Aventis

Ratio Analysis

Project By
M.Junaid Mehmood
M.Qaiser Mehmood
Sohail Ahmed Babar
Usman Sheharyar

MBA-3
Morning

Project Coordinator

Sir. Shoaib

1
COMSATS Institute of Information Technology, Wah Campus. of 44

Ratio Analysis

A. ACKNOWLEDGEMENT

I am thankful to Almighty Allah who is gracious & merciful and gave us strength for the
completion of this project. Secondly we are really thankful to our respected Teacher Mr.
Hafiz M. Ishaq for giving us such an opportunity to study the Aventis from Financial
point of view. At the end we would also like to acknowledge the moral support of our
friends who supported us and helped us to do this project.

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Ratio Analysis

PURP
OSE
OF
STUDY

The first purpose for making this project is to implement our bookish knowledge in
practical form. To know about application of Ratio Analysis in organizations.
Secondly, we want to complete the semester project regarding Financial Management.

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Ratio Analysis

Introduction

Aventis Limited is committed to improve the quality of life. Through the incredible growth
of knowledge, our scientists are on the threshold of major innovations in the field of
healthcare. Servicing healthcare providers and patients in major markets around the
world, Aventis Limited aims to achieve sustained growth by concentrating on innovative
products that meet significant medical needs. In each area, Aventis Limited is cultivating a
continuous flow of new product launches with high potential.

Vision:

To create and sustain value by being recognized as a pharmaceutical industry leader –
valued by patients and healthcare providers, sought after as an employer, and respected
by the scientific community and by our competitors.

Values:

• Respect for people
• Integrity
• Sense of urgency
• Networking
• Creativity
• Empowerment
• Courage

Aventis focuses on innovative pharmaceuticals and human vaccines to fight serious
diseases. Working in a network with partners, Aventis scientists are discovering and
developing therapeutic innovations in areas such as cancer, diabetes, cardiovascular
disease, asthma and allergies. We are also developing new vaccines to prevent and treat a
wide range of serious and often deadly diseases. Our goal is to satisfy unmet medical
needs in large patient populations.

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Ratio Analysis

We aim to generate optimum returns on our strategic brands through life-cycle
management and to achieve leadership positions by building on operational excellence in
major pharmaceutical markets such as the United States, France, Germany and Japan.

Aventis in Pakistan

Aventis Limited stands out among pharmaceutical companies for global reach, with a
strong presence in major markets, and for the diversity of people in the management
teams and business units. We are committed to a strong multicultural team as a source of
innovative thinking and customer-oriented service.

Aventis is a major player in the healthcare industry in Pakistan and has come out with
products that have enjoyed market leader ship and consequently played a very important
role in the development of the health care market in Pakistan. The company currently
markets 48 products in 107 representations

Aventis Limited has two manufacturing units - one at Karachi and the other at Wah. It
also has thirteen regional sales offices in Karachi, Hyderabad, Sukkur, Bahawalpur,
Multan, Faisalabad, Sargodha, Lahore, Gujranwala, Rawalpindi, Peshawar, Bannu and
Quetta.

History

Aventis limited was incorporated in 1967 as Hoechst Pakistan
limited.Concequently to a series of mergers and demergers,the name
was changed to the Hoechst Marion Roussel (Pakistan) limited, Aventis
Pharma (Pakistan) limited and finally to Aventis limited when the
company was leagly merged with Rhone-Poulenc Rorer Pakistan
(Private) Limited in 2003.

Aventis is officially created following an extraordinary meeting of
Rhône-Poulenc share holders who approved by an overwhelming
majority (97.1%) the final steps to complete the business combination.
Aventis shares begin trading on the Paris and Frankfurt stock
exchanges as well as the NYSE on December 20.

Dec. 1, Rhône-Poulenc and Hoechst announce their intention to combine their
1998 pharmaceutical and agricultural businesses to create Aventis.

1997 Hoechst AG becomes a strategic holding company with independently
operated businesses. Merial, a leader in animal health, is founded.

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Ratio Analysis

1997 Hoechst combines its specialty chemicals business with Clariant AG of
Muttenz, Switzerland.

1995 Hoechst acquires Marion Merrell Dow (formerly Marion Laboratories),
which is later combined with Roussel-Uclaf and the pharmaceutical
activities of Hoechst to create Hoechst Marion Roussel.

1994 Hoechst begins to strategically shift its business focus from industrial
chemicals to life sciences. Pasteur Mérieux Connaught becomes a
wholly owned subsidiary of the Rhône-Poulenc Group. Founding of PM-
MSD, which subsequently becomes Aventis Pasteur MSD, a joint
venture with the U.S. pharmaceutical company Merck & Co.

1989 Institut Mérieux acquires Connaught Laboratories. Hoechst builds its
first production facility for genetically engineered human insulin.
Operations begin in 1998. Pasteur Mérieux Sérums & Vaccins is created.
As a result of the acquisition of Connaught Laboratories, the company
becomes the world leader in vaccines.

