Ratio Analysis

INTRODUCTION
➢ RANBAX
BACKGROUND OF COMPANY
Ranbaxy Laboratories Limited is India's
largest pharmaceutical company. Incorporated in 1961,
Ranbaxy exports its products to 125 countries with ground
operations in 46 and manufacturing facilities in seven
countries. The company went public in 1973, and Japanese
company Daiichi Sankyo gained majority control in 2008.
Atul Sobti is currently Ranbaxy CEO and Managing

Director having taken over from Malvinder Singh in May
2009.
FORMATION
Ranbaxy was started by Ranbir Singh and Gurbax Singh in
1937 as a distributor for a Japanese company Shionogi. The
name Ranbaxy is aportmanteau word from the names of its
first owners Ranbir and Gurbax. Bhai Mohan Singh bought
the company in 1952 from his cousins Ranbir Singh and
Gurbax Singh. After Bhai Mohan Singh's son Parvinder Singh
joined the company in 1967, the company saw a significant
transformation in its business and scale. His sons Malvinder
Mohan Singh and Shivinder Mohan Singh sold the company
to the Japanese company Daiichi Sankyo in June 2008.
TRADING
In 1998, Ranbaxy entered the United States the world's
largest pharmaceuticals market and now the biggest market
for Ranbaxy, accounting for 28% of Ranbaxy's sales in 2005.
For the twelve months ending on 31 December 2005, the
company's global sales were at US $1,178 million with
overseas markets accounting for 75% of global sales (USA:
28%, Europe: 17%, Brazil, Russia, and China: 29%). For the
twelve months ending on December 31, 2006, the company's
global sales were at US $1,300 million.
A financial study on Ranbaxy and Pfizer
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Most of Ranbaxy's products are manufactured by license
from foreign pharmaceutical developers, though a
significant percentage of their products are off-patent drugs
that are manufactured and distributed without licensing
from the original manufacturer because the patents on such
drugs have expired.
In December 2005, Ranbaxy's shares were hit hard by a
patent ruling disallowing production of its own version
of Pfizer's cholesterol-cutting drug Lipitor, which has annual
sales of more than $10 billion.[4] In June 2008, Ranbaxy
settled the patent dispute with Pfizer allowing them to sell
Atorvastatin Calcium, the generic version of Lipitor(R)and
Atorvastatin Calcium-Amylodipine Besylate, the generic
version of Pfizer's Caduet(R) in the US starting November 30,
2011. The settlement also resolved several other disputes in
other countries. In 23 June 2006, Ranbaxy received from the
United States Food & Drug Administration a 180-day
exclusivity period to sell simvastatin (Zocor) in the U.S. as
a generic drug at 80 mg strength. Ranbaxy presently
competes with the maker of brand-name Zocor, Merck & Co.;
IVAX Corporation (which was acquired by and merged into
Teva Pharmaceutical Industries Ltd.), which has 180-day
exclusivity at strengths other than 80 mg; and Dr. Reddy's
Laboratories, also from India, whose authorized generic
version (licensed by Merck) is exempt from exclusivity.
On 16 September 2008, the Food and Drug Administration
issued two Warning Letters to Ranbaxy Laboratories Ltd.
and an Import Alert for generic drugs produced by two
manufacturing plants in India.
On 10 June 2008, Japan's Daiichi Sankyo Co. agreed to take a
majority (50.1%) stake in Ranbaxy, with a deal valued at
about $4.6 billion. Ranbaxy's Malvinder Singh will remain
CEO after the transaction. Malvinder Singh also said that
this was a strategical deal and not a sell out.
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On February 25, 2009 the U.S. Food and Drug Administration
said it has halted reviews of all drug applications including
data developed at Ranbaxy's Paonta Sahib plant in India
because of a practice of falsified data and test results in
approved and pending drug applications. "Investigations
revealed a pattern of questionable data," the FDA said.
ACQUASITION
On June 11 2008, Daiichi-Sankyo acquired a 34.8% stake
in Ranbaxy, for a value $2.4 billion. In November
2008, Daiichi-Sankyo completed the takeover of the
company from the founding Singh family in a deal worth
$4.6 billion by acquiring a 63.92% stake in Ranbaxy.
The addition of Ranbaxy Laboratories extends Daiichi-
Sankyo's operations - already comprising businesses in 21
countries. For Ranbaxy, the deal frees up its debt and
imparts more flexibility into its growth plans. The combined
company is worth about $30 billion.
MISSION
• “To become a Research-based Internatiopnal
Pharmaceutical Company”
VALUES
• Achieving customer satisfaction is fundamental to our
business.
• Provide products and services of the heighest quality.
• Practice dignity and equity in relationship and provide
opportuanities for our people to realise their full potential.
• Ensure profitable growth and enhance wealth of the
shareholders.
• Foster mutually beneficial relations with all our business
partners.
• Manage our operations with high concern for safety and
environment.
• Be a responsible corporate citizen.
VISSION
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• Achieve significant business in proprietary products by 2012
with a strong presence in developed markets.
PRODUCTS
Using the finest R&D and Manufacturing facilities, Ranbaxy
Laboratories Limited manufacture and markets generic
pharmaceuticals, value added generic pharmaceuticals,
branded generics, active Pharmaceuticals (API) and
intermediates.
The Company remains focused on ascending the value chain
in the marketing of pharmaceutical substances and is
determined to bring in increased revenues from dosage
forms sales.
Ranbaxy's diverse product basket of over 5,000 SKUs
available in over 125 countries worldwide, encompasses a
wide therapeutic mix covering a majority of the chronic and
acute segments. Healthcare trends project that the chronic
treatment segments will outpace the acute treatment
segments, primarily driven by a growing aging population
and dominance of lifestyle diseases. Our robust performance
in Cardiovasculars, Central Nervous System, Respiratory,
Dermatology, Orthopedics, Nutritionals and Urology
segments, clearly indicates that the Company has
strengthened its presence in the fast-growing chronic and
lifestyle disease segments.
Top 20 Molecules
• Simvastatin
• AmoxiClav Potassium
• Isotretinoin
• Amoxycillin and Combinations
• Ciprofloxacin and Combinations
• Ketorolac Tromethamine
• Omeprazole and Combinations
• Cefuroxime Axetil
• Cephalexin
• Loratadine and Combinations
• Clarithromycin
• Ginseng+Vitamins
• Diclofenac and Combinations
• Ranitidine
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• Cefaclor
• Cefpodoxime Proxetil
• Efavirenz
• Atorvastatin and Combinations
• Fenofibrate
• Ofloxacin and Combinations
➢ PFIZER
BACKGROUND OF COMPANY
Pfizer Incorporated (NYSE: PFE) is a pharmaceutical

