection period, the better the quality of debtors, as a short collection period
implies the prompt payments by debtors. Too low a collection period is not
necessarily favourable . Rather it indicates a very restrictive credit and
collection policy.
 CREDITORS TURNOVER RATIO

In the course of business operations, a firm has to make credit purchases

and incur short-term liabilities. A supplier of goods, i.e., creditor, is naturally
interested in finding out how much time the firm is, likely to take in repaying
its trade creditors. The analysis for creditors turnover is basically the same as
of debtors turnover ratio except that in place of trade debtors, the trade
creditors are taken as one of the components of the ratio and in place of
average daily sales, average daily purchases are taken as the other component
of the ratio. The creditors turnover ratio is found out by dividing sales by
debtors.

Creditors turnover ratio = Purchases

Average Creditors

The average collection period of creditors is calculated as:

Average collection period for Creditors= Days in year/months in a year

Creditors turnover ratio

The creditors turnover ratio of 12 or more, implying a debt payment

period of 30 or less number of days, indicates that the firm is not able to get
the best terms of credit. However, very less creditors turnover ratio, or high
debt payment period, may indicate the firm’s inability in meeting its
obligations in time.

The average collection period ratio represents the average number of

days taken by the firm to pay its creditors. Generally, lower the ratio, the
better is the liquidity position of the firm and higher the ratio, less liquid is
the position of the firm. But a higher payment period also implies greater
credit period enjoyed by the firm and consequently larger the benefit reaped
from credit suppliers.
 FIXED ASSETS TURNOVER RATIO

The fixed assets turnover ratio measures the efficiency with which the
firm is utilizing its investments in fixed assets, such as land, buildings, plant
and machinery, furniture, etc. It also indicates the adequacy of sales in relation
to the investment in fixed assets. The fixed assets turnover ratio is sales
divided by net fixed assets.

Fixed Assets Turnover Ratio = Sales

Net Fixed Assets

Generally, a high ratio indicates efficient utilization of fixed assets in

generating sales, while a low ratio indicates inefficient management and
utilization of fixed assets. However, the analyst should be cautious in deriving
conclusions form the fixed assets turnover ratio.
 TOTAL ASSETS TURNOVER RATIO

This ratio indicates the sales generated per rupee of investment in total
assets.

Although fixed assets are directly concerned with the generation of

sales, but other assets also contributes to the production and sales activities of
the firm. The firm must manage its total assets efficiently and should generate
maximum sales through their proper utilisation .

The total assets turnover is calculated dividing sales by total assets of

the firm:

Total Assets Turnover Ratio = Sales

Total Assets

The total assets turnover ratio is a significant ratio since it shows the
firm’s ability of generating sales from all the financial resources committed to
the firm. As this ratio increases, there is more revenue generated per rupee of
total investment in assets. The firm’s ability to produce a large volume of sales
on a small total asset base is an important part of the firm’s overall
performance in terms of profits. Idle or improperly used assets increase the
firm’s need for costly financing and the expenses for maintenance and upkeep.

While calculating the total assets turnover ratio of SMS Pharmaceuticals

Ltd., Total Assets are taken as total of fixed assets, current assets and
investments, intangible assets are not included in total assets,.
 WORKING CAPITAL TURNOVER RATIO

This ratio indicates the velocity of the utilisation of net working capital.
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

Working Capital turnover ratio indicates the number of times the

working capital is turned over in the course of a year. This ratio measures the
efficiency with which the working capital is being used by a firm. A higher
ratio indicates efficient utilisation of working capital and low ratio indicates
inefficient utilisation of the firm’s funds. But a very high working capital
turnover ratio is not a good situation for any firm and hence care must be taken
while interpreting the ratio. This ratio can be calculated as:

Working Capital Turnover Ratio = Cost of Sales

Average Working Capital
 CAPITAL EMPLOYED TURNOVER RATIO

Capital Employed may be defined as net fixed assets + Working Capital.

Capital Employed turnover Ratio = Sales

Capital Employed

The ratio indicates the firm’s ability of generating sales per rupee of
long-term investment.

The higher the ratio, the more efficient the utilisation of owners’ and
long-term creditors’ funds.

In computing the capital employed turnover ratio, capital employed

taken as the total of net fixed assets and working capital.
 PROFITABILITY RATIOS

A business is run primarily for profit. So its performance has been

measured in terms of profit. Profitability ratios give some yardstick to measure
profit in relative terms, either with reference to sales or assets or capital
employed. The term ‘profit’ is also variously defined for this purpose.

Profitability based on Sales or Revenue:

The term sales should be used when the source of revenue of the
business is sale of goods. The service sector enterprises charge rent, fees or
interest. So instead of sales the term ‘revenue’ can be used.
 GROSS PROFIT TO SALES RATIO

This ratio reveals the result of trading operations of the business. There
is no standard norm for gross profit ratio and it may vary from business to
business but the gross profit should be adequate to cover the operating
(administrative and office expenses, selling and distribution expenses) and to
provide for fixed charges, dividends and accumulation of reserves. Gross Profit
Ratio measures the relationship of gross profit to net sales and is usually
represented as a percentage. Thus, it is calculated by dividing the gross profit
by sales:

Gross Profit Ratio = Gross Profit

Net Sales

Gross Profit = Net Sales – Cost of Goods Sold

Net Sales = Total Sales – Sales Returns

Cost of Goods Sold = Opening Stock + Purchases + Manufacturing

Expenses – Closing Stock

There is no ideal or standard gross profit ratio. The higher the ratio,
better will be the performance of the business. 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.
 NET PROFIT TO SALES RATIO

This ratio is the overall measure of the firm’s ability to turn each rupee
of sales into net profit. If the net margin is inadequate, the firm will fail to
achieve satisfactory return on owners’ equity. This ratio also indicates the
firm’s capacity to withstand adverse economic conditions. A firm with a high
net margin ratio would be in an advantageous position to survive in the face of
falling sales prices, rising costs of production or declining demand for the
product. It would really be difficult for a low net margin firm to withstand
these adversities. Similarly, a firm with high net profit margin can make better
use of favourable conditions, such as rising sales prices, falling costs of
production or increasing demand for the product. Such a firm will be able to
accelerate its profits at a faster rate than a firm with low net profit margin.

The Net Profit Margin Ratio or Net Profit to Sales Ratio measured by
dividing net profit after taxes by sales.

Net Profit Margin = Net Profit After Taxes

Sales
 OPERATING RATIO

This ratio establishes the relationship between cost of goods sold and
other operating expenses on the one hand and the sales on the other. In other
words, it measures the cost of operations per rupee of sales. The ratio is
calculated by dividing operating costs with the net sales and its generally
represented as a percentage.

Operating Ratio = Operating Cost * 100

Net Sales

Operating Cost = Cost of Goods Sold + Operating Expenses

Operating Expenses consist of:

(a) Administrative and office expenses like rent, salaries to staff,

insurance, directors’ fees, etc.

(b) Selling and distribution expenses like advertisement, salaries of

salesmen, etc.

Operating ratio indicates the percentage of net sales that is consumed by

operating cost. Obviously, higher the operating ratio, the less favourable it is
because, it would have a small margin (operating profit) to cover interest,
income tax, dividend and reserves. A low operating ratio is an indication of
operating efficiency of the business.
 OPERATING PROFIT RATIO

This ratio establishes the relationship between operating profit and

sales. It is calculated by dividing operating profit by sales.