1987 Hoechst acquires the Celanese Corporation.

1986 Rhône-Poulenc acquires the agricultural division of Union Carbide, and
the product Temik, a highly effective pesticide that can protect plants
against insect pests for several months after a single application.

1982 Marion Laboratories introduces Cardizem, a calcium antagonist that is
introduced for the treatment of angina. Additional release forms extend
the indications to include hypertension.

1981 Nationalization of Rhône-Poulenc following the formation of a left-wing
government in France.

1974 Hoechst is renamed Hoechst Aktiengesellschaft. It is the world’s largest
pharmaceutical company.

1968 Rhône-Poulenc acquires a 51% stake in Institut Mérieux. Hoechst
acquires a stake in the French pharmaceutical company Roussel-Uclaf.

1967 Alain Mérieux succeeds his father, becoming chairman of Institut
Mérieux.

1961 Société des Usines Chimiques Rhône-Poulenc is restructured as Rhône-
Poulenc S.A.

1956 Rhône-Poulenc and Théraplix merge.

1952 Researchers at Rhône-Poulenc laboratories develop the antibiotic
Spiramycin, a derivative of Streptomycin. It goes on the market as
Rovamycin. A year later,
Rhône-Poulenc begins a new era of sedatives and neuroleptics with the
introduction of the sedative Largactil.

1951 Blaukorn fertilizer is put on the market. It becomes one of Hoechst’s

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Ratio Analysis

most successful agricultural products.

1950 Marion Laboratories, Inc. is established by Ewing Marion Kauffman as a
one-man company operating out of a basement in Kansas City.

1945 Behringwerke AG is the first company in Europe to begin processing
human blood plasma into medications.

1945 The World War II allies order the breakup of I.G. Farbenindustrie AG.
The factory in Höchst is renamed Farbwerke Hoechst U.S.
Administration. In 1951, the company is refounded in Frankfurt as
Farbwerke Hoechst AG vorm. Meister Lucius & Brüning.

1943 Scientists at Rhône-Poulenc succeed in producing the first batches of
penicillin based on a culture that the discoverer, Sir Alexander Fleming,
had given the Institut Pasteur a number of years before.

1937 I.G. Farbenindustrie AG comes under the control of the Nazi regime.
Forced labor and involvement in the crimes of Auschwitz are the result.

1928 Merger of Etablissements Poulenc Frères and Société Chimique des
usines du Rhône forms a new business known as Société des Usines
Chimiques Rhône-Poulenc.

1926 Institut Mérieux begins a long period of research aimed at finding a
vaccine against foot-and-mouth disease. Charles Mérieux subsequently
develops a vaccine against the disease. Industrial virology is born, and
it will later be used in human medicine.

1925 Foundation of I.G. Farbenindustrie AG, including the amalgamation of
Farbwerke Höchst.

1920 Gaston Roussel founds the Institut de Sérothérapie Hématopoiétique in
Romainville, France, to produce Hemostyl, a drug for the treatment of
anemia.

1919 Companhia quimica Rhodia brasileira is founded in Sao Paulo. Rhodia
forms the basis for S.C.U.R.’s expansion in Latin America.

1901 Emil von Behring is awarded the first Nobel Prize in medicine for the
medical success of his diphtheria vaccine.

1895 Gilliard, Monnet et Cartier in Lyon becomes a stock corporation called
Société Chimique des usines du Rhône (S.C.U.R.). This is later
considered the foundation year of Rhône-Poulenc.

1892 Collaboration between the three later Nobel Prize winners Robert Koch,
Emil von Behring and Paul Ehrlich, which began in the 1880s, leads to
the tuberculosis diagnostic Tuberculoidin, Hoechst’s first immunological
product.

1880 A stock corporation is formed in Höchst, Germany, near Frankfurt with
the soon world-famous name of Farbwerke vormals Meister Lucius &
Brüning. In 1883, the company begins producing pharmaceuticals and

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Ratio Analysis

achieves immediate world wide success with Antipyrin, a safe and
effective painkiller. Louis Pasteur develops the first successful vaccine
against rabies.
1859 In Frankfurt, Germany, Eugen Lucius begins laboratory experiments to
produce synthetic dyes.

Chairman
Syed Babar Ali

Board of directors
1. Syed Babar Ali
2. Tariq Wajid (MD)
3. Pir Ali Gohar
4. Syed Hyder Ali
5. Michel R.Lienard
6. Jacques Pervez
7. M.Z.Moin Mohajir (company sectary)
8. Mohammad Amjad

company registered office

Plot 23, sector 22
Korangi Industrial Area,
Kaachi-749000

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Ratio Analysis

Global Reach

Aventis have a commercial presence in
approximately 85 countries and our
products are available in more than 170.
Our top four markets are the United States,
Germany, France and Japan. In 2003, we
generated 62.5% of our core business sales
in these countries.