company, ranking number one in sales in the world. The
company is based in New York City, with its research
headquarters in Groton,Connecticut. It produces Lipitor
(atorvastatin, used to lower blood cholesterol); the
neuropathic pain/fibromyalgia drug Lyrica (pregabalin); the
oral antifungal medication Diflucan (fluconazole), the
antibiotic Zithromax (azithromycin), Viagra (sildenafil)
Page 5
for erectile dysfunction, and the anti-inflammatory Celebrex
(celecoxib) (also known as Celebra in some countries outside
the USA andCanada, mainly in South America). Its
headquarters are in Midtown Manhattan, New York City.
Pfizer's shares were made a component of the Dow Jones
Industrial Average on April 8, 2004.
Pfizer pleaded guilty in 2009 to the largest health care fraud
in U.S. history and received the largest criminal penalty ever
levied for illegal marketing of four of its drugs. Called
a repeat offender, this was Pfizer's fourth such settlement
with the U.S. Department of Justice in the previous ten
years.
On January 26, 2009, Pfizer agreed to buy pharmaceutical
giant Wyeth for US$68 billion, a deal financed with cash,
shares and loans.[8] The deal was completed on October 15,
2009.
FORMATION AND HISTORY
Pfizer is named after German-American cousins Charles

Pfizer and Charles Erhardt (they were originally from
Ludwigsburg, Germany) who launched a fine chemicals
business, Charles Pfizer and Company, from a building at the
intersection of Harrison Avenue and Bartlett
Street [10]
inWilliamsburg, Brooklyn in 1849. There, they
produced an antiparasitic called santonin. This was an
immediate success, although it was the production of citric
acid that really kick-started Pfizer's growth in the 1880s.
Pfizer continued to buy property to expand its lab and
factory on the block bounded by Bartlett Street; Harrison
Avenue; Gerry Street; and Flushing Avenue. That facility was
used by Pfizer until 2005, when Pfizer closed its original
plant along with several others. Pfizer established its
original administrative headquarters at 81 Maiden Lane in
Manhattan. By 1906, sales totaled nearly $3 million.
Page 6
World War I caused a shortage of calcium citrate that Pfizer
imported from Italy for the manufacture of citric acid, and
the company began a search for an alternative supply. Pfizer
chemists learned of a fungus that ferments sugar to citric
acid and were able to commercialize production of citric acid
from this source in 1919. As a result Pfizer developed
expertise in fermentation technology. These skills were
applied to the mass production of penicillin during World
War II, in response to a need from the U.S. government.
The antibiotic was needed to treat injured Allied soldiers. In
fact, most of the penicillin that went ashore with the troops
on D-Day was made by Pfizer.
Following the success of penicillin production in the 1940s,
penicillin became very inexpensive and Pfizer made very
little profit for its efforts. As a result, in the late 1940s
Pfizer decided to search for new antibiotics with greater
profit potential. The discovery and commercialization
ofTerramycin (oxytetracycline) by Pfizer in 1950 moved the
company on the path of change from a manufacturer of fine
chemicals to a research-based pharmaceutical company. To
augment its research in fermentation technology, Pfizer
began a program to discover drugs through chemical
synthesis. Pfizer also established an animal health division
in 1959 with an 700-acre farm and research facility in Terre
Haute, Indiana.
By the 1950s, Pfizer was established in Belgium, Brazil,
Canada, Cuba, Iran, Mexico, Panama, Puerto Rico, Turkey
and the United Kingdom. In 1960, the Company moved its
medical research laboratory operations to a new facility in
Groton, Connecticut. In 1980 Pfizer launchedFeldene
(piroxicam), a prescription anti-inflammatory medication
that became Pfizer's first product to reach a total of a billion
United States dollars in sales.
During the 1980s and 1990s Pfizer underwent a period of
growth sustained by the discovery and marketing
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of Zoloft, Lipitor, Norvasc, Zithromax,Aricept, Diflucan,
and Viagra. Pfizer has recently grown by mergers, including
those with Warner-Lambert (2000), with Pharmacia (2003),
and with Wyeth (2009).
MISSION
"We will become the world's most valued company to
patients, customers, colleagues, investors, business
partners, and the communities where we work and live."
VISSION
At Pfizer, we're inspired by a single goal: your health. That's
why we're dedicated to developing new, safe medicines to
prevent and treat the world's most serious diseases. And
why we are making them available to the people who need
them most. We believe that from progress comes hope and
the promise of a healthier world.
PRODUCTS
• Accupril
• Lipitor
• Vigra
• Accupril
• Aricept
• Bextra
• Ben-Gay
• Caduet
• Celebrex
• Chantix
• Genotropin
• Geodon
• Inspra
• Macugen
• Neurontin
• Relpax
• Selzentry
• Somavert
• Vfend
• Xanax
Page 8
THEORETICAL ASPECTS of
RATIO ANALYSIS
MEANING OF RATIO ANALYSIS
Ratio analysis is a widely used tool of financial analysis. It is