Operating Profit = Net Sales – Operating Cost

= Net Sales – (Cost of Goods Sold + Administrative

and Office Expenses + Selling and Distributive
Expenses)

Operating Profit can also be calculated as:

Operating Profit = Net Profit + Non-operating Expenses

- Non-Operating Income

So, Operating Profit Ratio = Operating Profit * 100

Sales

This ratio can also be calculated as:

Operating Profit Ratio = 100 – Operating Ratio

The higher the ratio, the better it is.

 PROFITABILITY BASED ON CAPITAL EMPLOYED

RETURN ON CAPITAL EMPLOYED (R O C E)

The return on capital employed indicates how well management used the
funds supplied by creditors and owners. This ratio is also called the earning
power of the firm and represents the return on the funds.

Higher the ratio, better it the position of the firm and more efficient is
the management in utilising the funds, entrusted to it.

Return on Capital Employed = Net Profit After Taxes

Capital Employed
 PROFITABILITY INDICATORS FOR SHAREHOLDERS

RETURN ON SHAREHOLDERS’ EQUITY

This is probably the single most important ratio to judge whether the
firm has earned a satisfactory return for its equity-holders or not. The rate of
return on ordinary shareholders’ equity is of crucial significance in ratio
analysis form the point of the owners of the firm.

It is calculated by dividing the profit after taxes and preference dividend

by the equity of the ordinary shareholders.

Return on Shareholders’ Equity = Net Profit After Taxes

Shareholders’ Equity / Net Worth
 RETURN ON TOTAL ASSET RATIO

The return on total asset is a useful measure of the profitability of all financial
resources invested in the firm’s assets. It evaluates the use of total funds
without any regard to the sources of funds. This ratio is particularly useful to
evaluate the performance of divisions in a multi-divisional firm. Generally,
these divisions have the responsibility of using and controlling assets without
any responsibility towards the raising and utilising funds.

Higher the ratio, more effective is the firm in using the “pool” of funds.

The Return on Assets or profit-to-assets ratio is net profit after taxes

divided by total assets.

Return on Total Assets = Net Profit After Taxes

Total Assets

In computing the Return on Total Assets Ratio of SMS Pharmaceuticals

Ltd., the Total Assets are taken as the total of net fixed assets, current assets
and investment.
 EARNINGS PER SHARE

The Earnings Per Share Ratio measures the profit available to the equity
holders on a per share basis, i.e., the amount that they can get on every share
held. It is calculated by dividing the profits available to the shareholders by
the number of the outstanding shares. The profits available to the ordinary
shareholders are represented by net profits after taxes and preference dividend.

Earnings Per Share = Net Profit Available to Equity holders

Number of Ordinary Shares Outstanding

EPS is a widely used ratio. Its usefulness in analyzing the effect of a

change in leverage on the net operating earnings to the ordinary shareholders
and, given the requirement of maximising EPS. If EPS has increased over the
years, it does not necessarily follow that the firm’s profitability has improved
because the increased profits to the owners may be the effect of an enlarged
equity capital as a result of profit retentions, though the number of ordinary
shares outstanding still remains constant. Another limitation of EPS is that it
does no reveal how much is paid to the owners as dividends or how much
earnings are retained in the business. It only shows how much “theoretically”
belongs to the ordinary shareholders.
 BOOK VALUE

It is that fraction of the net worth of the business, as depicted in the

Balance Sheet, which is attributable to one equity share of the business. It is
calculated as:

Equity Shareholders Funds

No. of Equity Shares

The higher the book value of a share, the more strong the business is
assumed to be. The book value should not be below the paid up value of one
share.
 LIMITATIONS OF RATIO ANALYSIS

The ratio analysis is a widely used technique to evaluate the financial

position and performance of business. Yet it suffers from various limitations.

a) It is difficult to decide on the proper basis for comparison. Ratios of

a company have meaning only when they are compared with some standards.
Usually, it is recommended that ratios should be compared with the industry
averages. But the industry averages are not easily available. In India, no
systematic and comprehensive industry ratios are compiled.

b) In the case of inter-firm comparison no two firms are similar in age,

size and product unit. Therefore, any comparison of ratios of two such firms
must take these factors into account.

c) Both the inter-period and inter-firm comparison is affected by price

level changes. A change in price-level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not
clearly indicate the trends in solvency and profitability of the company.

Like wise, there may be two firms - one having purchased the assets at a
lower price and another at a higher price. Return on investment calculated for
such firms are bound to differ substantially. The firm, which has purchased the
assets at a lower price, will have higher return than the firm, which has
purchased the assets at a higher price. Therefore, inter-firm comparisons are
also vitiated due to price-level changes.

d) The differences in the definitions of items in the balance sheet and

the income statements make the interpretation of ratios difficult.

Diversity of view exists as to the meaning of certain terms like net

worth, current assets, current liabilities, etc. Similarly, profit means different
things to different people.

e) The ratios calculated at a point of time are less informative and

defective as they suffer from short-term changes. The ratios do not have much
use if they are not analysed over years.
 Although trend analysis is more useful, but, still the analysis is static to
an extent.

The balance sheets, prepared at different points of time, do not reveal

the changes, which have taken, place between dates of two balance sheets. The
statement of changes in financial position reveals this information, but these
statements are not available to outside analysis.

f) The basis to calculate ratios is historical financial statements. The

financial analysis is more interested in what happened in the past.

Management of the company has information about the company’s future

plans and policies and, therefore, is able to predict future happening to a
certain extent. But the outside analyst has to rely on the past ratios, which may
not necessarily reflect the firm’s financial position and performance in the
future.

g) Ratios are simple to understand and easy to calculate. Therefore,

there has been a tendency to over employ them. However, it should be clearly
understood that ratios are only tools and the personal judgement of analyst is
more important. Again, the analyst should not merely rely on a single ratio. He
has to take several ratios (connected) into account before reaching a
conclusion.

h) Conclusions from analysis of statements are not sure indicators of

bad or good management. They merely convey certain observations pointing to
the probability of matters needing investigation. It is not wise to assume
without further investigation that a condition particularly favourable or
unfavourable is present.
 PROFILE OF THE COMPANY