Accounting for over 40% of global
prescription drug sales, the United States is
the world's largest pharmaceutical market
and our single largest national market. In
2003, we generated 38% of our core
business sales in the U.S. In Europe, our
leading markets are France, Germany,
Italy, Spain and the United Kingdom. Japan,
the world's second-largest national market,
accounted for 5% of our core business sales
in 2003.

Market Share

To day in Pakistan, Aventis limited is one of the top five companies in the Pharma
Industry, the growth rate of over 14% was also amongst the highest in the industry and
the company is market leader in the following ten therapeutic areas:

Products Market share
Flagyl 42%
Claforan 12%
Tarivid 8%
Haemaccel 98%
Phenergan 11%
Lasix 40%
Claxane 82%
Streptase 78%
Taxotere 40%

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Ratio Analysis

Nasacort AQ 25%

Products

Oncology

Cardiovascula
r

Bones

Respiratory

Metabolic

Anti-infective

Distribution

Company owns distribution of thirteen branches, and appointment of
regional distributor.

Sales and distribution offices in Pakistan

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Ratio Analysis

Head Office (Karachi) Branch. Karachi Branch

Address: Plot No.23,Sector 22, Area Distribution Manager
Korangi Industrial Area,Karachi.
Phone No: 5060221-35 (ext.2227) Address : Plot No.23,Sector 22,
Fax No : 5060781 & 5060358 Korangi Industrial Area,Karachi.
Phone No : 5060221-35 (ext.2316)
Hyderabad Fax No : 5060781 & 5060358

Area Distribution Manager

Address :A-25, S.I.T.E,Hyderabad.
Phone No : 0221-880539
Fax No : 0221-880539

Sukkur Quetta

Area Distribution Manager Area Distribution Manager

Address : F-33/4/8, Barrage Colony, Address : Annexe A-322/B , Sahib
United Nation Avenue, Sukkur. Bunglows, Shahrah-e-Tufail,Quetta
Phone No : 071-613356 Phone No : 081-835871
Fax No : 071-612246 Fax No : 081-843397

Bahawalpur Multan


Address : 6-A , Muhammad Hussain Address : 124-a, Bahawalpur
Road, Model Town-A, Bahawalpur. Road,Multan.
Phone No : 0621-874836 Phone No : 061-570996/584387/
Fax No : 0621-874836 513691
Fax No : 061 - 572549

Sargodha Faisalabad


Address : 102, Shamshir Road, Old Civil Address : 101-A, Civil Lines, Jail Road,
Lines , Sargodha. Faisalabad.
Phone No : 0451-221403 Phone No : 041-640370
Fax No : 0451-221403 Fax No : 041-642539

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Ratio Analysis

Peshawar Rawalpindi


Address : Gali No.8 , Nishtarabad, Address : 87-A , Satellite Town, P.O.Box
Peshawar. -168, Rawalpindi.
Phone No : 091-251685 Phone No : 051-4454728 / 4418524
Fax No : 051-4429735
Gujranwala Lahore


Address : Ground Floor, Center Point, Address : 14/C , New Muslim Town,
Near Iqbal High School , G.T Road , Lahore.
Gujranwala. Phone No : 042-5867431
Phone No : 0431-258206 Fax No : 042-5850613
Fax No : 0431-258206

Expansion
Expansion of the production facility and modernization of
plant and machinery and the quality of the products is the
high priority of the company. Company recently
purchases state of the art equipment for the commercial
production which increase the over all production of he
plant.

Profit
Company has achieved a profit before taxation of Rs.234
million which is a complete turnaround after the record
loss of Rs.209 million in 2002. This significant
improvement in the profitability has occurred mainly due
to reduction in discount and expenses, collection of trade
debts, lower interest costs, etc,.

Human Resource
The total numbers of employees were recorded 709 in the
year 2003 and these were recorded 743 in the year 2002.

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Ratio Analysis

SAP Adoption
The company has adopted a sap version which has been
extended to the Wah site and all the business working is
now conducted through the SAP.SAP is a video
conferencing facility, which reduces the travel cost and
further upgrading of the computer machines. Aventis
limited is also have a web site that is
www.aventispharma.com .pk

Holding company
The company is a subsidiary of the Aventis Pharma
Holding GmbH and Rhone-Poulenc Rorer UK Holding PLC,
which are incorporated in Germany and UK respectively.

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Ratio Analysis

What is a financial statement?

Financial Statement

Annual reports are divided into three parts the Executive Letter, the business Review,
and the Financial Review. The Executive Letter gives a broad overview of the company's
business and financial performance. The Business Review summarizes recent
developments, trends, and objectives of the company. The Financial Review is where
business performance is quantified in dollars.

