A STUDY ON PREDICTING FINANCIAL PERFORMANCE USING DUO PONT ANALYSIS IN CIPLA PHARMACEUTICAL COMPANY

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1 International Journal of Accounting and Financial Management Research (IJAFMR) ISSN(P): ; ISSN(E): Vol. 4, Issue 5, Oct 2014, TJPRC Pvt. Ltd. A STUDY ON PREDICTING FINANCIAL PERFORMANCE USING DUO PONT ANALYSIS IN CIPLA PHARMACEUTICAL COMPANY O. M. HAJA MOHIDEEN 1 & M. PARVEEN 2 1 Research Advisor, Head of the Department, Department of Business Administration, Khadir Mohideen College, Adirampattinam, Tamil Nadu, India 2 Research Scholar, Assistant Professor, Department of Management Studies, Jamal Mohamed College, Thirchirapalli, Tamil Nadu, India ABSTRACT The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive from the firm) into three distinct elements. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries).the problem of the study is to study the financial performance of Cipla Pharmaceutical industry in India using Duo Pont analysis. The objective of the study is to determine the financial condition and financial performance of the firm; it assesses the Duo Pont analysis using ROE and ROI of the company, to know how the company is productively using its assets, to measure the cash flow of the company. The different type of tools which are used for analysis Duo Pont Analysis (ROE, ROI), Mean, Standard Deviation, t test, Ratio Analysis. Finally using the data analysis the findings, suggestions are made, the study is expected to help understanding the overall financial performance of the Cipla Pharmaceutical Company. KEYWORDS: Cipla Pharmaceutical Company, Du Pont Identity, Financial Performance INTRODUCTION This study is enables on predicting the financial performance by using the of Du Pont analysis; it is basically dealt with Return on Equity and Return on Investment. A method of performance measurement that was started by the Duo Pont Corporation in the year 1920 s, with this method the assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE) it is also known as Duo Pont Identity. In Duo Pont analysis the ROE is affected in three components; Operating Efficiency is measured by profit margin, Asset use efficiency is measured by total asset turnover and Financial Leverage is measured by the Equity multiplier. These three components are used in this study to find the operating efficiency, asset use efficiency and financial leverage of Cipla pharmaceutical company. The Return on Investment (ROI) is used to measure the gain or loss generated on an investment which is relative to the amount of money invested. Finally this study also concentrates on Return on Assets (ROA). This ROA ratio is developed by Du Pont for its own use but, now the researcher are used to evaluate and to find out how effectively assets are used in Cipla Pharmaceutical Company. ABOUT CIPLA PHARMACEUTICAL CIPLA Ltd is a pharmaceutical company. The company focuses on development of new formulations and has a wide range of pharmaceutical products. It offers prescription drugs, bulk drugs, animal products and pesticides. It also editor@tjprc.org

2 40 O. M. Haja Mohideen & M. Parveen offers a wide range of food and beverages, baked foods, oral hygiene products, detergents, room fresheners and personal care products. The total investment for these projects is about Rs 400 crore. The total investment will be about USD 65 million, in a phased manner, for setting up state-of-the-art facilities for bio-similar products in Goa and China. The Indian GDP Growth rate at a decade is lowest of 5% for the fiscal year on account of weakness in investment, significant deceleration in household consumption and sluggish exports. The declining growth warranted the government to take immediate steps to curtail inflation and restore fiscal health. The Indian economy is expected to gradually recover, with a projected 6.4% growth for However, the financial climate will continue to face various challenges in the coming year. Objectives of the Study To evaluate the ROE and ROI of Cipla pharmaceutical company. It determines the financial condition and financial performance of the Cipla pharmaceuticals. To measure the operating efficiency, asset use efficiency and financial leverage of Cipla company. To know how the Cipla Company is productively using its assets. REVIEW OF LITERATURE The firm s financial management plays major role for an investment to be acceptable. The financial manager should be in a position to answer Will the acquisition of this asset will additionally increase the value of owners equity. The main financial objective for a profit business it mainly depends and concern on debt and equity capital of the external suppliers. The economic returns to shareholders comprise dividends and capital gains on the value of their shares. The earning made by the organization determine what can be paid form dividend in the long run, the primary stakeholders concerned with financial measures of earnings ROS, ROA, ROE, ROI. (R. Thorpe, J. Holloway, 2008) Du Pont analysis, a standard variety of financial analysis, decomposes return on net operating assets into two main multiplicative components. The components are gross margin and asset turnover. The rations gross margin and asset turnover are totally different construct, possessing totally different properties. Previous research has found that a modification in asset turnover is completely associated with upcoming changes in earnings. (M. Soliman) Du Pont analysis takes into consideration 3 indicators to predict firm profitability: ROA, ROE and ROI. Return on assets ROA offers a unique defies management effectiveness and divulges what proportion profit an organization earns for each dollar of its assets (S. Ross, R. Westerfield, J. Jaffe, B. Jordan). Assets represent things like cash in bank, property, accounts receivable, furniture and inventory. Only skilled finance managers will judge stocks with a ROA of less than 5%. Hence ROA = Total Asset / Net Income Return on equity ROE is a basic look on how effectively the Management utilize investors cash. ROE shows whether the company moving towards positive direction, growing positively, company value is increasing in an acceptable rate. Also, REO measures the company worth at a suitable rate. ROE calculates the firms earnings on stockholder s equity based on rate of return. As the result stockholders equity appears in the denominator, the ratio is directly related by the amount of dept a firm is utilizing to finance assets (B. McClure). Such that, ROE directly reflects the profit of the firm by measuring the investors return (J.J. Griffin, J.F. Mohan). Thus ROE = Stockholders equity/ Total Assets X Total Assets/Net Income X Stockholders equity / Total Assets. Impact Factor (JCC): Index Copernicus Value (ICV): 3.0

