“Ratio Analysis of Sun Pharma

“By- Kajal Gupta (PGFA1922)”

PGDM – ‘A’

“Current ratio:”

Current ratio is the ratio that measures company’s ability to pay for its short
and long term obligations. As per the graph above the current ratio of Sun
pharma seems to be declining. The ratio is closest to the benchmark in the year
2009-10, 2012-13 and 2013-14, which means that the company has sufficient
current assets to pay for its liabilities.
The current ratio is highest in the year 2010-11 which means blockage of
funds, the company is not able to use its current assets which may also lead to
profit reduction.

The current ratio keeps on declining after 2013 i.e. below the benchmark
which means that the company is not able to meet its liabilities. In this case the
company needs to increase their current assets.
Quick Ratio:

Quick ratio measures the company’s ability to use its cash to meet its current
liabilities immediately. As per the above graph ratio is good from 2008-09 to
2013-14 and it is closest to the benchmark in 2013-14, this means that the
inventories are less.

All current assets excluding inventory and prepaid expenses are called quick
assets. The quick assets are more liquid as compared to current assets because
inventory will take time to convert in cash and prepaid expenses will not fetch
cash for the company.

The quick ratio represents the company ability to pay its short term
obligations using quick assets.

The quick ratio of SUN PHARMA has fallen from 2009 to 2011 . It indicates the
company has neither invested more on quick assets nor reduce its value.

The quick ratio of the company is very close to industry benchmark which
represents that company has a good liquidity position and is able to pay its
short term liabilities even without sale of their inventories. The company is
utilising its quick assets properly so that obligations can be met without
affecting the profitability of the firm.
Debt-Equity Ratio:

The debt equity ratio of firm represents the balance of debt and equity fund in
the company. The ratio should neither be more than the industrial average nor
very less than industrial average because both the situations are harmful for
company. Sun pharma debt equity ratio has decreased over the years which
represents company has been through more of equity than debt fund over the
years. The company was not able to enjoy the advantages of debt funding such
as tax benefits as well as more of equity funds leads to increase in number of
shareholders and more of voting rights.

When we compare the ratio with industry average it is observed that in 2009
and 2010 the ratio of the company was more than the industry benchmark
indicating company had more debt and a risk of default but after 2011 the
debt equity ratio of the company was close to benchmark which is a good sign.
2013 onwards the company debt equity ratio has continuously start decreasing
and was very less than industry benchmark representing imbalanced debt and
equity ratio. The company did not enjoyed the tax benefits and other
advantages of having debt fund. My suggestion to the company is in future
when company is in need of funds it should be funded using debt fund so that
a proper balance could be maintained and company can enjoy the benefits of
debt fund.
Total Debt-Equity Ratio:

This ratio compares company’s total debt to its equity. In this company the
debt-equity is lower than the industry benchmark from the year 2008-09 to
2012-13 and is almost 0 which is actually good as this means that the company
is using more of its stakes in equity than from debts and hence we can say that
the company is in a stable position in these years.

The ratio tends to incline further as it crosses the benchmark after the year
2012-13 but still it is less than 0.5 which means that the liabilities are less than
half of the equity which is not bad. A company with higher rate of debt-equity
is considered to be risky as the debt must be repaid to the money lenders.

Interest Coverage ratio:

This ratio helps in measuring the company’s ability to make interest payments
on its debts in time. As seen in the graph although the company is above 1
which means that it is able to make enough money to pay for their interest on
debts but is way below the industry benchmark which is not good for the
company. A company below 1 can’t pay the interest on their loans. If the
company’s ratio is equal to 1 then it means that the company is highly
leveraged as it has exact amount of assets and liabilities to pay for.

Payable Turnover Ratio:

This ratio indicates how quickly the company pays off its vendors and helps
creditors to decide whether to sell products to them on credit or not. At the
starting the companies payable ratio is higher than the benchmark which
means that they pay their bills regularly and frequently as compared to other
companies in this industry.

But moving further it starts declining and the company pays less frequently as
compared to other companies in the industry.

Inventory Turnover Ratio:

This ratio indicates how fast a company is increasing its sales by converting its
inventory into sales. Initially the ratio is quite higher than the benchmark
which means that the company do not waste its inventory by storing them,
they are able to convert it into sales.

