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Current Research Journal of Social Sciences 3(3): 269-275, 2011
ISSN: 2041-3246
© Maxwell Scientific Organization, 2011
Received: March 05, 2011 Accepted: April 06, 2011 Published: May 25, 2011
Corresponding Author: Amalendu Bhunia, Fakir Chand College Under University of Calcutta, Diamond Harbour, South 24-
Parganas, Pin-743331, West Bengal, India. Tel: (0)9432953985
269
Financial Performance Analysis-A Case Study
1Amalendu Bhunia, 2Sri Somnath Mukhuti and 2Sri Gautam Roy
1Fakir Chand College Under University of Calcutta, Diamond Harbour,
South 24-Parganas, Pin-743331, West Bengal, India
2Indira Gandhi National Open University, New Delhi, India
Abstract: The present study aims to identify the financial strengths and weaknesses of the Indian public sector
pharmaceutical enterprises by properly establishing relationships between the items of the balance sheet and
profit and loss account. The study covers two public sector drug and pharmaceutical enterprises listed on BSE.
The study has been undertaken for the period of twelve years from 1997-98 to 2008-09 and the necessary data
have been obtained from CMIE database. The liquidity position was strong in case of both the selected
companies thereby reflecting the ability of the companies to pay short-term obligations on due dates and they
relied more on external funds in terms of long-term borrowings thereby providing a lower degree of protection
to the creditors. Financial stability of both the selected companies has showed a downward trend and
consequently the financial stability of selected pharmaceutical companies has been decreasing at an intense rate.
The study exclusively depends on the public sectors published financial data and it does not compare with
private sector pharmaceutical enterprises. This is a major limitation of the research. The study is of crucial
importance to measure the firm’s liquidity, solvency, profitability, stability and other indicators that the
business is conducted in a rational and normal way; ensuring enough returns to the shareholders to maintain
at least its market value. The study will help investors to identify the nature of Indian pharmaceutical industry
and will also help to take decision regarding investment.
Key words: Financial performance, indian pharmaceutical industry, multiple regressions, performance
indicators, public sector
INTRODUCTION
Finance always being disregarded in financial
decision making since it involves investment and
financing in short-term period. Further, also act as a
restrain in financial performance, since it does not
contribute to return on equity (Rafuse, 1996). A well
designed and implemented financial management is
expected to contribute positively to the creation of a
firm’s value (Padachi, 2006). Dilemma in financial
management is to achieve desired trade off
between liquidity, solvency and profitability
(Lazaridis et al., 2007). Management of working capital
in terms of liquidity and profitability management is
essential for sound financial recital as it has a direct
impact on profitability of the company (Rajesh and
Ramana Reddy, 2011). The crucial part in managing
working capital is required maintaining its liquidity in
day-to-day operation to ensure its smooth running and
meets its obligation (Eljelly, 2004). Ultimate goal of
profitability can be achieved by efficient use of resources.
It is concerned with maximization of shareholders or
owners wealth (Panwala, 2009). It can be attained through
financial performance analysis. Financial performance
means firm's overall financial health over a given period
of time.
Financial performance analysis is the process of
determining the operating and financial characteristics of
a firm from accounting and financial statements. The goal
of such analysis is to determine the efficiency and
performance of firm’s management, as reflected in the
financial records and reports. The analyst attempts to
measure the firm’s liquidity, profitability and other
indicators that the business is conducted in a rational and
normal way; ensuring enough returns to the shareholders
to maintain at least its market value.
Indian pharmaceutical industry has played a key role
in promoting and sustaining development in the vital field
of medicines. It boasts of quality producers and many
units have been approved by regulatory authorities in
USA and U.K. International companies associated with
this sector have stimulated, assisted and spearheaded this
dynamic development in the past 58 years and helped to
put India on the pharmaceutical map of the world. The
public sector has been the backbone of the Indian
economy, as it has acted as a strategic partner in the
nation’s economic growth and development. Public sector
enterprises possess strong prospects for growth because
they harness new business opportunities, and at the same
time expanding the scope of their current business.