1.0 Executive Summary

SMS Pharmaceuticals Ltd. (SMS) is a leading manufacturer and
exporter of API (Active Pharmaceutical Ingredient) and
Intermediates. SMS is also doing a major work in developing new
molecules in its established R&D facility at Hyderabad. SMS is the
largest manufacturer and exporter of Ranitidine and its
Intermediates. SMS is sharing 70% of the domestic and 65% of the
world’s non-regulatory market of Ranitidine.
SMS is also a leading manufacturer and exporter of Sumatriptan
Succinate and its intermediates. SMS is having the credit of
producing a European pharmacopial grade product first time in
India. SMS has filed for a patent for a non-infringing process and
filed drug master file in US FDA and Canadian FDA. Apart from the
Ranitidine and Sumatriptan, SMS is also producing Ramipril,
Quinapril and Gemicitabine.
One of the key features of SMS is close cooperation of IT experts,
scientists and process specialists in cross-functional teams – they
experts speak the same language as their customers and have
intimate knowledge of industry needs.
Another key feature of SMS is in-house development of R&D
laboratory with the state of art technology equipped with latest
precision equipments. SMS fortified its in-house R&D services by
adding experienced scientists to cater to the needs of the
organization in the fields of research, process development,
development of new molecules and to create intellectual property.
The company is already in the pursuit of arranging separate
premises for the R&D activities.
SMS R&D center is working on other anti cancer molecules
Imatinib, Geftinib like Gemicitabine. SMS has already created a FDA
facility (inspection due) for Sumatriptan at Unit II. Now SMS is
going ahead to build another state of art FDA facility for Ranitidine
to fulfill the US and other regulatory markets in Europe. SMS is also
planning to create FDA facility for the other small volume and high
volume drugs at unit II.
This business plan is part of our regular business planning process.
We revise this plan semi-annually.
Our keys to success and critical factors for the next year - in order of
importance are:
 Patenting all the processes to get a higher share of
international market.
 Test marketing and basic research to determine product
acceptance.
 Test marketing of multi-channel distribution.
 Test marketing of media, PR, pricing, and product endorsement
plans.
 Goal of recouping production start-up costs and first year
depreciation on initial three molds in year one.
 Reaching all retail distribution outlets in the country and
establishing the market.

1.1 Objectives

The principal objectives of SMS Pharmaceuticals Limited are as

follows:
Rs. 400 Crore turnover by the year 2007.
Upgrading the manufacturing facilities to meet the international
regulatory approvals.
Capitalize the gap occurred after patent expiry of the products in US
and other regulatory markets.
Developing Non-infringing methods of preparation for the products
whose patents are expiring, and tapping the requirement of API for
the 6 months exclusivity and further generic requirement. Patenting
the methods.
Concentrating on Research and development, for cost effective
production of the existing molecules to the maximum extent for
higher profit margins in growing competitive environment.
Strategic alliance with MNC’s in research and development
Development of new molecules.
Establishing in the Nutraceuticals market through selected product
line.

1.2 Mission
The mission of SMS Pharmaceuticals Limited, is
 To develop patented cost effective process for API's,
manufacture and market the API's in US and other regulatory
markets.
 Manufacture and supply of API intermediates which are in
demand, to patent holder of the API in the US and Europe.
 To do custom synthesis and contract research with MNC's
 To develop nutraceutical products and market them in India,
US, Europe and Gulf countries.
 To develop tobacco cessation NRT products and launch in India
and surrounding countries where there is a demand for them.
 To reach Rs.400 crore turnover from Rs.100 crore.

The mission of SMS Pharmaceuticals Limited is to develop, process

new molecular patents and to enable the life science companies to
improve productivity through comprehensive process integration
and decision support solutions across the research and development
value chain. The objective is to bring new products to market faster
and Capturing the global market.

1.3 Key to Success

The key to success for SMS Pharmaceuticals Limited is as detailed
below:
Efficient and dedicated teamwork from all the team members
towards the organizational goals
Highly qualified and rich experienced technical personnel resources.
Highly sophisticated technology meeting international USFDA and
cGMP Standards.
Strategic marketing wing with qualitative forecasting abilities.

2.0 Company Summary

SMS Pharmaceuticals Pvt. Ltd. was formed and started its

operations in 1987; subsequently the unit had gone into red and
declared sick. The existing management took over the sick unit in
the year of 1990 and started producing bulk drugs.
The company started their bulk drug business with the product
called Ranitidine Hcl with a capacity of 6 MT per annum and the
process consists of 12 major stages. The Ranitidine Hcl is an anti-
ulcer product widely used all over the world. The Product is very
sensitive molecule i.e. highly hygroscopic and oxidative. The
company has upgraded its manufacturing capacity to 1440 MT per
annum and also upgraded the technology to a three stage process
which enabled it to stand as a competitive seller in the market. The
company also acquired a second Unit at Miyapur as part of the
expansion programme, and started producing Sumatriptan Succinate
for which a non-infringing root of synthesis developed in the in-
House R&D. the company has filed a patent for the root of synthesis.
The company also filed DMF (drug master file) in US, Europe and
Canada.
The company also started producing ACE inhibitors Ramipril,
Quinapril and Anti- cancer drug Gemcitabine. The company is now in
the process of filing patents for non –infringing synthesis of the
products.

The company was having 20 employees with a single manufacturing

block in 1990 and single product. Now the company has expanded
its operations to the level of 450 employees and a multi block
manufacturing facilities in three different areas. The No. of products
have also increased to 10. The company also expanded their R&D
activities with five-experienced PhD’s supported by 20 senior
chemists.
The R&D center is mainly focusing on anti-cancer molecules, anti-
migraine molecules, antibacterial, anti-ulcer, important
intermediates and natural plant extracts.
The company has started a nutraceutical and health care division as
a part of diversification in the year 2003, by launching an OTC
product called Fenudiet in consumer market. The product is a
dietary food supplement for every adult and especially for Diabetics.
The product is made from fenugreek seeds, which are known not
only for diabetics but also for so many health reasons. Fenudiet was
launched in the month of April 2003 in twin cities as a test market
and after proving its potentiality, it was launched in the other areas
of the state in August 2003. Fenudiet received an excellent response
in the state from diabetics and hypercholestremics. The product is
being promoted through ethical marketing strategies and through
media.

2.1 Company Ownership

SMS Pharmaceuticals Limited founding shareholders are:

SHARE HOLDING PATTERN OF THE
COMPANY

S No %
no Particulars shares Holding

Directors and
Relatives 1063801 51.89%
Friends and
Relatives 157799 7.70%
Body corporate 561500 27.39%
Employees 145900 7.12%
Others 121000 5.90%
2050000

3.0 Future Products

3.1 API’s

The focus for the next five years will be to develop processes for the
following molecules
1 Imatinib Anticancer 1 Es-Citalopram Antidepressant
 2
2 Geftinib Anticancer 1 Clopidogrel Anticoagulants
3
3 Bicalutamid Antineoplastic 1 Venlafaxine Antidepressant
e 4
4 Irenotecan Anticancer 1 Roxindole
5
5 Tamsulosin Venigen 1 Reboxatine Anti depressant
prostatic 6
hyperplasia
6 Rizatriptan Antimigraine 1 Perindopril ACE inhibitor
7
7 Naratriptan Antimigraine 1 Trandopril ACE inhibitor
8
8 Eletriptan Antimigraine 1 Fosinopril ACE inhibitor
9
9 Rosilglitazo Antidiabetetic 2 Benazapril ACE inhibitor
ne 0
10 Pioglitazone Antidiabetetic 2 Abaperidone Antipsychotic
1
11 Repaginide Antidiabetetic 2
2

3.2 Nutraceuticals

The Nutraceuticals is having the following products in its

second phase of product line:

1. Nicotine Replacement Therapy (NRT) Products

SMS Pharmaceuticals Limited is all set to launch different

Nicotine Replacement Therapy Products for those who
want to quit their smoking habit. The nicotine replacement
therapy product is aimed at people who want to kick the
gutkha and cigarette smoking habit, is an over-the-counter
(OTC) product. The other brands that are available in the
Indian market are either prescription based such as Glaxo's
Zyban or drugs that contain some amount of tobacco in
them. SMS products contain only pharmaceutical
ingredients. The Indian tobacco market is estimated around
Rs. 50,000 Crore, of which cigarettes contribute about
 Rs.20,000 Crore and gutkha & others contributing the
balance. The government had banned gutkha in certain
parts of the country but the product is still sold illegally.
Other companies involved in the manufacturing of NRT
products are Pfizer, GSK and Novartis. These products,
however, are strictly under prescription while our products
are OTC products.