3 A Study on Predicting Financial Performance Using DUO Pont Analysis in CIPLA Pharmaceutical Company 41 Generally the ROE will be calculated by taking away the profit after tax and important dividends of the given year and dividing it by book value of equity, generally the ordinary shares at the starting of the years. Same time average equity can also be used to calculate. Equity would consist of issues normal share capital plus the share premium and reserves. (J.H.V.H. de Wet, E. dutoit). Return on Investment gives the clear picture of the firm with the help of return earned from the investment made. From the result it can be easily the management can identify the firm running in profitable position or not. ROI measure the earnings of the firm. ROI will increase profit margin and Asset turnover. (B. McClure) Figure 1: Return on Equity ROI = Assets Turnover (Operating Income X Total Assets) X Profit Margin (EBIT X Operating Income) DATA ANALYSIS Figure 2: Return on Investment Finding Mean, Standard Deviation and t- test for ROE and ROI editor@tjprc.org

4 42 O. M. Haja Mohideen & M. Parveen Table 1: Return on Equity Source: Annual Report Cipla pharmaceutical Figure 3: Return on Equity Figure 4: Return on Asset Inferences From the above table ROE it is clear that mean 0.204, Standard deviation is 0.052, the value is and it is significant at 1% level of significance (0.000). Total asset shows the highest value in the year 2013 as , it shows the more effectively that Cipla pharmaceutical company is using the assets. Common stock value is subdivided into three i.e., from is 59.97, from is and from is Financial leverage shows the moderate equity multiplier for all the years. Net profit margin of all the ten years it indicates that the cipla pharmaceutical Impact Factor (JCC): Index Copernicus Value (ICV): 3.0

5 A Study on Predicting Financial Performance Using DUO Pont Analysis in CIPLA Pharmaceutical Company 43 company is how efficiently it controls its cost. The total asset turnover is 1.13 to 1.19 for the year respectively, but for the subsequent year it is moderate, so the company has to use its asset efficiency to generate the sales revenue. Return on asset is low the company must concentrate on profit earn for each rupees of its assets. Return on equity is high in the year 2006 as 0.31, but for the subsequent year it is quite moderate so the company s management uses the investor s money effectively. Table 2: Return on Investment Source: Annual Report Cipla Pharmceutical Inferences Figure 5: Return on Investment From the above table ROI it shows that mean value 7.72, standard deviation is 2.33, the t-value is and it is significant at 1% level of significance (0.000). The operating income is shows high in the year as to which indicates the profit realized from the business operation after taking out operating expenses, but for the year it reduces to so it indicates there is less profit realization. Asset turnover is quiet satisfactory for all the years. EBIT is increases in the year 2012 and 2013 which shows that the Cipla pharmaceutical company s has high earning power from ongoing operations. There is high profit margin in the year 2006 and 2008 as 5.3 and 5.5 respectively, but from the it shows the low profit margin which indicates the low margin of safety. The Return on investment is high in the year 2007 and 2009 but for the other subsequent year it is moderate. Hence ROI shows that the amount of money invested is medium and quiet satisfactory. editor@tjprc.org

6 44 O. M. Haja Mohideen & M. Parveen CONCLUSIONS As a conclusion, from the above analysis it is found that Cipla is concentrating on its financial performance by reducing its expenses and cost. Using the Duo Pont analysis it is found that the Return on equity is high, so the Cipla s company management uses the investor s money effectively. The Return on investment is high in the year 2007 and 2009 but for the other subsequent year it is moderate. Hence ROI shows that the amount of money invested is medium and quiet satisfactory. Hence the study is expected to help in predicting financial performance using Duo Pont analysis of the Cipla Pharmaceutical Company. REFERENCES 1. F. Arditti, Risk and the required return on equity, The Journal of Finance, Vol. 22, No. 1, 1967, pp R. Thorpe, J. Holloway, Performance management multidisciplinary perspectives, Plagrave MacMillan, New York, 2008, pp S. Ross, R. Westerfield, J. Jaffe, B. Jordan, Modern Financial Management, eighth edition, McGraw Hill, New York, 2008, pp M. Soliman, The Use of DuPont Analysis by Market Participants, 5. B. McClure, ROA and ROE Give Clear Picture of Corporate Health 6. J. J. Griffin, J.F. Mahon, The corporate social performance and corporate financial performance debate, Business and Society; Mar 1997; 36, 1, pp J. H. v. H. de Wet, E. du Toit, Return on equity: A popular, but flawed measure of corporate financial performance, S. Afr. J. Bus. Manage.2007, 38(1), pp B. McClure, ROA and ROE Give Clear Picture o Corporate Health 9. Osteryoung, J. and Constand, R. Financial ratios in large public and small private firms, Journal of Small Business Management, July, 1992, pp Impact Factor (JCC): Index Copernicus Value (ICV): 3.0