The Financial Review has two major parts: Discussion and Analysis, and Audited
Financial Statements. In the Discussion and Analysis, management explains changes in
operating results from year to year. This explanation is presented mainly in a narrative
format, with charts and graphs highlighting the comparisons. The Operating results are
numerically captured and presented in the Financial Statements.
The major parts of the Financial Statements are the balance sheet; income statement;
statement of changes in shareholders' equity; statement of cash flows; and
footnotes. The balance sheet shows the financial strength of the company by showing
what the company owns and what it owes on a certain date. The balance sheet reports on
financial position as of the end of the year. The income statement, reports on how the
company performed during the year and shows whether operations have resulted in a
profit or loss. The statement of changes in shareholders' equity reconciles the activity in
the equity section of the balance sheet from year to year. Common changes in equity
result from company profits or losses, dividends, or stock issuances. The statement of
cash flows reports on the movement of cash by the company for the year. The footnotes
provide more detailed information on the balance sheet and income statement.

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Ratio Analysis

Types of financial statement analysis ratios

• Balance sheet ratios
1. Liquidity ratios
a. Current ratio
b. Acid test ratio

2. Financial leverage ratio
a. Debt to equity ratio
c. Debt to total assets

• Income statement ratios
1. Coverage ratio
a. Interest coverage ratio
2. Activity ratio
a. Receivable activity
b. Payable activity
c. Inventory activity
d. Total asset turn over
3. Profitability ratio
a. Sales growth ratio
b. Cost of goods sold to sales ratio
c. Gross profit margin ratio
d. Net profit margin ratio
4. Profitability in return to investment
a. Return on investment
b. Return on equity
5. Market value ratio
a. Profit earning ratio
b. Market to book value ratio

Trend analysis

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Ratio Analysis

Ratio analysis

The Balance Sheet and the Statement of Income are essential, but they are only the
starting point for successful financial management. Apply Ratio Analysis to Financial
Statements to analyze the success, failure, and progress of company business.
Ratio Analysis enables the business owner/manager to spot trends in a business and to
compare its performance and condition with the average performance of similar
businesses in the same industry. To do this compare company ratios with the average of
businesses similar to company. Ratio analysis may provide the all-important early warning
indications that allow to the company to solve business problems before business is
destroyed by them.

a. Balance Sheet Ratios

Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay
its bills as they come due) and leverage (the extent to which the business is dependent on
creditors' funding). They include the following ratios

Liquidity ratios:
Quick ratio is a prevalent indicator of liquidity with a long history of usage. As is well
known, it is defined as the ratio of the current assets less inventories to current liabilities.
Financial ratios often include the current ratio (current assets to current liabilities) in the
data basis along with the quick ratio.

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Ratio Analysis

a. Current ratio

Definition: The ratio between all current assets and all current liabilities; another way of
expressing liquidity.

What it is:
The current ratio is the standard measure of any business' financial health. It will tell you
whether your business is able to meet its current obligations by measuring if it has
enough assets to cover its liabilities. The standard current ratio for a healthy business is
two, meaning it has twice as many assets as liabilities.

When to use it:
The current ratio should be part of any business’ basic financial planning, meaning it
should be tracked monthly or quarterly. By keeping a close eye on this figure, you will
recognize if it begins to get out of line. This will allow taking early action to prevent
business from ending up in a difficult position.

Computation: Total current assets divided by total current liabilities.

Total Current Assets
Total Current Liabilities

Financial years 2000 1999
Calculations 685153/515127 737505/514054
Resulting ratios 1.330 1.434

Analysis:
Even there is a slight decrease in the both years of the company’s current ratio, still in the
week position to pay its short term debts. This ratio is a rough indication of a firm's ability
to service its current obligations. Generally, the higher the current ratio, the greater the
"cushion" between current obligations and a firm's ability to pay them. The stronger ratio
reflects a numerical superiority of current assets over current liabilities. However, the
composition and quality of current assets is a critical factor in the analysis of an individual
firm's liquidity. 1:1 current ratio means; the company has $1.00 in current assets to cover
each $1.00 in current liabilities. Look for a current ratio above 1:1 and as close to 2:1 as
possible. The ratio values are arrayed from the highest positive to the lowest positive.

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Ratio Analysis

b. Acid test ratio

Definition:
After deduction of the inventories from the current assets, the ratio between the
remaining value and all current liabilities is called acid test ratio.

What it is:
This ratio serves as a supplement to the current ratio in analyzing liquidity. .This ratio is
same as the current ratio except that it excludes inventories-presumably the least liquid
portion of current asset-from the numerator.

When to use:
A measurement of the liquidity position of the business. The quick ratio compares the
cash plus cash equivalents and accounts receivable to the current liabilities. The primary
difference between the current ratio and the quick ratio is the quick ratio does not include
inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio
will be lower than its current ratio. It is a stringent test of liquidity.

Computation: current assets-inventories
Current liabilities
Or
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
Or
Quick assets
Current liabilities

Financial year 2000 1999
Calculations (685153-365061)/515127 (737505-413464)/514054

Analysis:
Increase in the quick ratio shows the company’s strong position to pay its debts. Indicates
the extent to which you could pay current liabilities without relying on the sale of
inventory -- how quickly you can pay your bills. Generally, a ratio of 0.7:1 is good and
indicates you don't have to rely on the sale of inventory to pay the bills.
Although a little better than the Current ratio, the Quick ratio still ignores timing of
receipts and payments.