a. Chewing gum
The product is designed primarily as a NRT Product and
in a proprietary mint flavor ethnic and Indian Gutkha
flavor
Each gum contains 2 mg of Nicotine in the form of NPR
b. Chewetts
The product is designed as an alternative and NRT
product for tobacco (gutkha) chewers, jarada pan eaters
The product has the look, feel and flavor of gutkha and
will be the first of its kind.
Available in sachets containing 2 gms of chewetts which
contains 2mg of nicotine in the form of NPR

2. Night master
An aphrodisiac Product, designed specially for men sexual performance.

3. Health Drink for cancer patients

4. High calcium diet

5. High Iron syrup

6. Cardio protective Nutraceuticals dietary supplement

7. PLN Pregnant lactating Nourishing Supplement

8. HIV-AIDS Nutritional supplement

9. A Tube feeding nutrition supplement

4.1 Sales Strategy

API’s
The sales strategy of the company in APIs is to provide Quality
products to the end formulators at a competitive price.
 Quality products to the customer
 Economical pricing
 Effective service
 Better understanding
These are the few traits that made SMS to have a largest number of
satisfied customers in its journey.

4.2 Milestones

 Continues profit making company form last 13 years.

 Free reserves stood at Rs.4230.25 Lakhs and paid up share
capital Rs.205 Lakhs as at 31st, March 2003.
 Regular 20% Dividend paying company over the 14 years.
 Company filed Non-infringement Process Patent for
Sumatriptan Succinate.
 World largest producer of Ranitidine.
 Managed by Technical promoters having 22 years experience in
core industry.
 Three Manufacturing facilities and ISO9002 Certified and
located in Andhra Pradesh only.
 Having 400 work force.
 High technical background backed up by corporate level
Research and Development center.
 Large and strong clientele base like Ranbaxy, Cadila and
Torrent in indigenous market and world vide in Exports.
 Having export House status and winner of “Pandit Jawaharlal
Nehru Silver Rolling Trophy “for Best Industrial Productivity
Efforts in the State”.
 First company that is, producing Nutraceuticals for alternative
to medicines for various health related problems.

Process for FDA Approval for Unit-II to manufacture Sumatriptan

has been in an advanced stage i.e. USFDA inspection is completed
 in Nov 3rd week 2003 and we are expecting the approval
communication is awaited.

5.0 Management Summary

The management has rich experience in all the aspects for the
prosperity of the organization.

5.1 Managing Directors

S.L. Name Age Academic Designatio Experien No of Previou

No Qualificati n& ce years sly
on Responsib with employe
ility SMS d
1 P.Rames 44 MSc inManaging 20 12 Globe
h Babu Organic Director organics
Chemistry Corporate Limited
Finance,
R&D and
Business
Strategy

2 T.V.V.S.N 42 B.Sc in Managing 20 12 Chemino

. Chemistry Director r Drugs
Murthy Production Limited
and
Technology
3 A.P. Rao 60 MBA and Director 09 Dr.
C.A (corporate Reddy’s
advise)
Image
Building,
policies,
growth
plans

5.2 Management Team

S.L Name Ag Academic Designatio Exp No Previou
No e Qualificati n& erie of sly
on Responsib nce year employ
ility s ed
with
SMS
1 Dr. 56 Ph. D. General 26 IDPL
Hariharakris Manager
hnan R&D
Responsibl
e for new
drug
developme
nt
2 P. Ravi M.Com SBU head 20 09 Chemin
Kumar Unit II or
Production, Drugs
Purchases,
Marketing
and
Finance
3 Y Ravi B.A and SBU head 18 09 Chemin
Kumar Diploma in Unit I or
Internation Production, Drugs
al Purchases,
Marketing Marketing
and
Finance
4 Mr. A. Hari B.A General 17
Babu Manager
HRD&
Commerci
al
Logistics
for Exports
and central
Excise
5 Mr. Hari 45 MSc. SBU head 20 12
Kishore Chemistry Unit III &
General
Manager
(Corporat
 e
Purchases
)
Nutraceutic
als and
corporate
purchases
6 T.V. Srihari 42 B.E. General 22 Natco
Chemical Manager Pharma
Engineerin (Technical
g )
Process
designing,
scale up for
new
projects
and new
products.
 BOARD OF DIRECTORS OF THE COMPANY

1) D RADHA KRISHNA RAO DIRECTOR

2) A P RAO DIRECTOR

3) P RAMESH BABU CMD

4) T V V S N MURTHY VC JMD
 THE PERIOD OF STUDY

OBJECT OF THE STUDY

The object of the present study is to obtain a true insight into the
financial position of the SMS Pharmaceuticals Ltd. It seeks to study the
changes that have taken place therein over a given period of time, and to judge
profitability, liquidity, stability and turnover (with the help of comparison of
the firms’ present ratios with past ratios). The performance of SMS
Pharmaceuticals Ltd., will be measured for the last 6 years and conclusions
will be drawn which will provide guidelines to management.

METHODOLOGY OF THE STUDY

The date relating to the financial statements of SMS Pharmaceuticals

Ltd., have been collected from the published Annual Reports for the years 1998
to 2003 which were obtained from the Administrative office of the SMS
Pharmaceuticals Ltd.

LIMITATIONS OF THE STUDY

The Present Study is subjected to the following limitations:

1) The study is based on financial data provided by the company’s financial

statements are equally applicable to the study.

2) The limitations of the financial ratio analysis are also implied.

 CURRENT RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Current Assets Current Liabilities Ratio (in No.of times)

------------------------------------------------------------------------------------------

1998 19,83,82,962 12,45,53,354 1.59

1999 30,53,24,249 19,45,11,481 1.56

2000 32,31,84,382 19,53,97,650 1.65 (15 Months)

2001 33,72,20,844 17,24,47,596 1.95

2002 41,15,08,538 21,98,40,008 1.87

2003 36,69,10,352 16,40,42,286 2.23 (9 Months)

------------------------------------------------------------------------------------------

As a conventional rule a current ratio of 2 to 1 or more is considered

satisfactory. The ratio is not constant. There has been an increase in the
current ratio from 1.65 to 1.95. The SMS Pharmaceuticals Ltd., has a current
ratio of 2.23. Therefore, it may be interpreted to be sufficiently liquid. The
current ratio represents a margin of safety for creditors.

In 2003 the current liabilities decreased by 34% and current assets also
decreased by 12%. Due to decrease in current assets and current liabilities the
ratio has gone up by 16%.

The year 2000 and 2003 consists of 15 and 9 months respectively. The
rest of the years consist of 12 months.
 QUICK RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Quick Assets Current Liabilities Ratio (in No.of times)

------------------------------------------------------------------------------------------

1998 10,14,33,770 12,45,53,354 0.81

1999 16,96,11,528 19,45,11,481 0.87

2000 22,10,22,655 19,53,97,650 1.13

2001 20,98,12,920 17,24,47,596 1.21

2002 25,20,93,267 21,98,40,008 1.14

2003 20,27,35,529 16,40,42,286 1.23

------------------------------------------------------------------------------------------

The table indicates that Quick Ratio has been 1.23 during 2003, an all
time high and 0.81 during 1998, an all time low.