Moving ahead the company’s inventory turnover declined and came close to
the benchmark which means that the other companies in this industry are also
facing the same issues in converting inventories into sales.

Receivable Turnover Ratio:

This ratio tells us that how efficiently a company turns its receivables into cash.
In the beginning it is seen that the ratio was quite high and above the
benchmark point but sooner it also declined and came below the benchmark
till 2014 when it was closest to the benchmark. This means that earlier in 2008-
09 the company’s ability to convert its receivables into cash was good but later
it declined a lot in the period 2009-10 and 2013-14 which means that the
company is not able to collect its receivables very frequently in a year. The
ratio was closest to the benchmark during the period 2014-15 when the
company was able to collect its receivable almost equally along the other
companies in the industry.

Fixed Asset Turnover Ratio:

Fixed Asset turnover ratio is used to measure how efficiently the revenue is
generated using its fixed assets. In the period 2008-09 the company had a high
fixed asset ratio above the benchmark which means that the company was
making the best use of its assets to generate revenue as compared to the other
companies in the same industry. Later after 2009-10 the ratio started declining
and it came close to benchmark which meant that the efficiency of using its
assets to generate revenue came almost equally along with other companies in
the industry.

Gross Profit ratio:

This ratio helps to know how profitable a particular product is and also shows
how efficiently a business sells its products. In the above graph the gross profit
ratio of the company is seen to be below the benchmark during the period of
2008 to 2013 which means that the gross profit margin of the company was
below the margins of other companies in the industry. Later after 2013 the
company started performing better and came close to the benchmark of the
industry which means that the company is now able to make profit along with
the other companies in the industry.

Net Profit Ratio:

Net profit ratio helps in measuring the overall profitability of the company
considering all the operating expenses, taxes, etc. In the above graph the net
margin of the company was above and close to the benchmark between the
period 2008 and 2013 which means that the company was performing well in
the industry in comparison with the other companies. Later the company
started declining and even came to negative showing losses way below the
industry benchmark line which means that the company is not able to make
profits in the business as compared to its other competitors.

Return on Capital Ratio:

The return on capital employed ratio shows the amount of profit that the
company is making against each rupee. Higher the ratio means the company is
in favorable condition where it is making more profit against its capital
employed. In the above graph the company is not in much favorable condition
except during the period2010-11 and 2011-12 where it is above the
benchmark of the industry and is performing better than its competitors. Apart
from this the company has poor performance in the industry especially during
the period 2013-14 and 2014-15 when it is way below the benchmark of the
industry which means that the company is not able to use its employed capital
properly to generate returns.

Price earning ratio:

This ratio indicates expected price of the shares of the company in the future
with regards to the current profit. Earning per share leads to increase in the
market value of the share. In the above graph the company is not seen to be
performing well in the industry since the ratios are quite similar to the
benchmark. The company has shown tremendous amount of downfall during
the year 2016-17 which means that the company’s current position is poor. In
general higher ratio means higher performance and lower ratio means poor
performance of the company in the industry.

Return on Total Assets ratio:

This ratio helps in understanding how effectively a company can earn a profit
through its investments in assets. As seen in the graph above the company is
not able to effectively make profit from its assets as there are many ups and
downs between the period of 2008-09 and 2012-13. The ratio of the company
was close to the benchmark which means that other companies in the industry
were also on the same track except in 2010-11 and 2011-12 when the
company’s performance improved a bit and recorded ratio above the
benchmark. The company’s performance was the worst in the year 2013-14
when it dropped way more than the benchmark of the industry.

Return on Equity ratio:

Return on Equity shows that how efficiently a company uses its shareholder’s
fund in order to generate profits and lead to the company’s growth. In the
above graph the company seems to have in a better position in terms of using
its shareholder’s fund to generate profit. The ratio is always seen above the
benchmark which means that the company is efficiently using its shareholder’s
fund to generate profit in comparison with the other companies in the
industry. The ratio is seen closest to the industry benchmark in the year 2017-
18 when the returns on their equity funds declined and came to point where
rest of the companies are also lying.