defined as the systematic use of ratio to interpret the
financial statements so that the strength 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.
SIGNIFICANCE OF RATIO ANALYSIS

• It helps in evaluating the firms performance
With the help of ratio analysis conclusion can be drawn
regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking.
Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets
correctly, to increase the investor’s wealth. It ensures a fair
return to its owners and secures optimum utilization of firms
assets
• It helps in inter-firm comparison

Ratio analysis helps in inter-firm comparison by providing
necessary data. An Inter firm comparison indicates relative
position. It provides the relevant data for the comparison of
the performance of different departments. If comparison
shows a variance, the possible reasons of variations may be
identified and if results are negative, the action may be
initiated immediately to bring them in line.
• It simplifies financial statement

The information given in the basic financial statements
serves no useful Purpose unless it s interrupted and
analyzed in some comparable terms. The ratio analysis is
one of the tools in the hands of those who want to know
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something more from the financial statements in the
simplified manner.
• It helps in determining the financial position of the concern

Ratio analysis facilitates the management to know whether
the firms financial position is improving or deteriorating or
is constant over the years by setting a trend with the help of
ratios The analysis with the help of ratio analysis can know
the direction of the trend of strategic ratio may help the
management in the task of planning, forecasting and
controlling.
• It is helpful in budgeting and forecasting

Accounting ratios provide a reliable data, which can be
compared, studied and analyzed. These ratios provide sound
footing for future prospectus. The ratios can also serve as a
basis for preparing budgeting future line of action.
• Liquidity position
With help of ratio analysis conclusions can be drawn
regarding the Liquidity position of a firm. The liquidity
position of a firm would be satisfactory if it is able to meet
its current obligation when they become due. The ability to
met short term liabilities is reflected in the liquidity ratio of
a firm.
• Long term solvency:

Ratio analysis is equally for assessing the long term
financial ability of the Firm. The long term solvency is
measured by the leverage or capital structure and
profitability ratio which shows the earning power and
operating efficiency, Solvency ratio shows relationship
between total liability and total assets.
• Operating efficiency:
Yet another dimension of usefulness or ratio analysis,
relevant from the View point of management is that it
throws light on the degree efficiency in the various activity
ratios measures this kind of operational efficiency.
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CLASSIFICATION OF RATIO ANALYSIS
Different ratios are used for different purposes; these ratios

can be grouped into various classes according to the
financial activity. Ratios are classified into four broad
categories.
Liquidity Ratio
Leverage Ratio
Profitability Ratio
Activity Ratio
Liquidity Ratio:
Liquidity ratio measures the firms ability to meet its current
obligations i.e. ability to pay its obligations and when they
become due. Commonly used ratios are:
1.Current Ratio 2. Acid Test Ratio or Quick Ratio
1. Current Ratio
Current ratio is the ratio, which express relationship
between current asset and current liabilities. Current asset
are those which can be converted into cash within a short
period of time, normally not exceeding one year. The
current liabilities which are short- term maturing to be met.
Current Assets
Current ratio = ----------------------------------------
Current Liabilities
Page 11
Acid Test Ratio or Quick Ratio:
The acid test ratio is a measure of liquidity designed to

overcome the defect of current ratio. It is often referred to
as quick ratio because it is a measurement of firm’s ability
to convert its current assets quickly into cash in order to
meet its current liabilities.
Current Asset – Inventories Liquid

Assets
Acid Test Ratio = ------------------------------------------------ or
----------------------------------------
Current liabilities Quick
Liabilities
Leverage or Capital Structure Ratio:

Leverage or capital structure ratios are the ratios which
indicate the relative interest of the owners and the creditors
in an enterprise. These ratios indicate the funds provided by
the long-term creditors and owners.
To judge the long term financial position of the firm
following ratios are applied.
Debt – Equity Ratio
Total Debt Ratio
Debt – Equity Ratio

Debt-equity ratio which expresses the relationship between
debt and equity. This ratio explains how far owned funds are
sufficient to pay outside liabilities. It is calculated by
following formula:
Debenture + Current Liabilities + Pref. Share

Capital
Debt Equity Ratio
=------------------------------------------------------------------------------------
Equity Shareholder’s fund
Profitability Ratios
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Profitability ratio are the best indicators of overall efficiency
of the business concern, because they compare return of
value over and above the value put into business with sales
or service carried on by the firm with the help of assets
employed. Profitability ratio can be determined on the basis
of:
1. Sales 2. Investment
Profitability Ratios Related to Sales:

Gross Profit to Sales Ratio
Net Profit to Sales Ratio or Net Profit of Margin.
Gross Profit to Sales Ratio

The gross profit to sales ratio establishes relationship
between gross profit and sales to measure the relative
operating efficiency of the firm to reflect pricing policy.
Sales - Cost of Goods Sold

Gross Profit to Sales Ratio = -------------------------------------- X 100
Sale
Net Profit Margin

The net margin indicates the management’s ability to earn
sufficient profit on sales to earn sufficient profit on sales not
only to cover all revenue operating expenses of the
business, the cost of borrowed funds and the cost of goods
or servicing, but also to have sufficient margin to pay
reasonable comparison to shareholders on their
contributions to the firm.
Net profit after tax and interest

Net Profit Margin =-------------------------------------------------------------- X 100
Sales
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Profitability Ratios Related to Investments:
Return on Assets
Return on Capital Employed
Return on Assets
The profitability ratio here measures the relationship

between net profit and assets.
Net Profit after Tax

Return on Assets =--------------------------------------------------
Fixed Assets
Return on Capital Employed:

Net Profit after Taxes
Return on Capital Employed =---------------------------------------------------------
Total Capital Employed
Activity Ratios or Efficiency Ratios:
Activity ratio are sometimes are called efficiency ratios.

Activity ratios are concerned with how efficiently the assets
of the firm are managed. These ratios express relationship
between level of sales and the investment in various assets
inventories, receivables, fixed assets etc.
The important activity ratios are as follows:

Inventory Turnover Ratio
Debt Turnover Ratio
Average Collection Period Ratio
Inventory Turnover Ratio:

Raw Materials Consumed
Inventory Turnover Ratio =------------------------------------------------------
Average Stock of Raw Materials
Debt Turnover Ratio
This ratio shows how quickly the debtors are converted into
cash
Total Sales
Debt Turnover Ratio =------------------------------------------
Debtors
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Average Collection Period Ratio
This ratio indicates how quickly the inventory is converted

into cash.
Days in a Year
Average Collection Period Ratio =-----------------------------------------------
Debtors Turnover
PARTIES INTERESTED IN RATIO:
Trade creditors
Trade creditors are interested in firm's ability to meet their
claims over a very short period of time. Their analysis will,
there fore confine to the evaluation of the firm's liquidity
positions.
Suppliers of long-term debt
Page 15
Suppliers of long-term debt on the other hand are concerned
with firm's long-term solvency and survival. They analysis
the firms profitability over time, its ability to generate cash
to be able to pay interest and repay interest and repay
principal and the relationship between various source of
funds. (Capital structure relationship).
Long-term creditors do analyses the historical financial
statements but they place more emphasis on the firm's
projected financial statement to make analysis about its
future solvency and profitability.
Investors
Investors who have invested their money in the firms share
are most concerned about the firm steady growth in
earning. As such, they concentrate on the analysis of the
firm's present and future profitability. They are also
interested in the firms financial structure of the extent it
influence the firms earning ability and risk.
Management
An organization would be interested in every aspect of the
financial analysis. It is their overall responsibility to see that
the resources of the firm are used most effectively and
efficiently and that the firm's financial condition is sound.
So thus management employee financial analysis for the
purpose of internal control and to better provide what
capital supplier seeks in financial condition and performance
from the business and from an internal control standpoint,
management needs to take financial analysis in order to
plan and control effectively.
RATIO ANALYSIS:
Financial ratios are useful indicators of a firm's performance
and financial situation. Financial ratios can be used to
analyze trends and to compare the firm's financials to those
Page 16
of other firms. Ratio analysis is the calculation and
comparison of ratios which are derived from the information
in a company's financial statements. Financial ratios are
usually expressed as a percent or as times per period. Ratio
analysis is a widely used tool of financial analysis. It is
defined as the systematic use of ratio to interpret the
financial statements so that the strength 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. With the help of ratio analysis conclusion can be
drawn regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking.
Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets
correctly, to increase the investor’s wealth. It ensures a fair
return to its owners and secures optimum utilization of
firm’s assets. Ratio analysis helps in inter-firm comparison
by providing necessary data. An inter firm comparison
indicates relative position. It provides the relevant data for
the comparison of the performance of different
departments. If comparison shows a variance, the possible
reasons of variations may be identified and if results are
negative, the action may be initiated immediately to bring
them in line. Yet another dimension of usefulness or ratio
analysis, relevant from the View point of management is
that it throws light on the degree efficiency in the various
activity ratios measures this kind of operational efficiency.
Liquidity Ratios Leverage Ratios

