Financial Analysis of Pharmaceutical Company
Every business organisations manages its resources in
a manner that fosters growth and maximises profit in long run. Financials
statements should be analysed in order to understand the financial position and
performance of the company. Financial analysis is useful to different groups of
people.
• The
proprietor can know the financial position and overall performance of the
company.
• The
shareholders and investors can know whether they will get dividend for their
shares or not
• By
means of financial analysis, the debenture holders can know the financial as
well as the earning position of the company.
• The
banks and other short-term creditors can know the current assets and current
liabilities of the company.
Objectives of Financial Analysis
Financial analysis is directed towards ensuring
certain objectives
• Profit
objectives can be ensured
• Financial
and credit positions are maintained
• Liquidity
situation is monitored
• Solvency
conditions can be maintained effectively
All the objectives are interrelated. Greater liquidity
usually increases the solvency, which in turn enhances the financial position
in time.
Various
Techniques of Analysing Financial Statements
Financial statements can be analysed by the following
methods:
• Comparative
financial statements
• Common
size financial statements
• Funds
flow analysis
• Ratio
analysis
Comparative Financial
Statements
These are statements of the financial position of the
company at different periods of time. The financial statements are shown in a
comparative form so as to know the financial position of the company – at the
current year as well as the previous year. Generally two financial statements namely
Profit and Loss Account and Balance Sheet are prepared in comparative form for financial
analysis purpose. A comparative profit and loss account gives expenses and
revenues of two consecutive years. A comparative balance sheet gives the
amounts of assets and liabilities of two consecutive years.
Common Size Financial Statements
In this statement, the figures (amount) shown in the
financial statements are converted into percentages. For example, in the profit
and loss account, the sale figure is assumed to be 100 and all figures are
expressed as a percentage of sales. Similarly, in the Balance Sheet, the total
assets or liabilities are taken as 100 and all figures are expressed as a
percentage of this total.
Fund Flow Analysis
Funds flow analysis reveals changes in the working
capital position of the company. It indicates
the sources from which the working capital was
obtained and the purpose for which it was used.
Ratio Analysis
Ratio analysis is one of the most widely used
techniques of financial analysis. It is very simple and more informative
method. The term 'Ratio' refers to the relationship between two figures or two
amounts. Ratios are derived from balance sheet and profit and loss statement.
Advantages
• Ratio
analysis helps to judge whether the financial position of the company is
improving or deteriorating over the years
• It
helps in future planning
• Ratio
analysis technique is helpful to compare the financial position of one company
with that of other firms. The management can detect the weakness and strength
of company.
Disadvantages
• Assets
acquired at different periods at different prices are shown in balance sheet.
Due to changes of price level at different periods, these figures cannot be
compared by means of
ratio analysis.
• Ratio
analysis is useful when they are compared with similar ratios of other
companies. Most of the companies may have accounting periods of their own and
different types of assets. In such cases, ratio analysis may not be helpful to
compare the statements of the other
companies.
• The
ratio analysis is based on the data written in the financial statement. If the
data written in the financial statement is not accurate and up-to date, the
analysis ratios become unreliable.
The accounting ratios are classified into:
• Liquidity
ratios
• Solvency
ratios
• Efficiency
ratios
• Profitability
ratios
• Miscellaneous
ratios