Curr. Res. J. Soc. Sci., 3(3): 269-275, 2011
270
The ability of an organization to analyze its financial
position is essential for improving its competitive position
in the marketplace. Through a careful analysis of its
financial performance, the organization can identify
opportunities to improve performance of the department,
unit or organizational level. In this context researcher has
undertaken an analysis of financial performance of
pharmaceutical companies to understand how
management of finance plays a crucial role in the growth.
LITERATURE REVIEW
Financial performance analysis is vital for the
triumph of an enterprise. Financial performance analysis
is an appraisal of the feasibility, solidity and fertility of a
business, sub-business or mission. Altman and
Eberhart (1994) reported the use of neural network in
identification of distressed business by the Italian central
bank. Using over 1,000 sampled firms with 10 financial
ratios as independent variables, they found that the
classification of neural networks was very close to that
achieved by discriminant analysis. They concluded that
the neural network is not a clearly dominant mathematical
technique compared to traditional statistical techniques.
Gepp and Kumar (2008) incorporated the time “bias”
factor into the classic business failure prediction model.
Using Altman (1968) and Ohlson’s (1980) models to a
matched sample of failed and non-failed firms from
1980’s, they found that the predictive accuracy of
Altman’s model declined when applied against the 1980’s
data. The findings explained the importance of
incorporating the time factor in the traditional failure
prediction models.
Campbell (2008) constructed a multivariate
prediction model that estimates the probability of
bankruptcy reorganization for closely held firms. Six
variables were used in developing the hypotheses and five
were significant in distinguishing closely held firms that
reorganize from those that liquidate. The five factors were
firm size, asset profitability, the number of secured
creditors, the presence of free assets, and the number of
under-secured secured creditors. The prediction model
correctly classified 78.5% of the sampled firms. This
model is used as a decision aid when forming an expert
opinion regarding a debtor’s likelihood of rehabilitation.
No study has incorporated the financial performance
analysis of the central public sector enterprises in Indian
drug & pharmaceutical Industry. Nor has any previous
research examined the solvency position, liquidity
position, profitability analysis, operating efficiency and
the prediction of financial health and viability of public
sector drug & pharmaceutical enterprises in India.
Objectives of the study: The main objectives of the
present work are to make a study on the overall financial
performance of selected public sector drug &
pharmaceutical enterprises in India. More specifically, it
seeks to dwell upon mainly (i) to assess the short-term
and long-term solvency, (ii) to assess the liquidity and
profitability position and trend, (iii) to know the
efficiency of financial operations and (iv) to analyze the
factors determining the behavior of liquidity and
profitability. Keeping the above objectives in mind, the
following null and alternative hypotheses have been
formulated and tested statistically.
METHODOLOGY
The present study covers two public sector drug &
pharmaceutical enterprises listed on BSE. The sample of
the companies has been selected on a convenient basis
and the necessary data have been obtained from CMIE
database and public enterprises survey. We select
Karnataka Antibiotics and Pharmaceuticals Ltd. (KAPL)
and Rajasthan Drugs and Pharmaceuticals Ltd. (RDPL).
The study has been undertaken for the period of twelve
years from 1997-98 to 2008-09. In order to analyze
financial performance in terms of liquidity, solvency,
profitability and financial efficiency, various accounting
ratios have been used. Various statistical measures have
been used i.e., A.M., S.D., C.V., linear multiple
regression analysis and test of hypothesis t-test.
RESULTS
Financial analysts often assess the firm's liquidity,
solvency, efficiency, profitability, operating efficiency
and financial stability in both short-term and long-term.
Ratio analysis provides relative measures of the
company’s performance and can indicate clues to the
underlying financial position. For measuring financial
position and financial efficiency, appropriate level of
financial performance indicators are required with whom
comparison can be made. Generally liquid ratio, debt-
equity ratio, interest coverage ratio, inventory turnover
ratio, return on investment ratio and debt to net worth
ratio are highly useful in determining financial position,
financial performance and the financial stability or
otherwise of such management.