Profitability Ratios Activity Ratios
Market Ratios Statements of Cash Flow
Page 17
COMPARATIVE ANALYSIS OF RANBAXY & PFIZER
LIQUIDITY RATIO:
1. CURRENT RATIO: Current Assets / Current Liabilities
This ratio indicates the extent to which current liabilities are

covered by those assets expected to be converted to cash in
the near future. Current assets normally include cash,
marketable securities, accounts receivables, and
inventories. Current liabilities consist of accounts payable,
short-term notes payable, current maturities of long-term
debt, accrued taxes, and other accrued expenses. Current
assets are important to businesses because they are the
assets that are used to fund day-to-day operations and pay
ongoing expenses.
RANBAXY
YEAR 2004 2005 2 20 20
006 07 08
CURRENT ASSETS 2,366. 2,409.08 2,620. 2,922.4 6,509.9

89 99 2 7
CURRENT 1,542. 1,397.56 1,508. 1,915.4 4,571.3

LIABILITIES 33 24 9 1
CURRENT RATIO 1.72 1 1

1.53 1.74 .53 .42
PFIZER
YEAR 2004 2005 2 200 20

006 7 08
CURRENT ASSETS 389.9 465.83 563.22 797.24 1,742.31

1
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CURRENT 174.1 206.9 211.67 225.75 929.62
LIABILITIES 1 8
CURRENT RATIO 2. 2.2 2.2 3.5 1.8

24 5 5 3 7
INTERPRETATION OF CURRENT RATIO
Current ratio refers short term solvency or liquidity position

of the firm. It indicates how much current assets in rupees
are being held by the company for each rupee of current
liabilities. As a convention, current ratio 2:1 is taken as
standard which means that each rupee of current liabilities
should be backed by current assets valued two rupees. The
logic behind this is that even if actual value of current
assets is reduced to half, the firm will not face any problem
in meeting its current liabilities. However, current ratio
should not be blindly followed in measuring the liquidity
position of the firm in as much as it does not consider
quality of current assets. For e.g. if current assets of a firm
hold huge amount of old and doubtful debts and obsolete
inventory, its debt paying capacity will be deteriorated.
Hence too much emphasis should not be placed on current
ratio to measure liquidity position. Further investigation
should be made about quality of current assets.
RANBAXY
The current ratio for the year 2004, 2005, 2006, 2007 &
2008 is 1.53, 1.72, 1.74, 1.53 & 1.42 respectively, compared
to standard ratio 2:1 this ratio is lower which shows
company’s debt paying capacity is not up to the mark.
PFIZER
The current ratio for the year 2004, 2005, 2006, 2007 is
2.24, 2.25, 2.66, 3.53 which is showing company’s debt
paying capacity is strong but in 2008 current ratio comes to
1.87 i.e lees than standard but it is the effect of global
recession.
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Current assets – Inventories
Liquid(quick)Assets 2. ACID TEST
RATIO : ----------------------------------- OR -------------------------------------
Current liabilities Quick
Liabilities
Acid test ratio or quick ratio is a refinement over current

ratio. As it excludes inventory from current assets, it can
more effectively measure the short term debt paying ability.
As a convention, acid test ratio 1:1 is taken as standard
indicating that each rupee of quick liabilities should be
backed by quick assets of each value. However, although
acid test ratio is more penetrating test of liquidity than
current ratio.
YEAR 2004 2005 2006 2007 2008
RANBAXY .91 .98 1.03 .96 .86
PFIZER 1.74 1.75 2.12 3.03 1.71
INTERPRETATION OF QUICK RATIO
The acid-test ratio is rigorous measures of firms’ ability to

service short term liabilities. The usefulness of the ratio lies
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in the fact that it is widely accepted as best available test to
judge liquidity position of the firm. Generally speaking an
acid test ratio of 1:1 is considered satisfactory as a firm can
easily meet all current claims.
RANBAXY
The quick ratio for the year 2004, 2005, 2006, 2007 & 2008
is 0.91, 0.98, 1.03, 0.96 & 0.86 which means the company
has shortage of quick liquidity except in year 2006. Hence
the firms position is not healthy to meet its all current
claims.
PFIZER
The quick ratio for the year 2004, 2005, 2006, 2007 & 2008
is 1.74, 1.75, 2.12, 3.03, 1.71 which is indicating that the
company has strong liquidity position. Hence the firm is in a
healthy position to meet its all current claims.
Page 21
LEVERAGE RATIO:
By using a combination of assets, debt, equity, and interest

payments, leverage ratio's are used to understand a
company's ability to meet it long term financial obligations.
Leverage ratios measure the degree of protection of
suppliers of long term funds. The level of leverage depends
on a lot of factors such as availability of collateral, strength
of operating cash flow and tax treatments. Thus, investors
should be careful about comparing financial leverage
between companies from different industries. For example
companies in the banking industry naturally operates with a
high leverage as collateral their assets are easily
collateralized.
These include:
Debenture + Current Liabilities + pref.
share Capital
1. DEBT-EQUITY
RATIO:-------------------------------------------------------------------------------
Equity Shareholder’s
fund
Total External Liabilities