There has been an increase in the quick ratio form 0.87 to 1.13. A quick
ratio of less than 1 is indicative of inadequate liquidity of the business.
Generally a quick ratio of 1 to 1 is considered to represent a satisfactory
current financial position. The ratio during 2000 and 2002 is nearest to 1, so,
it can be called as satisfactory ratio.
 ABSOLUTE CASH RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Cash Reservoir Current Liabilities Ratio (in percentage)

------------------------------------------------------------------------------------------

1998 1,83,66,613 12,45,53,354 0.14

1999 3,36,53,648 19,45,11,481 0.17

2000 2,88,79,996 19,53,97,650 0.14

2001 5,73,05,673 17,24,47,596 0.33

2002 6,06,17,146 21,98,40,008 0.27

2003 5,11,19,578 16,40,42,286 0.31

------------------------------------------------------------------------------------------

The Cash Ratio in 1998 was 0.14, In 1999 it was increased to 0.17, In
2000 it was again decreased to 0.14, In 2001 it was increased to 0.33 and in
2002 it was decreased to 0.27 and in 2003 it was increased to 0.31.

The purpose of this ratio is to show how far cash reservoir is sufficient
to meet current liabilities.
 CASH POSITION TO TOTAL ASSETS RATIO OF SMS
PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Cash Reservoir Total Assets Ratio (in percentage)

------------------------------------------------------------------------------------------

1998 1,83,66,613 41,75,49,489 0.04

1999 3,36,53,648 59,85,84,084 0.05

2000 2,88,79,996 71,05,71,461 0.04

2001 5,73,05,673 83,73,96,367 0.06

2002 6,06,17,146 93,61,31,680 0.06

2003 5,11,19,578 98,84,42,948 0.05

------------------------------------------------------------------------------------------

In 1998, Cash position to total assets ratio was 0.04; In 1999 it was
increased to 0.05; In 2000 it was again declined to 0.04; In 2001 and 2002 it
was slightly increased to 0.06 and was stable; In 2003 it was declined to 0.05.

Too high a cash reserve is not good because this may reduce the level of
resource development for other assets. On the other hand maintaining too low a
ratio is also not good, that may create cash crisis for day-to-day operations of
the business.
 DEBT-EQUITY RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Debt Equity Pure Ratio

------------------------------------------------------------------------------------------

1998 13,45,43,741 15,84,52,394 0.84

1999 21,44,60,243 18,96,12,360 1.13

2000 21,47,46,332 30,04,27,479 0.71

2001 32,67,19,886 33,82,28,885 0.96

2002 32,29,54,977 39,23,36,695 0.82

2003 39,15,69,572 43,28,31,090 0.90

------------------------------------------------------------------------------------------

In 1998, debt-equity ratio was 0.84:1 and in 2000 the ratio was 0.71:1
and in 2002 the ratio was 0.82:1. The main reason for fall of debt-equity ratio
is due to repayment of loans from SMS in view of sound financial position and
surplus cash.

The debt-equity ratio was 1.13:1 in 1999 and in 2001 the ratio was
0.96:1 and in 2003 the ratio was 0.90:1. From the point of view of creditors, it
represents a satisfactory capital structure of the business, since a high
proportion of equity provides a larger margin of safety for them. From the
shareholder ’s point of view, there was an advantage during the period as the
firm employs maximum amount of debt in order to take lesser risk of their
investment and to increase their earnings (per share) by paying a lower fixed
rate of interest to outsiders.
 DEBT TO CAPITAL RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Total Debt Capital Employed Ratio (in No.of times)

------------------------------------------------------------------------------------------

1998 25,15,80,183 41,00,32,577 0.61

1999 39,96,63,130 58,92,75,490 0.67

2000 39,42,34,362 69,46,61,841 0.56

2001 48,15,25,566 81,97,54,451 0.58

2002 52,29,39,237 91,52,75,932 0.57

2003 52,83,03,487 96,11,34,577 0.54

------------------------------------------------------------------------------------------

In 1998, the ratio was 0.61; In 1999 the ratio was increased to 0.67; In
2000 it was decreased to 0.56; In 2001 it was increased to 0.58; In 2002 it was
decreased to 0.57; In 2003 it was still decreased to 0.54.

This ratio shows the relationship between outside liabilities and total
capital. This ratio is not having any standard norm prescribed, but
conventionally a ratio of 1:2 is considered as satisfactory.

The Debt to Total Capital ratio of the company for the year 2003 is less
than 1:2, which reveals that the company debt to total assets is desirable for
the creditors as there is sufficient margin of safety available to them.
 PROPRIETARY RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Proprietary Fund Total Assets Ratio (in percentage)

------------------------------------------------------------------------------------------

1998 15,84,52,394 41,75,49,489 0.37

1999 18,96,12,360 59,85,84,084 0.31

2000 30,04,27,479 71,05,71,461 0.42

2001 33,82,28,885 83,73,96,367 0.40

2002 39,23,36,695 93,61,31,680 0.41

2003 43,28,31,089 98,84,42,948 0.43

------------------------------------------------------------------------------------------

In 1998, the proprietary ratio was 0.37 and in 1999 it was decreased to
0.31 and in 2000 it was increased to 0.42. In 2001 t was decreased to 0.40 and
then increased to 0.41 in 2002. In 2003, it was still increased to 0.43.

As proprietary ratio shows what portion of total assets are financed by

the owner ’s capital. A high proprietary ratio indicates a relatively low degree
of risk to the creditors; conversely, a low proprietary ratio indicates a greater
degree of risk to the creditors.

Proprietary ratio of SMS Pharmaceuticals Ltd., was high in 2003 and low
in 1999.
 CAPITAL GEARING RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Funds bearing Equity Shareholder ’s Ratio (in percentage)

fixed interest funds
------------------------------------------------------------------------------------------

1998 13,45,43,741 15,84,52,394 0.84

1999 21,44,60,243 18,96,12,360 1.13

2000 21,47,46,332 30,04,27,479 0.71

2001 32,67,19,886 33,82,28,885 0.96

2002 32,29,54,977 39,23,36,695 0.82

2003 39,15,69,572 43,28,31,090 0.90

------------------------------------------------------------------------------------------

In 1998, the Capital Gearing ratio was 0.84; In 1999 it was increased to
1.13; In 2000 it was decreased to 0.71; In 2001 it was increased to 0.96; In
2002 it was decreased to 0.82. In 2003 it was increased to 0.90.

A company is said to be highly geared if it has a high capital-gearing

ratio and low geared if the capital-gearing ratio is low.

Capital Gearing ratio of SMS Pharmaceuticals Ltd., was high in 1999

and low in 2000. The current Capital Gearing ratio is 0.90.
 FIXED ASSETS RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Fixed Assets Capital Employed Ratio (in percentage)

------------------------------------------------------------------------------------------

1998 14,14,81,141 29,29,96,135 0.48

1999 20,36,67,635 40,40,72,603 0.50

2000 29,42,54,604 51,51,73,811 0.57

2001 40,51,84,213 66,49,48,771 0.60

2002 44,33,53,460 71,52,91,672 0.61

2003 50,55,49,795 82,44,00,662 0.61

------------------------------------------------------------------------------------------

In 1998, the fixed assets ratio was 0.48; In 1999 it was increased to
0.50; In 2000 it was again increased to 0.57; In 2001 it was still increased to
0.60; In 2002 and 2003 it was constant i.e. it is 0.61.