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Ratio Analysis

1. Financial leverage ratio
Highly leveraged firms (those with heavy debt in relation to net worth) are more
vulnerable to business downturns than those with lower debt to worth positions. While
leverage ratios help to measure this vulnerability, it must be remembered that they vary
greatly depending on the requirements of particular industry groups.

a. Debt to equity ratio

Definition:
Shows the ratio between capital invested by the owners and the funds provided by
lenders.

What it is:
This ratio indicates how much the company is leveraged (in debt) by comparing what is
owed to what is owned. A high debt to equity ratio could indicate that the company may
be over-leveraged, and should look for ways to reduce its debt.

When to use:
Equity and debt are two key figures on a financial statement, and lenders or investors
often use the relationship of these two figures to evaluate risk. The ratio of business’
equity to its long-term debt provides a window into how strong its finances are. Equity will
include goods and property business owns, plus any claims it has against other entities.
Debts will include both current and long-term liabilities.

Computation: Total liabilities divided by total equity.

Total Debt
Total Equity
Calculation 104000/860767 108000/937090

Analysis: There is decrease in this ratio, but it is higher than the bench mark which 0.8
is. Comparison of how much of the business was financed through debt and how much
was financed through equity. For this calculation it is common practice to include loans
from owners in equity rather than in debt. The higher the ratio, the greater the risk to a
present or future creditor.
Too much debt can put the business at risk. But too little debt may mean company is not
realizing the full potential of business and may actually hurt overall profitability. This is
particularly true for larger companies where shareholders want a higher reward (dividend
rate) than lenders (interest rate).

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Ratio Analysis

b. Debt to total assets

Definition:
The ratio between the debt and the total assets is called debt to total assets ratio.

What it is:
It shows the relative importance of debt financing to the firm by showing the percentage
of the firm’s asset that is supported by the debt financing.

When it used:
When the company wants the relation ship between its total debts and the total assets it
use this ratio because this ratio expresses the relationship between capital contributed by
creditors and that contributed by owners. It expresses the degree of protection provided
by the owners for the creditors. The higher the ratio, the greater the risk being assumed
by creditors. A lower ratio generally indicates greater long-term financial safety. A firm
with a low debt/worth ratio usually has greater flexibility to borrow in the future. A more
highly leveraged company has a more limited debt capacity.

Computation:
Total Liabilities
Net Worth
Or
Total debt
Total assets
Calculations 515127/860767 514054/937090

Analysis:
Decrease in this ratio is a good sign and this ratio shows that out of $1 only $.2727 is hold
by the others because the bench mark for this ratio is 0.8; if it is more than 0.8 it is more
risky. Generally, the higher this ratio, the more risky a creditor will perceive its exposure
in your business, making it correspondingly harder to obtain credit.

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Ratio Analysis

• Income statement ratios

It is the combination of three types of ratios coverage ratio, activity ratio and
profitability ratio. These ratios are derived from income statement and balance sheet
data.

1. Coverage ratio

Coverage ratios measure a firm's ability to service debt.

1. Activity ratio

The ratio that measure how effectively the firm is using its assets. It is also known as
efficiency or turn over ratio. In computing the activity ratio amuse year end asset levels
from the balance ratio.

a. Receivable activity

Definition:
Ratio between the annual net credit sales and the account receivable is called receivable
activity.

What it is:
This ratio indicates how much the company’s active in accounts receivable turn over in to
cash during the year.

When it is use:
This ratio is a measure of turn over of a firm's accounts receivable in to cash during a
specific time. The higher the turnover the shorter the time between typical sale and the
cash collection.

Computation:
Annual net sales
Account receivable

Calculation 1800607/13521 1624284/8093

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Ratio Analysis

Analysis:

The higher the turnover, the shorter the time between sales and collecting cash.

B. Payable activity

Definition:
Ratio between the annual net purchases and the account payable is called receivable
activity.

What it is:
This ratio indicates how much the company’s active in accounts payable turn over in to
cash during the year.

When to use:
This ratio is a measure of turn over of a firm's accounts payable in to cash during a
specific time. The higher the turnover the shorter the time between typical purchases and
the cash payment.

Computation:
Net purchases
Account pay able

Calculation 825670/286370 929060/334122
Resulting ratios 2.88 times 2.78 Times

Analysis:
The pay able activity means that purchases can be paid in that period or times so it also
means that we can pay cash in365/2.36=154days.

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Ratio Analysis

C. Inventory activity

Definition:
The number of times the average inventory has been replenished during a fiscal period,
known as the inventory turn over.

What it is:
It is ratio between the cost of goods sole and the inventories.

When it to use:
The inventory position and the approximate disposal time may be evaluated by calculating
the inventory turn. The inventory turn over is calculated by dividing the cost of goods sold
by the average inventory for the period.