OR, --------------------------------------------
Shareholder’s fund
[Shareholder’s fund= Equity Share Capital + Pref. Share Capital +

Reserve & Surplus – Fictitious assets, if any]
CURRENT LIABILITIES
RANBAXY 1,011.53 983.57 985.57 1,177.35 3,840.11
PFIZER 119.90 139.19 147.07 110.78 125.15
EQUITY SHARE CAPITAL

RANBAXY 185.89 186.22 186.34 186.54 210.19
PFIZER 28.80 29.84 29.84 29.84 29.84
RESERVE AND SURPLUS

RANBAXY 2,320.79 2,190.80 2,162.79 2,350.68 3,330.92
PFIZER 312.92 346.72 409.91 618.80 869.72
Page 22
DEBT-EQUITY RATIO:
RANBAXY 0.05 0.43 1.35 1.38 1.05
PFIZER 0.04
INTERPRETATION OF DEBT EQUITY RATIO

Debt-equity ratio indicates the respective claim of outsider
and owners i.e. equity shareholders in the assets of the
firm. So it reflects the financial soundness of the firm. A
high D/E ratio indicates that dependence of firm on outside
fund is high. In this case the firm is exposed to greater
financial risk. This is because if the firm does not perform
well for some reason or other, it will face problem in
payment of interest and repayment of principal in time. The
debt holders will then interfere in the management of the
firm.
On the other hand, a firm with low D/E ratio will provide a
high margin of safety to out side suppliers of capital the
become sure about return of their capital in time. Thus D/e
ratio should be maintained carefully keeping in view the
market condition, profitability of the firm and other related
factor.
Page 23
PBIT
2. INTEREST COVERAGE RATIO: ----------------------------------------
INTEREST
The interest coverage ratio tells us how easily a company is

able to pay interest expense associated to the debt they
currently have. The ratio is designed to understand the
amount of interest due as a function of company’s earnings
before interest and taxes (EBIT). This ratio measures the
extent to which operating income can decline before the
firm is unable to meet its annual interest cost.
RANBAXY
YEARY 2004 2005 2006 2007 2008
PBIT 697.43 307.69 603.62 965.72 -1331.47
INTEREST 10.98 26.41 58.44 93.43 145.83
ICR 63.52 11.65 10.32 10.34 -9.13
PFIZER
YEARY 2004 2005 2006 2007 2008
Page 24
PBIT 94.60 129.87 181.86 466.05 434.45
INTEREST 0.81 0.16 0.07 0.02 __
ICR 116.80 811.69 2,598 23,302.50 ---
INTERPRETATION OF INTEREST COVERAGE RATIO

The interest coverage ratio indicate firms ability to meet its
interest obligation it shows how many times interest is
covered by earning available for its payment. The earning
should be before deducting tax as interest is a tax
deductable expense. For safety a high interest coverage
ratio is preferable.
PROFITABILITY RATIO
Profitability is the net result of a number of policies and

decisions. This section of the discusses the different
measures of corporate profitability and financial
performance. These ratios, much like the operational
performance ratios, give users a good understanding of how
well the company utilized its resources in generating profit
and shareholder value. The long-term profitability of a
company is vital for both the survivability of the company as
well as the benefit received by shareholders. It is these
ratios that can give insight into the all important "profit".
Profitability ratios show the combined effects of liquidity,
asset management and debt on operating results. These
ratios examine the profit made by the firm and compare
these figures with the size of the firm, the assets employed
by the firm or its level of sales. There are four important
profitability ratios that I am going to analyze:
1. NET PROFIT MARGIN RATIO: Net Profit / Sales x 100
Page 25
This ratio indicates the management ability to operate the
business with sufficient success not only to recover from
revenues of the period, the cost of merchandise or services,
the expenses of operating the business (including
depreciation) and the cost the borrowed funds, but also to
leave a margin of reasonable compensation to the owners
for providing their capital at risk. The ratio of net profit
(after interest and tax) to sales essentially express the cost
price effectiveness of the operation.
A high net profit margin ensure adequate return to the

owners as well as enable a firm to withstand adverse
economic conditions when selling price is declining, cost of
production is rising and demand for the product is falling.
A low net profit margin has the opposite implications.