As fixed assets ratio indicates the mode of financing the fixed assets. A
financially well-managed company will have its fixed assets financed by long-
term funds. Therefore, the fixed assets ratio should never be more than 1.
A ratio of 0.67 is considered ideal. Fixed Assets ratio of SMS
Pharmaceuticals Ltd., was satisfactory in 2002 and 2003.
 INVENTORY TURNOVER RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Cost of Goods Sold Average Inventory Ratio (in No. of times)
------------------------------------------------------------------------------------------

1998 41,56,71,470 8,90,08,870 4.67

1999 47,67,55,308 9,60,09,664 4.96

2000 74,91,93,145 10,33,38,868 7.24

2001 38,29,45,641 11,00,04,917 3.48

2002 49,47,66,997 14,03,60,900 3.52

2003 30,10,64,623 15,88,53,926 1.89

------------------------------------------------------------------------------------------

In 1998, the ratio was 4.67 times and in 1999 the inventory turnover
ratio was increased to 4.96. In 2000 it was still increased to 7.24.

Since the inventory turnover ratio measures how quickly inventory is

sold. As the ratio in 2001 was 3.48 and it was increased to 3.52 in 2002. It may
be interpreted that the sales has increased from the years 1999 to 2000 and has
been fluctuated from 2001 to 2003 and the very high inventory turnover may
be the result of very low level of inventory which results in frequent stock-
outs the turnover will also be high if the firm replenishes its inventory in too
many small lot sizes. The situations of frequent stock-outs and too many small
inventory replacements can prove costly for the firm.
 DEBTORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Sales Average Ratio Collection period of

Net Debtors (in No.of times) debtors in months
------------------------------------------------------------------------------------------

1998 54,50,69,973 8,30,67,157 6.56 1.82

1999 62,46,40,180 10,95,12,519 5.70 2.10

2000 1,09,62,44,779 16,40,50,269 6.68 2.24

2001 56,49,01,493 17,23,24,953 3.27 3.66

2002 71,11,85,706 17,19,91,684 4.13 2.90

2003 46,53,78,498 17,15,46,036 2.71 3.32

------------------------------------------------------------------------------------------

The Debtors Turnover ratio indicates the number of times on the average
the debtors turnover each year. In 1998, the ratio was 6.56 times; In 1999 it
was 5.70; In 2000 it was 6.68 times; In 2001 it was 3.27 times; In 2002 it was
4.13 times and in 2003 it was 2.71. The high debtor turnover ratio is mainly
due to advances are recovered from customers.

The average collection period ratio measures the quality of debtors since
it indicates the rapidity or slowness of their collect ability . The shorter the
collection period, the better the quality of debtors, as a short collection period
implies the prompt payments by debtors. Too low a collection period is not
necessarily favourable . Rather it indicates a very restrictive credit and
collection policy.
 CREDITORS TURNOVER RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Purchases Average Ratio Payment period of

Creditors (in No.of times) creditors in months
------------------------------------------------------------------------------------------

1998 30,29,07,127 10,98,09,585 2.75 4.36

1999 38,70,24,915 14,41,61,097 2.68 4.47

2000 50,16,60,874 17,24,30,796 2.90 5.17

2001 27,63,86,029 15,44,97,544 1.78 6.74

2002 37,06,33,852 16,55,09,674 2.23 5.38

2003 20,09,50,292 15,77,47,256 1.27 7.08

------------------------------------------------------------------------------------------

The Creditors Turnover ratio indicates the velocity with which the
creditors are turned over in relation to purchases. In 1998, the ratio was 2.75
times; In 1999 it was 2.68 times; In 2000 it was 2.90; In 2001 it was 1.78
times; In 2002 it was 2.23 times and in 2003 it was 1.27.

The higher the creditor ’s velocity better it is or otherwise lower the

creditor ’s velocity, less favourable are the results.

The average payment period ratio represents the average number of days
taken by the firm to pay its creditors. Generally, lower the ratio, the better is
the liquidity position of the firm and higher the ratio, less liquid is the
position of the firm. But a higher payment period also implies greater credit
period enjoyed by the firm and consequently larger the benefit reaped from
credit suppliers. But one has to be careful in interpreting this ratio, as a higher
ratio may also imply lesser discount facilities availed or higher prices paid for
the goods purchased on credit.
WORKING CAPITAL TURNOVER RATIO OF SMS PHARMACEUTICALS
LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Sales Average Working Ratio (in No.of times)

Capital
------------------------------------------------------------------------------------------

1998 54,50,69,973 7,38,29,608 7.38

1999 62,46,40,180 9,23,21,188 6.76

2000 1,09,62,44,779 11,92,99,750 9.18

2001 56,49,01,493 14,62,79,990 3.86

2002 71,11,85,706 17,82,20,889 3.99

2003 46,53,78,498 19,72,68,298 2.35

------------------------------------------------------------------------------------------

In 1998, the ratio was 7.38; In 1999 it was 6.76. The ratio in 2000 was
9.18; In 2001 it was 3.86; In 2002 it was 3.99 and in 2003 it has decreased to
2.35. 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 a year. This ratio measures the efficiency
with which the working capital is being used by a firm.

The reciprocal of the ratio of 2003 i.e. 2.35 is 0.23. Thus, it is indicated
that for one rupee of sales, the company needs Re.0.23 of working capital.
NET FIXED ASSETS TURNOVER RATIO OF SMS PHARMACEUTICALS
LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Sales Net Fixed Assets Ratio (in percent)

------------------------------------------------------------------------------------------

1998 54,50,69,973 14,14,81,141 3.85

1999 62,46,40,180 20,36,67,635 3.06

2000 1,09,62,44,779 29,42,54,604 3.72

2001 56,49,01,493 40,51,84,213 1.39

2002 71,11,85,706 44,33,53,460 1.60

2003 46,53,78,498 50,55,49,795 0.92

------------------------------------------------------------------------------------------

In 1998, the Fixed Assets Turnover ratio was 3.85 percent; In 1999 it
was 3.06; In 2000 it was 3.72; In 2001 it was 1.39; In 2002 it was 1.60 and in
2003 it was 0.92.

Generally, a high ratio indicates efficient utilisation of fixed assets in

generating sales, while a low ratio indicates inefficient management and
utilisation of fixed assets. Since in 2003 as the ratio is low i.e. 0.92, the
interpretation is that it indicates inefficient utilisation of fixed assets as the
sales has been decreased.
 TOTAL ASSETS TURNOVER RATIO OF SMS
PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Sales Total Assets Ratio (in percent)

------------------------------------------------------------------------------------------

1998 54,50,69,973 41,75,49,489 1.30

1999 62,46,40,180 59,85,84,084 1.04

2000 1,09,62,44,779 71,05,71,461 1.54

2001 56,49,01,493 83,73,96,367 0.67

2002 71,11,85,706 93,61,31,680 0.75

2003 46,53,78,498 98,84,42,948 0.47

------------------------------------------------------------------------------------------

In 1998, the ratio was 1.30; In 1999 it was 1.04; In 2000 it was 1.54; In
2001 it was 0.67; In 2002 it was 0.75. The Total Assets Turnover ratio in 2003
was 0.47 implies that SMS Pharmaceuticals Ltd., generates a sale of Re.0.47
for one rupee investment in fixed and current assets together.