Liquid ratio: It is the ratio of liquid assets to current
liabilities. Liquid ratio is more rigorous test of liquidity
than the current ratio because it eliminates inventories and
prepaid expenses as a part of current assets. Usually a
high liquid ratio an indication that the firm is liquid and
has the ability to meet its current or liquid liabilities in
time and on the other hand a low liquidity ratio represents
that the firm's liquidity position is not good. Table 1 show
that liquid ratio is not satisfactory in the case of KAPL
and liquid ratio is more satisfactory in the case of RDPL
Curr. Res. J. Soc. Sci., 3(3): 269-275, 2011
271
Table 1: Selected liquidity ratios
Liquid ratios Debt-equity ratios
--------------------------------------------------------------------- -----------------------------------------------------------------------------
Year KAPL RDPL Industry average KAPL RDPL Industry average
2001-02 0.68 1.06 0.82 0.11 0.42 0.73
2002-03 0.77 1.04 0.74 0.06 0.55 0.70
2003-04 0.92 1.04 0.70 0.01 0.43 0.66
2004-05 0.83 1.16 0.78 0.07 0.41 0.72
2005-06 0.65 1.13 0.84 0.18 0.64 0.75
2006-07 0.75 0.71 0.90 0.29 0.81 0.63
2007-08 0.75 0.79 0.78 0.21 1.34 0.59
2008-09 0.49 1.01 0.70 0.17 1.12 0.78
Mean 0.73 0.99 0.78 0.14 0.72 0.70
S.D. 0.13 0.16 0.07 0.09 0.35 0.06
C.V. (%) 17.81 16.16 8.74 64.29 48.61 8.57
CMIE database
Table 2: Selected profitability ratios
Return on investment ratios Debt to net worth ratios
--------------------------------------------------------------------- -----------------------------------------------------------------------------
Year KAPL RDPL Industry average KAPL RDPL Industry average
2001-02 9.87 17.21 11.62 0.06 0.48 0.74
2002-03 13.85 25.51 13.38 0.06 0.55 0.73
2003-04 11.85 14.12 13.99 0.007 0.43 0.52
2004-05 12.61 6.66 12.51 0.07 0.41 0.46
2005-06 9.95 19.47 13.07 0.18 0.64 0.58
2006-07 10.59 16.62 15.58 0.29 0.81 0.26
2007-08 12.14 15.43 13.21 0.21 1.34 0.59
2008-09 12.46 20.32 8.77 0.17 0.94 0.70
Mean 11.67 16.92 12.77 0.13 0.70 0.57
S.D. 1.40 5.44 1.98 0.10 0.32 0.16
C.V. (%) 12.00 32.51 15.51 76.92 45.71 28.07
CMIE database
because the ratio is more than industry average. KAPL
have not been able to meet their matured current
obligations under the study period. Coefficient of
variation of liquid ratio of KAPL and RDPL is 17.81 and
16.16%, respectively, which shows less consistency
during the study period because coefficient of variation of
industry as a whole is 8.74%. Greater variability in the
liquid ratio indicates improper or inefficient management
of fund inasmuch.
Debt/equity ratio: The debt-to-equity ratio (D/E) is a
financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's
assets. The two components are often taken from the
firm's balance sheet or statement of financial position, but
the ratio may also be calculated using market values for
both, if the company's debt and equity are publicly traded,
or using a combination of book value for debt and market
value for equity financially. A high debt/equity ratio
generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense. This
can result in volatile earnings as a result of the additional
interest expense. A low debt/equity ratio usually means
that a company has been friendly in financing its growth
with debt and more aggressive in financing its growth
with equity. Table 2 shows that debt-equity ratio in case
of KAPL is very low as its average is 0.14. This is an
indication of improper debt-equity management. A high
debt-equity ratio is observed in case of RDPL with an
average of 0.72, which means the company has been
aggressive in financing its growth with debt. Coefficient
of variation of debt-equity ratio of KAPL and RDPL is
64.29 and 48.61%, respectively, which shows more
consistency during the study period because coefficient of
variation of industry as a whole is 8.57%. Lower
variability in the debt-equity ratio indicates proper or
efficient management of debt-equity.
Interest coverage ratio: A ratio used to determine how
easily a company can pay interest on outstanding debt.
The interest coverage ratio is calculated by dividing a
company's Earnings Before Interest and Taxes (EBIT) of
one period by the company's interest expenses of the same
period. The lower the ratio, the more the company is
burdened by debt expense. When a company's interest
coverage ratio is lower, its ability to meet interest
expenses may be questionable and it indicates that the
company is not generating sufficient revenues to satisfy
interest expenses.