However, a firm with a low profit margin can earn a high
rate of return on investments if it has a higher inventory
turnover.
RANBAXY
YEA 20 200 20 200 20
R 04 5 06 7 08
NET 527.52 212.04 380.54 617.72 -1,044.80

PROFIT
SALES 3,791.28 3,640.49 4,165.12 4,293.02 4,652.04
NPM 13.91% 5.82% 9.14% 14.39% -22.46%

RATIO
PFIZER
YEA 200 2 20 2 2
R 4 005 06 007 008
NET 45.52 68. 105 338.9 299.1

PROFIT 12 .73 3 2
635.99 660. 728 731.3 729.0

SALES
88 .96 0 2
NPM 7.16% 10.31 14. 46.3 41.1

RATIO % 50% 5% 2%
Page 26
INTERPRETATION OF NET PROFIT MARGIN
This ratio indicates the efficiency of management in manufacturing,
administration and selling the product. This ratio is of special interest to
the owners as it states how much of sales is left for them after meeting
all expenses. For e.g. 10% net profit ratio 10 paisa per rupee of sale
belong to the owner as their reward for taking risk in investment. So
higher this ratio, more is return to shareholders.
It needs no mention that the aim of the management should be to

maintain this ratio as high as possible. A high net profit ratio will enable
the firm ton withstand the hardship in adverse situation like falling
selling price, increasing raw material cost or decline in demand etc.
A low net profit is the danger signal for the firm.
Sales –
Cost of Goods Sold
2. GROSS PROFIT TO SALES RATIO:
--------------------------------------------------- X 100
Sales
RANBAXY
YEAR 2 20 200 20 20
004 05 6 07 08
SALES 3,791.28 3,640.49 4,165.12 4,293.02 4,652.04
COST OF 3,241.45 3,486.01 3,577.55 3,919.09 4,511.46

GOODS SOLD
GROSS 14.5% 4.24% 14.12% 8.71% 3.02%

MARGIN
PFIZER
YEAR 2 20 200 20 20
004 05 6 07 08
Page 27
SALES 635.99 660.88 728.96 731.30 729.02
COST OF 503.57 546.15 560.70 555.11 582.40

GOODS SOLD
GROSS 20.82% 17.36% 23.08% 24.09% 20.11%

MARGIN
INTERPRETATION OF GROSS PROFIT MARGIN
Net Profit after Tax

3. RETURN ON ASSETS: ---------------------------------------------------- X 100
Average Total Assets
Page 28
ROA, a measure of a company's profitability, equal to a fiscal
year's earnings divided by its total assets, expressed as a
percentage. This is an important ratio for companies
deciding whether or not to initiate a new project. The basis
of this ratio is that if a company is going to start a project
they expect to earn a return on it, ROA is the return they
would receive. Simply put, if ROA is above the rate that the
company borrows at then the project should be accepted, if
not then it is rejected.
RANBAXY
YEAR 200 200 200 200 200

4 5 6 7 8
NET PROFIT 527.52 212.04 395.13 617.72 -

1,044.80
AVG. TOTAL 2,500.71 3,026.24 4,467.8 5,785.02 6,741.78

ASSETS 6
ROA 21.1% 7.01% 8.84% 10.68% -15.5%
PFIZER
YEAR 200 200 2006 2007 200

4 5 8
NET PROFIT 45.52 67.83 105.73 338.93 299.12
AVG. TOTAL 331.58 365.67 408.17 544.20 774.10
ASSETS
ROA 13.73% 18.55% 25.9% 61.16% 38.64%
Page 29
INTERPRETATION OF RETURN ON ASSETS (ROA)
RANBAXY
PFIZER
Page 30
Net
Profit after Taxes + Interest
4. RETURN ON CAPITAL EMPLOYED
(ROCE):-------------------------------------------------------X 100
Capital Employed
[Capital Employed=Fixed Assets + Current Assets – Current

Liabilities]
This is second type of second type of ROI. It is similar to

the ROA except in one respect. Here the profits are related
to the total capital employed. The term capital employed
refers to long term funds supplied by the creditors and
owners of the firm. Ti can be computed in two ways. Fires it
is equal to non-current liabilities (long-term liabilities) plus
owner’s equity. Alternatively, it is equivalent to net working
capital plus fixed assets. Thus, the capital employed basis
provides a test of profitability related to the sources of long-
term funds. A comparison of this ratio with similar firms,
with industry average and over time would provide
sufficient insight into how efficiently the long-term funds of
owner’s and creditors are being used. The higher the ratio,
the more efficient is the use of capital employed.
RANBAXY
YEAR 200 200 200 200 20

4 5 6 7 08
PAT + INTEREST 538.5 238.45 453.57 711.15 -

1,190.6
3
CAPITAL 1,633.86 2,423.54 4,543.0 4,864.07 3,602.0

EMPLOYED 4 4
ROCE 32.96% 9.84% 9.98% 14.62% -33.54%
PFIZER
Page 31
YEAR 2004 200 2006 2007 200
5 8
NAT + INTEREST 46.03 67.99 105.80 338.95 299.12
CAPITAL 234.85 237.36 292.69 537.87 774.43

EMPLOYED
ROCE 19.6% 28.64% 36.15% 63.02% 38.62%
INTERPRETATION OF RETURN ON CAPITAL EMPLOYED (ROCE)
RANBAXY
PFIZER
ACTIVITY OR EFFICIENCY RATIOS
Activity ratio are sometimes are called efficiency ratios.