As the ratio decreases, there is less revenue generated per rupee of total
investment in assets.
 CAPITAL EMPLOYED TURNOVER RATIO OF SMS
PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Sales Capital Employed Ratio (in percent)

------------------------------------------------------------------------------------------

1998 54,50,69,973 21,53,10,749 2.53

1999 62,46,40,180 31,44,80,403 1.98

2000 1,09,62,44,779 42,20,41,336 2.59

2001 56,49,01,493 56,99,57,461 0.99

2002 71,11,85,706 63,50,21,990 1.11

2003 46,53,78,498 70,84,17,861 0.65

------------------------------------------------------------------------------------------

In 1998, the Capital Employed Turnover ratio was 2.53; In 1999 it was
1.98; In 2000 it was 2.59; In 2001 it was 0.99; In 2002 it was 1.11 and in 2003
it was decreased to 0.65.

This ratio indicates the firm’s ability of generating sales per rupee of
long-term investment. The higher the ratio, the more efficient the utilisation of
owner ’s and long-term creditor ’s funds or otherwise the lower the ratio, the
less efficient the utilisation of owner ’s and long-term creditor ’s funds.
 NET PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Profit (After taxes) Sales Ratio (in percent)

------------------------------------------------------------------------------------------

1998 2,57,99,471 54,50,69,973 0.04

1999 3,56,69,966 62,46,40,180 0.05

2000 11,66,16,619 1,09,62,44,779 0.10

2001 4,23,19,606 56,49,01,493 0.07

2002 5,82,07,810 71,11,85,706 0.08

2003 4,50,12,595 46,53,78,498 0.09

------------------------------------------------------------------------------------------

The Net Profit Margin in 1998 was 0.04 percent; In 1999 it was
increased to 0.05; In 2000 it was still increased to 0.10; In 2000 to 2001, the
ratio was slightly up and down. The net profit margin from 2002 to 2003 has
been increasing.

This ratio indicates the efficiency of the management in manufacturing,

selling, administrative and other activities of the firm. It also indicates the
firm’s capacity to face adverse economic conditions such as price competition,
low demand, etc.
 GROSS PROFIT MARGIN RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Gross Profit Net Sales Ratio (in percent)

------------------------------------------------------------------------------------------

1998 12,93,98,503 54,50,69,973 0.23

1999 14,78,84,872 62,46,40,180 0.23

2000 34,70,51,634 1,09,62,44,779 0.31

2001 18,19,55,852 56,49,01,493 0.32

2002 21,64,18,709 71,11,85,706 0.30

2003 16,43,13,875 46,53,78,498 0.35

------------------------------------------------------------------------------------------

In 1998 and 1999 the Gross Profit Margin was constant i.e. 0.23 percent.
In 2000 it was increased to 0.31 percent; In 2001 it was still increased to 0.32;
In 2002 it was slightly decreased to 0.30 and in 2003 it was increased to 0.35.

The Gross Profit ratio indicates the extent to which selling prices of
goods per unit may decline without resulting in losses on operations of a firm.
It reflects the efficiency with which a firm produces its products.
 OPERATING RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Operating Cost Net Sales Ratio (in percent)

------------------------------------------------------------------------------------------

1998 47,70,72,198 54,50,69,973 0.87

1999 54,70,36,625 62,46,40,180 0.87

2000 91,20,08,264 1,09,62,44,779 0.83

2001 45,84,09,059 56,49,01,493 0.81

2002 59,00,22,675 71,11,85,706 0.82

2003 37,92,53,591 46,53,78,498 0.81

------------------------------------------------------------------------------------------

In 1998 and 1999 the Operating ratio was constant i.e. it was 0.87
percent; In 2000 it has decreased to 0.83 percent; In 2001 it has still decreased
to 0.81; In 2002 it was increased to 0.82 and in 2003 it has slightly decreased.

This ratio indicates the percentage of net sales that is consumed by

operating cost. Higher the Operating ratio, the less favourable it is, because, it
would have a small margin (Operating Profit) to cover interest, income tax,
dividend and reserves.
 OPERATING PROFIT RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Operating Profit Net Sales Ratio (in percent)

------------------------------------------------------------------------------------------

1998 6,79,97,775 54,50,69,973 0.12

1999 7,76,03,555 62,46,40,180 0.12

2000 18,42,36,515 1,09,62,44,779 0.16

2001 10,64,92,434 56,49,01,493 0.18

2002 12,11,63,031 71,11,85,706 0.17

2003 8,61,24,907 46,53,78,498 0.18

------------------------------------------------------------------------------------------

The Operating Profit ratio in 1998 and 1999 was constant i.e. 0.12
percent; In 2000 it has increased to 0.16; In 2001 it has still increased to 0.18
and then fluctuated in the years 2002 and 2003 by 0.17 and 0.18.

The Operating Profit ratio of SMS Pharmaceuticals Ltd., is high in the

current year 2003 i.e. 0.18. The higher the ratio, the better it is.
 RETURN ON CAPITAL EMPLOYED RATIO OF SMS
PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Profit Capital Ratio (in percent)

(After taxes) Employed
------------------------------------------------------------------------------------------

1998 2,57,99,471 29,29,96,135 0.08

1999 3,56,69,966 40,40,72,603 0.08

2000 11,66,16,619 51,51,73,811 0.22

2001 4,23,19,606 66,49,48,771 0.06

2002 5,82,07,810 71,52,91,672 0.08

2003 4,50,12,595 82,44,00,662 0.05

------------------------------------------------------------------------------------------

In 1998 and 1999, the Return on Capital Employed ratio was constant
i.e. 0.08; In 2000 it was increased to 0.22; In 2001 it was decreased to 0.06; In
2002 it was increased to 0.08 and in 2003 it was decreased to 0.05.

Higher, the ratio, better is the position of the firm ad more efficient is
the management in utilising the funds, entrusted to it. So, the Return on
Capital Employed of SMS Pharmaceuticals Ltd., was more satisfactory in the
year 2000.
 RETURN ON SHAREHOLDER’S EQUITY RATIO OF SMS
PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Profit Shareholder ’s Equity Ratio (in percent)

(After taxes) /Net Worth
------------------------------------------------------------------------------------------

1998 2,57,99,471 15,84,52,394 0.16

1999 3,56,69,966 18,96,12,360 0.18

2000 11,66,16,619 30,04,27,479 0.38

2001 4,23,19,606 33,82,28,885 0.12

2002 5,82,07,810 39,23,36,695 0.14

2003 4,50,12,595 43,28,31,089 0.10

------------------------------------------------------------------------------------------

In 1998, the Return on Shareholder ’s Equity ratio was 0.16; In 1999 it

was increased to 0.18; In 2000 it was still increased to 0.38; In 2001 it was
decreased to 0.12 and then fluctuated in the years 2002 and 2003 by 0.14 and
0.10 percent.