Computation:

Cost of goods sold
Inventories

Calculation 1218270/365061 1149727/413464

Analysis:
Lower the ratio, the better it is, the bench mark of this ratio is 4 to 6 time. If the company
has the ratio more than the bench marks it means that there is excessive or over
production.

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Ratio Analysis

e. Total asset turn over

Definition:
The production or sales on the total assets referred to as the assets turn over ratio.

What it is:
It is found or calculated by dividing the net sales for the year by the total assets employed
in the production of such sales.

When it to use:
When the company wants to check the contribution that is made by total assets to sales.
A ratio increase suggests the better utilization of the assets. An increase in the total
assets when accompanied by a ratio decrease my show an over investment in assets or
their in effective use.

Computation:
Net sales
Total assets

Calculation 1800607/860767 1624284/937090

Analysis:
A slight increase shows how effectively the company is using the assets to turn them into
huge sales so that they remain the market leaders. The bench mark for this ratio is 1.6.

24

Ratio Analysis

2. Profitability ratio

Profitability ratios undoubtedly are the most important financial ratios in financial
statement analysis.
Profitability is best regarded as earnings generated in relation to the resources invested in
a firm's activities. There are two major ways of looking at profitability. The shareholders
are per definition interested mainly in the return on their investment. On the other hand,
taking a more managerial oriented view, the focus of interest becomes the productivity of
the firm's capital resources. These views are well reflected in including as profitability
ratios the return after interest and taxes on equity, and the return on total assets.

1. Sales growth ratio

Definition:
The growth in the sales from the last year is called sales growth ratio.

What it is:
It is calculated by subtracting the last yea sales from the current year sales and by
dividing the last year sales.

When it to use:
When the company want to compare the last year sales from the current year sales. The
greater the figure shows the growth of the company and it also shows that by using the
extra resources what percentage of the sales of the company increase.

Computation:
Current year sales-last year sales
Last year sales

Calculation 1800607-1624284/162428
4
Resulting ratios 10.85%

Analysis:

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Ratio Analysis

Higher the ratio, the better it is. If the company has the ratio more than the last year it
means that there is progress but if inflation rate in the county is 5% it means that growth
of the company is 9.27%.
B. Cost of goods sold to sales ratio

Definition:
The ratio between the cost of goods sold and sales is called cost of goods sold to sales
ratio.

What it is:
It is the Indicator of how much cost on your products you are selling.

When it to use:
When the company wants to check the percentage of the cost of goods sold on the sales.
It Compare to other businesses in the same industry to see that what is the percentage
difference they have adopted the cost of goods sold and sales.

Computation:
Cost of goods sold
Sales

Calculation 2042436/2896603 1149727/1624284
Resulting ratios 0.6765*100=67.65% 0.7078*100=70.78%

Analysis:
There is a decrease in this ratio that shows that company is decreasing the percentage of
cost of goods sold. It means that if we have $1 then there is $0.70 is our cost of goods
sold.

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Ratio Analysis

C. Gross profit margin ratio

Definition:
Indicator of how much profit is earned on your products without consideration of selling
and administration costs.

What it is:
This ratio is the percentage of sales dollars left after subtracting the cost of goods sold
from net sales. It measures the percentage of sales dollars remaining (after obtaining or
manufacturing the goods sold) available to pay the overhead expenses of the company.
Comparison of your business ratios to those of similar businesses will reveal the relative
strengths or weaknesses in your business.

When it to use:
When the company wants to check that is there enough gross profit in the business to
cover the operating cost and is there is a positive gross margin. It Compare to other
businesses in the same industry to see that business is operating as profitably as it should
be.

Computation:
Gross Profit
Total Sales
Or
Net sales-CGS
Net sales

where Gross Profit = Sales less Cost of Goods Sold

Calculation 854167/2896603 474557/1624284

Analysis:
The gross profit margin ratio indicates how efficiently a business is using its materials and
labor in the production process. It shows the percentage of net sales remaining after
subtracting cost of goods sold. A high gross profit margin indicates that a business can

27

Ratio Analysis

make a reasonable profit on sales, as long as it keeps overhead costs in control. The
bench mark for this ratio is 23.8.

28

Ratio Analysis

d. Net profit margin ratio

Definition:
It shows how much profit comes from every rupee or dollar of sales.

What it is:
This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold
and all expenses, except income taxes. It provides a good opportunity to compare
company’s "return on sales" with the performance of other companies in industry. It is
calculated before income tax because tax rates and tax liabilities vary from company to
company for a wide variety of reasons, making comparisons after taxes much more
difficult.

When it to use:
Company uses this ratio when the company wants to measure the rate of net profit
earned on sales.

Computation:
Net Profit
Total Sales

Calculation 172448/1800607 83325/1624284

Analysis:
Huge increase in this ratio shows that company has adequate control over the expenses
and reduces the cost of production. The bench mark for this ratio is 4.7.