The interest coverage ratio is a measure of the
number of times a company could make the interest
payments on its debt with its earnings before interest and
taxes, also known as EBIT. The lower the interest
coverage ratio, the higher is the company's debt burden
and the greater the possibility of bankruptcy or default.
Curr. Res. J. Soc. Sci., 3(3): 269-275, 2011
272
Table 3: Selected solvency ratios
Interest coverage ratios Inventory turnover ratios
--------------------------------------------------------------------- -----------------------------------------------------------------------------
Year KAPL RDPL Industry average KAPL RDPL Industry average
2001-02 1.34 1.98 1.18 7.12 9.44 3.89
2002-03 0.06 0.55 1.35 7.53 8.04 3.02
2003-04 25.24 8.93 1.63 7.57 7.03 3.87
2004-05 23.52 4.53 1.98 5.64 6.22 4.11
2005-06 0.18 0.64 0.97 5.76 12.29 3.59
2006-07 0.29 0.81 1.34 7.34 7.41 3.63
2007-08 11.40 4.96 1.56 8.59 11.07 4.68
2008-09 11.08 3.66 1.51 8.37 12.86 3.98
Mean 9.14 3.26 1.44 7.24 9.30 3.85
S.D. 10.53 2.89 0.31 1.07 2.52 0.48
C.V. (%) 115.21 88.65 21.53 14.78 27.10 12.47
CMIE database
For bond holders, the interest coverage ratio is supposed
to act as a safety gauge. It gives you a sense of how far a
company’s earnings can fall before it will start defaulting
on its bond payments. For stockholders, the interest
coverage ratio is important because it gives a clear picture
of the short-term financial health of a business. Table 3
shows that interest coverage ratio in case of KAPL and
RDPL is more than industry averages as its averages are
9.14 and 3.26, respectively. This is an indication of debt
burden and the greater the possibility of bankruptcy.
Coefficient of variation of interest coverage ratio of
KAPL and RDPL is 115.21 and 88.65%, respectively,
which shows less consistency during the study period
because coefficient of variation of industry as a whole is
21.53%. Greater variability in the interest coverage ratio
indicates improper or inefficient management of debt-
fund.
Inventory turnover ratio: The inventory-turnover ratio
gives a general view on the inventories of a company. In
order to calculate it you should divide the annual
sales/cost of sales of the company by its inventory. If the
value of the inventory-turnover ratio is low, then it
indicates that the management team doesn't do its job
properly in managing inventories. This ratio should be
compared against industry averages. A low turnover
implies poor sales and, therefore, excess inventory. A
high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they
represent an investment with a rate of return of zero. It
also opens the company up to trouble should prices begin
to fall. Table 3 shows that inventory-turnover ratio of
KAPL and RDPL during the period of study is very
satisfactory as its average are 7.24 and 9.30, respectively,
which is much higher than 3.85, grand industry average,
which is taken as standard. This is a sign of strong sales.
Coefficient of variation of inventory-turnover ratio of
RDPL is 27.10%, which shows less consistency during
the study period because coefficient of variation of
industry as a whole is 12.47%. Greater variability in the
inventory-turnover ratio indicates improper or inefficient
management of inventory. Whereas Coefficient of
variation of inventory-turnover ratio of KAPL is 14.78%
i.e., more than its grand industry C.V. that shows less
consistency and proper management of inventory as well.
Return on investment ratio: Return on investment ratio
is used by financial analysts to ascertain the best
investment plans. It is also an important tool used by
investors and shareholders, while making investment
decisions. Return on Investment ratio for a company
shows how much profit a company is making against the
investments made by the shareholders and the investors.
Return on Investment ratio is also used to compare
different investment options by an investment advisor. An
investment with a higher ROI ratio is more lucrative
option as compared to an investment with a lower ROI
ratio. An investment with a negative or lower ROI ratio is
most likely to be discontinued by the investors. Table 2
exemplifies that return on investment ratio of RDPL is
very higher as its average is11.67 than grand industry
averages of 12.77 and this ratio of KAPL is very lower as
its average is16.92 than grand industry averages of 12.77.
