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Application of y Score Analysis in Evaluating Pharma Industry in India
Application of y Score Analysis in Evaluating Pharma Industry in India
K. Bhargavi
Student
Department of Administration
Annamacharya PG College of Computer Studies
Rajampet-516126
9502188870
karanambhargavi17@gmail.com
ABSTRACT
The paper is an empirical study to understand the financial soundness of pharmaceutical
industry in India. For this purpose five pharmaceutical companies are taken which are listed in
BSE. A sample period of 2009 - 2013 was considered for the study. The financial performance of
the pharmaceutical industry was critically examined by using Y-Score model (proposed by Dr.
Srivastava & Dr. R.A. Yadav). This study analyses the possibility of business failure with
reasonable accuracy by using the Y-score model. The findings indicate that the pharmaceutical
industry is in good financial performance in spite of global economic slowdown in the study
period. Further, a close relation is identified between working capital management, liquidity
and profitability of pharmaceutical industry. A strong support is identified for Y-Score model as
a case in Indian pharmaceutical industry facing global challenges and competitiveness.
The pharmaceutical industry is facing stiff competition in domestic and international market.
Therefore it is very important to analysis the perform ace of the of the sector to provide a base
for improving upon its performance and profit levels with the traditionally low profit of the
pharmaceutical industry, managing for profitability means managing cost .The industry is
assessed in terms of financial statement by way of analyzing their cost structures. Analysis of the
financial statement useful for management
With the objective making an in depth and analytical the present study has been understand and
it is an attempt to make a critical evaluation of pharmaceutical industry based on sampling
techniques. These industries are situated and selected randomly from different part of India
*Cost effective
*Diverse ecosystem
The turnover of Indian pharmaceutical industry was around 10 crores then reliance on imports
continued. The Multinational Corporation controlled 70 to 80 percent of the market. The price of
the medicines were very high quiet out of reach for the Indian population
REVIEW OF LITERATURE
A major portion of financial research is concerned with the working capital management. This
issue has been broadly investigated at both conceptual and empirical levels [CITATION DRA11 \l
1033 ].[ CITATION Gar07 \l 1033 ] Found that firm’s profitability improves by reducing their
inventories and the number of days for which their accounts are outstanding and shortening the
cash conversion cycle.[CITATION Sin08 \l 1033 ] Identify that the size of inventory directly affects
working capital management. He suggested that inventory was the major component of working
capital, and needed to be carefully controlled. [ CITATION DrA11 \l 1033 ] Financial statement
analysis is the method of accepting the risk and profitability of a firm in the course of analysis of
reported monetary information, by using different accounting tools and techniques for assessing
and pricing credit risk and for doing fundamental company valuation
The univariate and multivariate analysis applied to predict corporate failure or to reflect
operational efficiency for predicting the financial health using single variable or number of
variables. The univariate approach indicates the significance of the financial ratios of performing
and non-performing industry. Multivariate model uses number of variables at one time
predicative process. Working capital assessment is based on Multi Discriminant Model that
provides industry ability to meet its current obligations [ CITATION Elh \l 1033 ]. Multi Discriminant
Model (MDA) gauges the Working Capital position of a business firm. Dr. S.S. Srivastava and
Dr. R.A. Yadav have developed a model that used for the analysis. The model by Dr. Srivastava
and Dr. Yadav was developed based on 78 companies[ CITATION AKS09 \l 1033 ].
The review of relevant literature produced till date on the offered subject reveals wide room for
the validity and originates of this work and reflects some significant evidences that affirm its
viability, as may be marked here it. Nor the existence of working capital position (Based on Y-
Score) of private sector pharmaceutical companies in India.
OBJECTIVE OF THE STUDY
To predict corporate failure or to reflect operational efficiency for predicting the financial health
using Y-Score Model (single variable or number of variables) of selected pharmaceutical
companies in India.