29

Ratio Analysis

4. Profitability in return to investment

A. Return on investment

Definition:
It considered a measure of how effectively assets are used to generate a return.

What it is:
The ROI is perhaps the most important ratio of all. It is the percentage of return on funds
invested in the business by its owners. ROI shows the amount of income for every dollar
tied up in assets.

When it to use:
This ratio tells the owner whether or not all the effort put into the business has been
worthwhile. If the ROI is less than the rate of return on an alternative, risk-free
investment such as a bank savings account, the owner may be wiser to sell the company,
put the money in such a savings instrument, and avoid the daily struggles of small
business management

Computation: Net Profit
Total Assets

Calculation 172448/860767 83325/937090

Analysis:
The great improvement in this ratio shows that company is utilizing its resources at the
maximum point. The industrial bench mark for this ratio is 7.8.

30

Ratio Analysis

B. Return on equity

Definition:
Making enough profit to compensate for the risk of being in business.

What it is:
Determines the rate of return on your investment in the business. As an owner or
shareholder this is one of the most important ratios as it shows the hard fact about the
business.

When it to use:
When the company want to Compare the return on equity to other investment
alternatives, such as a savings account, stock or bond and want to Compare the ratio to
other businesses in the same or similar industry.

Computation:

Net Profit
Equity

Calculation 172448/69448 83325/69448

Analysis:
By comparing the bench mark of 14.04%with the company’s 34.9% which has increase
nearly 73 points from the last year ratio; shows strong investment by the investors and
the return on that investment.

31

Ratio Analysis

5. Market value ratio

A. Profit earning ratio

Definition:
The ratio that shows what the company is earning per share is called price earning ratio.
Value ratio

What it is:
This ratio indicates how much times the difference between the market price per share
and the earning per share.

When it to use:
When the company wants to check that what the company is earning per share

Computation:
Market price per share
Earning per share

Where the earning per share is calculated by total equity by the number of shares issued.
Calculation 120/16.04 62/(22.15)
Resulting ratios 7.48 -2.799

Analysis:
There is great increase in the figure. It also shows that profit will cover with in 7.48 years.

32

Ratio Analysis

b. Market to book value ratio

Definition:
The ratio between the market and the book value per share is called market to book value
ratio.

What it is:
This ratio indicates how much times the difference between the market and in the books
of accounts per share.

When it to use:
When the company want to compare the value of the share in time from the books of
accounts and market price.

Computation:
Price per share
Book value per share

Calculation 120/45.9031 62/

Analysis:
The current figure shows that there is a good increase in the value of the share the bench
mark for this ratio is 02 this figure also shows the company’s good will.

Inventory Turn Over Ratio:
Computation: C.G.S
Avg.Inventroy

Calculation 1218270/396602 1149727/341554
Resulting ratios 307.17% 336.61%

33

Ratio Analysis

Raw Material turnover:

Computation: R.M Consumed
Avg.R.m

Calculation 824674/1699682 875008/1699682

34

Ratio Analysis

Trend analysis

Serial Ratio’s 2002 2003 Difference Analysis
#
1 Current ratio 0.99 0.97 (0.2) Decrease in the
current ratio
2 Acid test ratio 0.46 0.52 0.06 Increase

3 Debt to equity 3.47 1.4 (2.07) Decrease
ratio
4 Debt to total 0.82 0.73 (0.09) Decrease
assets
5 Interest (0.8) 4.7 5.5 Increase
coverage ratio
6 Receivable 29.48
activity
7 Payable activity 3.9 2.36 (15.4) Decrease

8 Inventory 2.984
activity

9 Total asset turn 1.32 1.83 0.48 Increase
over
10 Sales growth 14.27
ratio
11 Cost of goods 76.3% 70.5% (5.8)% Decrease
sold to sales
ratio
12 Gross profit 23.66% 29.4% 5.74 Increase
margin ratio
13 Net profit (8.4)% 5.3% 13.7 Increase
margin ratio
14 Return on (11.16)% 9.783% 20.943% Increase
investment
15 Return on equity (61.7)% 34.9% 96.6% Increase

16 Profit earning (2.799) 7.48 10.279 Increase
ratio
17 Market to book 1.7 2.614 0.914 Increase
value ratio

35

Ratio Analysis

In the both years of the company’s current ratio, still in the week position to pay its short
term debts. This ratio indicates the firm's ability to service its current obligations.
Generally, the higher the current ratio, the greater the "cushion" between current
obligations and a firm's ability to pay them. The stronger ratio reflects a numerical
superiority of current assets over current liabilities.

Current Ratio

1.6
1.4
1.2
1
Ratios

0.8
0.6
0.4
0.2
0
1 2 3 4 5
Years
But increase in the quick ratio shows the company’s strong position to pay its debts.
Indicates the extent to which you could pay current liabilities without relying on the sale of
inventory -- how quickly you can pay your bills.

The sales growth ratio of the company is less than the previous year which is 14.3% in
this year but in the last year it was 22.3% the decrease in this ratio is because that
company has shut down its some distribution centers.