It indicates more wealth for the shareholders or investors
of RDPL. Coefficient of variation of return on investment
ratio of RDPL is 32.51%, which shows less consistency
during the study period because coefficient of variation of
industry as a whole is 15.51%. Coefficient of variation of
return on investment ratio of KAPL is 12.00%, which
shows more consistency during the study period because
coefficient of variation of industry as a whole is 15.51%.
Lesser variability in the return on investment ratio
indicates proper or efficient management of wealth.
Debt to net worth ratio: Debt to net worth Ratio
measures is used in the analysis of financial statements to
show the amount of protection available to creditors. The
ratio equals total liabilities divided by total stockholders'
equity; also called debt to net worth ratio. A high ratio
usually indicates that the business has a lot of risk because
it must meet principal and interest on its obligations.
Potential creditors are reluctant to give financing to a
Curr. Res. J. Soc. Sci., 3(3): 269-275, 2011
273
Table 4: Multiple regression coefficients (a) of KAPL
Unstandardized Coefficients
-------------------------------------------- Standardized Coefficients
Model B SE Beta t Sig.
1 Constant 10.400 5.935 1.752 0.222
LR - 0.846 5.137 - 0.077 - 0.165 0.884
DER - 63.907 37.891 - 4.165 - 1.687 0.234
ICR - 0.019 0.069 - 0.143 - 0.276 0.808
ITR 0.542 0.520 0.414 1.043 0.407
DNWR 52.855 34.210 3.607 1.545 0.262
a. Dependent Variable
Model Summary
Model R R2Adjusted R2SE of the Estimate
1 0.842(a) 0.710 -0.016 1.41907
company with a high debt position. However, the
magnitude of debt depends on the type of business.
Usually, book value is used to measure a firm's debt and
equity securities in calculating the ratio. Market value
may be a more realistic measure, however, because it
takes into account current market conditions. Table 2
exemplifies that debt to net worth ratio of KAPL and
RDPL during the period of study is lower and higher as its
averages are 0.13 and 0.70, respectively than 0.57, grand
industry average, which is in use as standard. It is an
indication less risk and more risk about debt obligations
of those companies. Coefficient of variation of debt to net
worth ratio of KAPL and RDPL is 76.92 and 45.71%
respectively, which shows less consistency during the
study period because coefficient of variation of industry
as a whole is 28.07%. Greater variability in the debt to net
worth ratio indicates improper or inefficient management
of financial risk.
Financial performance through multiple regressions:
In this section an attempt has been made to examine
composite impact of financial performance indicators on
profitability through the sophisticated statistical
techniques. Accordingly, multiple regression techniques
have been applied to study the joint influence of the
selected ratios indicating company's financial position and
performance on the profitability and the regression
coefficients have been tested with the help of the most
popular ‘t’ test. In this study, LR, DER, ICR, ITR and
DNWR have been taken as the explanatory variables and
ROIR has been used as the dependent variable. The
regression model used in this analysis is ROIR = £ + ß1LR
+ ß2 DER + ß3 ICR + ß4 ITR + ß5 DNWRR where £, ß1,
ß2, ß3, ß4, ß5, are the parameters of the ROIR line.
Joint impact of performance indicators on profitability
of KAPL: Multiple regression analysis of KAPL has been
tabulated in Table 4. Table 4 proves the potency of
relationship between the dependent variable, ROIR and
all the independent variables taken together and the
impact of these independent variables on the profitability.
It was observed that for one unit increase in LR, the
profitability of the company decreased by 0.846 units,
which was statistically significant at 1% level. However,
when DER increased by one unit, the ROIR of the
company decreased by 63.907 units though the influence
of DER on ROIR was very significant. For one unit
increase in ICR, the profitability of the company
decreased by 0.019 units. Again, ITR increased by one
unit, ROIR increased by 0.542 which was statistically at
1% level. However, when DNWR increased by one unit,
the ROIR of the company increased by 82.855 units
though the influence of DNWR on ROIR was very
noteworthy.