The Return on Shareholder ’s Equity ratio is high in 2000, the higher the
ratio, the better it s for the shareholders.
 RETURN ON ASSETS RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Profit Total Assets Ratio (in percent)

(After taxes)
------------------------------------------------------------------------------------------

1998 2,57,99,471 41,75,49,489 0.06

1999 3,56,69,966 59,85,84,084 0.05

2000 11,66,16,619 71,05,71,461 0.16

2001 4,23,19,606 83,73,96,367 0.05

2002 5,82,07,810 93,61,31,680 0.06

2003 4,50,12,595 98,84,42,948 0.04

------------------------------------------------------------------------------------------

The Return on Assets ratio in 1998 was 0.06; In 1999 it was decreased to
0.05; In 2000 it was increased to 0.16; In 2001 it was decreased to 0.05 and
then fluctuated in the years 2002 and 2003 by 0.06 and 0.04 percent

The Return on Assets ratio of SMS Pharmaceuticals is high in 2000, the

higher the ratio, the better it is.
 EARNINGS PER SHARE RATIO OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Net Profit No. of Ordinary Ratio (in percent)

(After taxes) Shares Outstanding
------------------------------------------------------------------------------------------

1998 2,57,99,471 20,50,000 12.58

1999 3,56,69,966 20,50,000 17.39

2000 11,66,16,619 20,50,000 56.88

2001 4,23,19,606 20,50,000 20.64

2002 5,82,07,810 20,50,000 28.39

2003 4,50,12,595 20,50,000 21.95

------------------------------------------------------------------------------------------

In 1998, Earnings Per Share is 12.58; In 1999 it was increased to 17.39;

In 2000 it was still increased to 56.88; In 2001 it was decreased to 20.64; In
2002 it was increased to 28.39 and in 2003 it has been decreased to 21.95.

Earnings Per Share shows profitability of the firm on a per-share basis.

It does not reflect how much is paid as dividend and how much is retained in
business.

Earnings Per Share of SMS Pharmaceuticals Ltd., is high in 2000, the

higher the Earnings Per Share, the better is the performance of the company.
 BOOK VALUE OF SMS PHARMACEUTICALS LTD.,
DURING 1998 TO 2003

------------------------------------------------------------------------------------------

Year Equity Shareholder ’s No. of Ratio (in percent)

Funds Equity Shares
------------------------------------------------------------------------------------------

1998 15,84,52,394 20,50,000 77.29

1999 18,96,12,360 20,50,000 92.49

2000 30,04,27,479 20,50,000 146.54

2001 33,82,28,885 20,50,000 164.98

2002 39,23,36,695 20,50,000 191.38

2003 43,28,31,089 20,50,000 211.13

------------------------------------------------------------------------------------------

The Book Value in 1998 was 77.29; In 1999 it was increased to92.49; In
2000 it was again increased to 146.54; In 2001 it was still increased to 164.98;
In 2002 it was again increased to 191.38. From 1998 to 2003 the Book Value is
being increasing.

The Book Value of SMS Pharmaceuticals Ltd., is high in 2003 i.e.

211.13, the higher the book value of a share, the more strong the business is
assumed to be.
 OBSERVATIONS

The basic objective of financial statement is to provide information

useful for making economic decisions.

The published financial statements are properly oriented towards the

long-term investor, who is mainly interested in long-term earning power.
Short-term creditors such as major suppliers of banks are usually more
interested in the short run ability of the corporation to satisfy its obligations as
they mature. Financial analysts usually use a company’s annual report as the
springboard for their review.

The primary use of financial statements consists of evaluating past

performance and predicting future performance. Both of these uses can be
facilitated by comparison. The ultimate effect of analysis of financial
statement is usually to make some financial decisions. After comparing
financial statements with past statements with those of similar companies or in
the industry averages, the analyst will predict how the organization will fare.
The analyst then will decide to buy, sell or hold the common stock.

The current ratio is a widely used statistic. Other things being equal, the
higher the ratio the more assurance the creditors have about being paid in full
and on time.

Annexure-I, SMS Pharmaceuticals Ltd., has increased their current ratio

from 1.87 to 2.23 in 2003.

The next two ratios’ the inventory turnover and the average collection
period are closely watched signals. For example, a decreased in inventory
turnover may suggest slower moving merchandise or working co-ordination of
the buying and selling functions. An increase in the average collection period
of receivables may indicate increase acceptance of poor credit risks of less
energetic collection efforts.
 Ratios of debt to equity will be watched by the shareholders to judge the
degree of risk of insolvency and of stability of profits. SMS’s Debt-equity
ratio’s reflecting average stability of profits and risk or uncertainty concerning
the company’s ability to pay its debts on time.

The profitability ratio’s studies the ratios of net profit to sales and gross
profit to sales as indicators of operating success. To owners however the
ultimate measure of overall accomplishment is the rate of return on their
invested capital.

To summarise the observations, the current ratio is impressive and its

debt management ratios are average. Its profit ratios are outstanding.
 SUGGESTIONS AND RECOMMENDATIONS

Relevance and reliability are the two major qualities that make
accounting useful for decision-making. Relevance is defined as the capability
of information to make a difference to the decision maker. To be relevant,
information must be timely and understandable. Reliability is defined as the
quality of information that allows users to depend on it to represent the
conditions or events that it purports to represent. Comparable information
prepared consistently over time enhances both reliability and relevance.

Research in finance and accounting during the past twenty years has
reinforced the idea that financial ratios and other data provide such as reputed
earning provide inputs to prediction of such economic phenomenon as financial
failure or earnings growth. Further more many ratios are used simultaneously
rather the one at a time for same predictions. The income statement is the sole
service of information about a company. Lenders and shareholders invent in a
company because of its reputed earnings per share the higher the stock price
and the easier it to raise capital.

Financial ratios aid the intelligent analysis of statements they are used
as a basis of evaluation, comparison and prediction. The rate of return on
invested capital is a very popular means of comparing performance. Financial
statements are only one source of information about a company. Market
efficiency implies that accounting regulates should focus on issues of
disclosure, not format.

The ratios contain good news and bad news. The good news is that the
company would appear to be slightly more liquid. The bad news is that the
inventory turnover, the average collection period and the rate of return on
stockholders equity are less attractive.
 For example, a high inventory turnover generally considered to be
indication of operating efficiency may be temporarily achieved by unwarranted
price reductions, failure to maintain stock in hand or other unsound policies.
Similarly, a higher current ratio although index of strong current position, may
result form unreasonable accumulation of liquid resources.

Even when the ratios are worked out correctly, it should be remembered
that they can at best be used like a doctor uses symptoms indications that
something is wrong somewhere.
 CONCLUDING REMARKS

As a tool of financial management the ratio analysis is a crucial

significance. Ratio analysis, a relevant in assessing to performance of a firm in
respect of the liquidity position, long-term solvency, operating efficiency, over
all profitability, inter firm comparison and trend analysis.

Reliance and reliability of the information are very important. Reliance

as a single ratio for a particular purpose may not be a conclusive indicator.
Ratios are only a postmortem of what has happened between two balance
sheets.

In order to have meaningful derivations ratio analysis as well as common

size statements should be compared both over time (trend ratios) and across
companies (inter firm comparison) with in the industry.

In view of its limitations, ratio analysis should be considered only as a

tool for analysis rather than an end in itself. The reliability and significance
attached to ratios will largely depend on the quality of data on which they are
based.
 BIBLIOGRAPHY

NAME OF THE TEXT BOOK AUTHOR

1. Financial Management My. Khan & P .K. Jain

2. Financial Management I.M. Pandey

3. Financial Management Kuchahal

4. Financial Management Prasanna Chandra

theory and practice