DATA SOURCES
The present study has been undertaken to make a critical evaluation of pharmaceutical Industry
based on simple random sampling techniques. Firms are placed and selected from different parts
of India. To do the analysis data drawn from the annual reports selected Pharmaceutical
companies in India for the period from 2009 to 2013 have been tabulated, analyzed and
interpreted through ratio analysis, Y-score model (univariate and multivariate analysis). The
following companies are selected samples for the current study.
1. Ajanta Pharma
2. Aurobindo Pharma
3. Natco Pharma
4. Ranbaxy Laboratories
5. Dr Reddy’s Laboratories
In order to assess and evaluate the financial health of a Pharmaceutical Industry, attempt have
been made to evaluate profit generating capacity for short-term and long-term stability of the
Pharmaceutical Industry. Profitability refers to profit generating to survive and grow over a long
period of time.
In the present study, the profitability of the Pharmaceutical Industry has been assessed with the
help of two profitability ratios i.e. one based on sales and another based on investment is known
as Return on Investment (ROI), to assess the overall profitability. The Net Operation Profit Ratio
(NOPR) is another significant indicator of profit generating capacity. In the study Return on
Investment (ROI) and Net Operating Profit Ratio (NOPR) are applied for evaluation and to
assess the profit based on ratios analysis. Brief descriptions of these ratios are:
Net Operating Profit Ratio (NOPR)
NOPR is calculated by, dividing operating profit with net sales of the given financial year. It is
ascertained by subtracting all operating expenses from gross profit that are debited to profit and
loss account, Administration overheads, selling and distribution overheads are major components
of operating expenses in addition to the production overheads. It should be noted that non-
operating income and non-operating expenses are ignored while calculating NOPR since they do
not affect operational efficiency. This ratio is a measure of the industry ability to turn each rupee
of sales into net profit and it indicates the firm capacity to with stand the adverse economic
conditions. High ratio would be advantageous to survive in the face of falling sales prices, rising
cost of production or declining demand for the product. A firm with high net profit margin can
use favorable conditions of rising sales prices, falling costs of production or increasing demand
for the product to accelerate its profits at a faster rate than a firm with low net profit margin.
Thus NOPR may be defined as:
The term investment may refer to total assets or net assets. The fund employed in net assets is
known as capital employed. Net assets equal net fixed asset plus current assets minus current
liabilities excluding bank loans. The conventional approach of calculating ROI is to divide net
operating profit ratio by capital employed.
The return on investment indicates management efficiency to use funds employed by creditors
and owners. The higher the ratio, the more efficient the firm in using funds entrusted to it.
Cash Flow
V 2=
Total Tangible Assets
Net Profit + Depreciation
¿
Total Tangible Assets
The ratios have a high degree of predictive power and are found helpful in judging the efficiency
of Working capital. Higher the ratio more is the efficient utilization of resources and less is the
financial problem.
The ratio is new to the accountancy and financial management. The ratio is found by dividing
defensive assets to total operating expenditure.
Defensive Assets
V 35=
Total Operating Expenses
Defensive Assets
¿
Total Daily CashOperating Expenditure
Defensive assets include cash, debtors, bills, receivables and marketable securities. The total
daily cash operating expenses is comprised of operating expenses other than depreciation,
depletion and amortization. The depreciation is excluded because they do not require the
utilization of current resources. The ratio possesses the predictive power to forecast the financial
health of a firm. This ratio, points the liquidity position of a firm. A lower ratio is considered to
be a sign of liquidity crisis and thus indicates corporate sickness, and therefore a negative
relationship is understood to exist between this ratio and corporate sickness.
Net Sales
V 31=
Total Tangible Assets
As the ratio increases, there is more revenue generated per rupee of total investment in the assets.
The firm’s ability to produce a large volume of sales on a small total asset base is an important
part of the firm’s overall performance in terms of profits. In order to evaluate liquidity position
of pharmaceutical industry, the ratio and MDA model is applied on the data collected through
financial statements.