The multiple correlation coefficient between the
dependent variable ROIR and the independent variables
LR, DER, ICR, ITR and DNWR taken together was
0.842. It indicates that the profitability was perfectly
influenced by its independent variables. It is also evident
from the value of R2 that 71% of variation in ROIR was
accounted by the joint variation in all the independent
variables. Coefficient of determination is negatively 1.6%
varied. Standard error of estimate is flawlessly associated
with regression analysis. Such a significant variation
could be justified as the impact of many other financial
performance indicators, which have not taken into the
study, in addition to the effect of the used in the study
Joint impact of performance indicators on profitability
of RDPL: Multiple regression analysis of RDPL has been
tabulated in Table 5. Table 5 proves the power of
relationship between the dependent variable, ROIR and
all the independent variables taken together and the
impact of these independent variables on the profitability.
It was observed that for one unit increase in LR, the
profitability of the company increased by 9.681 units,
which was statistically significant at 1% level. However,
when DER increased by one unit, the ROIR of the
company increased by 16.205 units though the influence
of DER on ROIR was very significant. For one unit
increase in ICR, the profitability of the company
decreased by 0.108 units. Again, ITR increased by one
unit, ROIR decreased by 0.770 which was statistically at
1% level. However, when DNWR increased by one unit,
Curr. Res. J. Soc. Sci., 3(3): 269-275, 2011
274
Table-5: Multiple regression coefficients (a) of RDPL
Unstandardized Coefficients
---------------------------------------------- Standardized Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 5.085 10.431 0.488 0.711
LR 9.681 10.422 1.122 0.929 0.523
DER 16.205 41.225 3.658 0.393 0.762
ICR - 0.108 0.312 - 0.228 - 0.347 0.787
ITR - 0.770 0.689 - 1.164 - 1.118 0.465
DNWR - 9.992 44.327 - 2.213 - 0.225 0.859
a. Dependent Variable: ROIR
Model Summary
Model R R2Adjusted R2SE of the Estimate
1 0.829 0.688 -0.874 2.02696
the ROIR of the company decreased by 9.992 units
though the influence of DNWR on ROIR was very
noteworthy.
The multiple correlation coefficient between the
dependent variable ROIR and the independent variables
LR, DER, ICR, ITR and DNWR taken together was 82.9.
It indicates that the profitability was perfectly influenced
by its independent variables. It is also evident from the
value of R2 that 68.8% of variation in ROIR was
accounted by the joint variation in all the independent
variables. Coefficient of determination is negatively
87.4% varied indicates that the regression line partially
fits the data. Standard error of estimate is flawlessly
associated with regression analysis. Such a significant
variation could be justified as the impact of many other
financial performance indicators, which have not taken
into the study, in addition to the effect of the used in the
study.
CONCLUSION
From the study of the financial performance of the
select pharmaceutical it can be concluded that the
liquidity position was strong in case of KAPL and it was
so poor in case of RDPL thereby reflecting the ability of
the companies to pay short-term obligations on due dates.
Long-term solvency in case of KAPL is lower which
shows that companies relied more on external funds in
terms of long-term borrowings thereby providing a lower
degree of protection to the creditors.
Financial stability ratios in the vein of debt to net
worth ratio in case of RDPL have showed a downward
trend and consequently the financial stability has been
decreasing at an intense rate.
The Indian pharmaceutical industry will witness an
increase in the market share. The sector is poised not only
to take new challenge but to sustain the growth
momentum of the past decade.
LIMITATIONS OF THE STUDY
The study suffers from certain limitations.
CStudy exclusively depends on the published financial
data, so it is subject to all limitations that are inherent
in the condensed published financial statements.
CThe drug and pharmaceutical enterprises selected
have been taken from CMIE database. The study
covers a period of only twelve years from 1998 to
2009. The data collected is only for ten companies
and this might not be true representation of the
population. This is a major limitation of the research.
ACKNOWLEDGMENT
This is my proud privilege of expressing my deepest
sense of gratitude and indebtedness to the Chairman,
University Grant Commission (ERO), India for funding
me to complete the research project work and valuable
suggestions at every stage of this study. I thank the Chief
Librarian of the Indian Institute of Management (IIMC),
Kolkata for having given me the required information that
has formed the basis of this study. I am indebted to the
Principal, teachers of the Department of Commerce, Fakir
Chand College, Diamond Harbour, for their constant
support, inspiration and suggestions.
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