36

Ratio Analysis

Sales Growth Ratio

25.00%
20.00%
15.00%
Ratios
10.00%
5.00%
0.00%
1 2 3 4 5
Ye ars

The gross profit margin ratio indicates how efficiently a business is using its materials and
labor in the production process. It shows the percentage of net sales remaining after
subtracting cost of goods sold. A high gross profit margin indicates that a business can
make a reasonable profit on sales, as long as it keeps overhead costs in control. But the
gros profit in this year is 29.4% and in the last year it was 23.7%.

Gross Profit Margin

40.00%
30.00%
Ratios 20.00%
10.00%
0.00%
1 2 3 4 5
Years
Net Profit Margin
Huge increase in the net profit ratio shows that company has adequate control over the
expenses and reduces the cost of production. Net profit ratio of the aventis in this year is
5.3% but in the last 10.00% -8.4% this shows that company is utilizing its resources in
year it was
a very good manner. 5.00%
Ratios 0.00%
-5.00%
-10.00%
1 2 3 4 5 37
COMSATS Institute of Information Technology, WahYears
Campus. of 44

Ratio Analysis

Suggestion
As the year 2002 shows that company was receiving heavy loss this was because that
some of the company units and distribution centers were not working well and another
cause was the competition from the some other companies ,because of these reasons
company was not receiving profit but in that year 2003 the net profit of the company is
Rs.154673 thousands so for the year 2004 it is important for the company to decrease its
miss utilization of resources, to shut down less productive units , adopt new technology
for its long term market survival , because through this way the company can increase is
profit ratio in the up coming years.

38

Ratio Analysis

VERTICAL ANALYSIS
P/L Account
For the year ended Dec 31, 2000

2000 1999

Net Sales 309.20% 342.27%

Cost of Good Sold (C.G.S) 209.20% 242.27%

Trading/Gross Profit 100% 100%

Admin/Gen Expense 70.38% 82.44%

Operating Profit 29.58% 17.56%

Other Income 3.5% 6.81%

33.08% 24.71%

Financial Charges 6.48% 6.99%

Other Charges 3.21% 2.55%

9.69% 9.54%

Profit Before Tax 23.39% 14.82%

39

Ratio Analysis

Taxation 13.53% 10.17%

Profit After Tax 9.36% 4.65%

HORIZONTIAL ANALTYSIS
P/L Account
For the year Ended Dec 31,2000

Increase/Decrease 2000

Net Sales 10.8%

Cost of Good Sold (C.G.S) 6%

Trading/Gross Profit 22.71%

Gen Admin & selling Expense 4.7%

Operating Profit 107%

Other Income (36)%

67%

Financial Charges 14%

Other Charges 54.19%

24.06%

Net Profit Before Taxation 94.26%

Taxation 63.23%

Net Profit 162.24%

40

Ratio Analysis

HORIZONTIAL ANALYSIS
Balance Sheet
As on December 31,2000

Increase/Decrease Increase/Decrease %Age
Share capital & reserves ------ 0%
Authorized Capital ----- 0%
Issued, subscribed 33500 13.81%
Revenue reserve 17 9.71%
Unappropriated Profit 33517 10.73%

Redeemable capital (104000) 100%
Deferred Taxation (6913) 100%

CURRENT LIABILITIES

Current Liabilities 100000 2500%
Under mark-up (58120) 36.65%
Creditors, accrued (47752) 14.29%
Proposed Dividends 7008 40.36%
1073 0.20%
Contingences & (76323) 8.14%
Commitment

41

Ratio Analysis

TANGIBLE ASSETS

Operating Assets (43991) 23.13%
Capital work in progress 16949 246.56%
Long-Term Deposits 1553 282.36%
Long-Term & Advances 1518 75.67%

CURRENT ASSETS

Stores & Spares (568) 2.33%
Stock in Trade (48403) 11.70%
Trade Debts 145871 192.36%
Loans & Advances (358) 7.8%
Deposits & short-term (109591) 78.45%
Prepayments
Taxation (47784) 68.28%
Other Receivables 5428 67%
Bank and cash 3053 200%
(52652) 7.13%

42

Ratio Analysis

VERTICAL ANALYSIS

Balance Sheet
As on Dec 31, 2005

CURRENT ASSETS

2000 1999
Stores & spares 3.4% 3.3%
Stock in trade 53.2% 56%
Trade debts 32.3% 10.2%
Loans & advances 0.6% 0.6%
Deposits & short-term Pay 4.3% 18.9%
Taxation 3.2% 9.4%
Other Receivables 1.9% 1%
Bank and cash balances 0.6% 0.2%

CURRENT LIABILITIES

2000 1999
Current Liabilities 20.1% 0.7%
Under mark-up 19.5% 30.8%
arrangement
Creditors, accrued and 55.5% 64.9%
Proposed Dividend 4.7% 3.3%

43

Ratio Analysis

44

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