Activity ratios are concerned with how efficiency the assets
Page 32
of the firm are managed. These ratios express relationship
between levels of sales and the investment in various assets
inventories, receivables, fixed assets etc.
Raw Materials
Consumed
1. INVENTORY TURNOVER RATIO:
---------------------------------------------------
Average Stock of
Raw Materials
RANBAXY
YEAR 2004 2005 2006 2007 2008
RAW MATERIAL 1,483.86 1,536.59 1,663.53 1,820.51 1,933.72

CONSUMED
AVG. STOCK OF RAW 1,494.49 1,510.23 1,600.10 1,742.02 1877.12

MATERIAL
INVENTORY 0.99 1.02 1.04 1.05 1.03

TURNOVER
RATIO
PFIZER
YEAR 2004 2005 2006 2007 2008
RAW MATERIAL 224.75 206.54 225.74 233.19 239.10

CONSUMED
AVG. STOCK OF RAW 217.5 215.65 216.14 229.47 236.15

MATERIAL
INVENTORY 1.03 0.96 1.04 1.02 1.01

TURNOVER
RATIO
Page 33
INTERPRETATION OF INVENTORY TURNOVER RATIO
RANBAXY
PFIZER
TOTAL SALES
2. DEBT TURNOVER RATIO: --------------------------------------
DEBTORS
This ratio is ratio of credit sales to average receivables. It

shows how quickly the debtors are converted in to cash.
RANBAXY
YEAR 2004 2005 2006 2007 2008
TOTAL SALES 3791.82 3640.49 4165.12 4293.02 4652.04
DEBTORS 784.69 806.62 1013.75 882.91 1024.54
DABT TURNOVER 4.83 4.51 4.11 4.86 4.54

RATIO
Page 34
PFIZER
YEAR 2004 2005 2006 2007 2008
TOTAL SALES 635.99 660.88 728.96 731.30 729.02
DEBTORS 71.73 82.82 69.63 61.37 59.73
DABT TURNOVER 8.87 7.98 10.50 11.92 12.21

RATIO
INTERPRETATION OF DEBTOR TURNOVER RATIO
RANBAXY
PFIZER
Page 35
No. of Days
1. AVERAGE COLLECTION PERIOD: ----------------------------------------------
Debtor Turnover Ratio
YEAR 2004 2005 2006 2007 2008
RANBAXY 2.48 2.66 2.92 2.47 2.64
PFIZER 1.35 1.50 1.14 1.00 0.98
Page 36

Ratio Analysis

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INTRODUCTION

Atul Sobti is currently Ranbaxy CEO and Managing

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

Pfizer Incorporated (NYSE: PFE) is a pharmaceutical

A financial study on Ranbaxy and Pfizer

FORMATION AND HISTORY

Pfizer is named after German-American cousins Charles

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

MEANING OF RATIO ANALYSIS

Ratio analysis is a widely used tool of financial analysis. It is

SIGNIFICANCE OF RATIO ANALYSIS

• It helps in inter-firm comparison

• It simplifies financial statement

A financial study on Ranbaxy and Pfizer

• It helps in determining the financial position of the concern

• It is helpful in budgeting and forecasting

• Long term solvency:

A financial study on Ranbaxy and Pfizer

Different ratios are used for different purposes; these ratios

1.Current Ratio 2. Acid Test Ratio or Quick Ratio

A financial study on Ranbaxy and Pfizer

The acid test ratio is a measure of liquidity designed to

Current Asset – Inventories Liquid

Leverage or Capital Structure Ratio:

Debt – Equity Ratio

Debenture + Current Liabilities + Pref. Share

A financial study on Ranbaxy and Pfizer

Profitability Ratios Related to Sales:

Gross Profit to Sales Ratio

Sales - Cost of Goods Sold

Net Profit Margin

Net profit after tax and interest

A financial study on Ranbaxy and Pfizer

The profitability ratio here measures the relationship

Net Profit after Tax

Return on Capital Employed:

Activity Ratios or Efficiency Ratios:

Activity ratio are sometimes are called efficiency ratios.

The important activity ratios are as follows:

Inventory Turnover Ratio:

Debt Turnover Ratio

A financial study on Ranbaxy and Pfizer

This ratio indicates how quickly the inventory is converted

PARTIES INTERESTED IN RATIO:

Suppliers of long-term debt

A financial study on Ranbaxy and Pfizer

A financial study on Ranbaxy and Pfizer

Liquidity Ratios Leverage Ratios

A financial study on Ranbaxy and Pfizer

1. CURRENT RATIO: Current Assets / Current Liabilities

This ratio indicates the extent to which current liabilities are

CURRENT ASSETS 2,366. 2,409.08 2,620. 2,922.4 6,509.9

CURRENT 1,542. 1,397.56 1,508. 1,915.4 4,571.3

CURRENT RATIO 1.72 1 1

YEAR 2004 2005 2 200 20

CURRENT ASSETS 389.9 465.83 563.22 797.24 1,742.31

A financial study on Ranbaxy and Pfizer