Ratios such as current ratio, quick ratio are analyzed under univariate approach. Liquidity
assessment is a measure to find the current obligations. Working capital as a measure of liquidity
is also assessed for each industry. Working capital assessment is based on Multi Discriminant
Model (MDA) developed by Dr. S.S. Srivastava and Dr. R.A. Yadav.
Ajanta Pharma
The profitability ratios and liquidity ratios of Ajanta pharma as determined from the balance
sheets. Profitability has been expressed both in terms of Sales and Investments from the year
2009 to 2013. The profitability in terms of sales has registered mixed trend for Ajanta pharma
during the study period from 2009 to 2013. It was gradually declined from 0.119 (2009) to
0.072(2013) due to fluctuations in sales value .However profitability in terms of sales is showing
negative trend and in terms of investment it is positive. It seems to be heavy investment in the
fixed assets is the cause for the performance of Return on Investment values.
Liquidity for Ajanta pharma have registered during the study period it is found that current ratio
and quick ratio showing increased trend but current ratio is lower than the standards (2:1) from
2009 to 2011. The lack of uniformity in current ratio shows the poor liquidity position of the
firm. Through the examination of quick ratio it is identified that the ratio is always more than
standards (1:1). The gap between current ratio and liquidity ratio reveals that company will face
problem of over stocking. In general the liquidity position may considered as good as revealed
by the acid test ratio.
Working capital management based on Y-Score model as present in the above table shows that
company moving with more than standards (1.71) and abnormal increase of Y-Score value is
indication that company have great success in managing its working capital efficiency. The
current ratio of firm has maximum 3.409(2013) and minimum 1.708(2010) with a variation of
more than 100%.
Aurobindo Pharma
The profitability ratios and liquidity ratios of Aurobindo pharma as obtained from the balance
sheets. Profitability has been expressed both in terms of Sales and Investments from the year
2009 to 2013. NOPR and ROI of the Aurobindo shows fluctuations due to improper fund
management. Liquidity position of the firm having always above the standards of current ratio
(2:1) and quick ratio (1:1) during the study period. The current ratio is maximum 3.159(2009)
and minimum 2.293(2010). However liquidity position of the firm is above satisfactory level but
due to the high values of liquidity problems may occur in future to maintain funds.
Working capital management based on Y-Score model as present in the above table shows that
company moving with more than standards (1.71) and abnormal increase of Y-Score value is
indication that company have great success in managing its working capital efficiency.
Natco Pharma
The profitability position of NATCO Pharma in terms of investment has gradually declined and
in terms of sales, there are year on year variations during the study period. Average current ratio
is above the standard ratio of 2:1 but there is gradual decline. Similar trend is observed for quick
ratio. An average value of 11.003 for Y-Score indicate company working capital efficiency. The
declining trend of current ratio and quick ratio may influence the Y-Score value thereby negating
the working capital efficiency in future.
Ranbaxy laboratories
Dr Reddy’s Laboratories
The profitability ratios and liquidity ratios of Dr Reddy’s Lab as determined from the balance
sheet. The profitability in term of sales has registered mixed trend Dr Reddy’s Lab during the
study period from 2009 to 2013.NOPR and ROI is fluctuations due to improper fund
management but in 2009 having and same in ROI also negative values occurred. Liquidity
position of the having below the standard current but two years only they follow the standard
2.192(2012)2.498(2013) ratio (2:1) and quick ratio (1:1) .The current ratio is maximum is
2.498(2013) and minimum 1.299(2010).However liquidity position of the firm is satisfactory
level but due to high of liquidity problem may occur in future to maintain fund. Working capital
management based on Y-score model as present in above table show that company moving with
more than standards (1.71) and abnormal increases of Y-score value is indication that company
have great success in managing its working capital efficiency
4.0 CONCLUSION
It is important to understand the financial soundness and predict the financial health of the
pharmaceutical industry that the far facing the global challenges and competitiveness. The
pharmaceutical industry efficient in working capital management, defensive assets played a vital
role to bring balance in the liquidity position. Results of this study found that industry have to be
more Y-Score values which is an indication that to become globally competitive and face
challenges in future.
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