Ratio

Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures.

Liquidity ratios measure the availability of cash to pay debt.

Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.

Financial ratios allow for comparisons

•between companies•between industries•between different time periods for one company•between a single company and its industry average

Evaluating Internal Liquidity:

Internal liquidity (solvency) ratios indicate the ability of the firm to meet future short-term financial obligation. They compare near- term financial obligation, such as accounts payable or notes payable, to current assets or cash flows that will be available to meet these obligations.

Current ratio:

Clearly the best-known liquidity measure is the current assets, which examines the relationship between current assets and current liability as follows:

RATIO 2008 2009 2010

Current ratio 1.15 1.17 1.11

InterpretationFrom the above chart we can see that, Renata’s current ratio increased in year 2009 than 2008. Than it decrease in the year 2010. So RENATA’s ability to meet short time liability has been decreased.

Quick ratio:

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

Ratio 2008 2009 2010

Quick Ratio 0.35 0.34 0.35

Interpretation: RENATA’s ability to transform their asset into more liquid form has been changed slightly from 2008 to 2010. Generally, the quick ratio should be 1:1 or higher, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

Cash ratio:

The ratio of a company's total cash and cash equivalents to its current liabilities. The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt.

Ratio 2008 2009 2010

Cash Ratio 0.0937 0.1016 0.0963

Interpretation: RENATA’S ability to utilize cash was quite better in 2009 than 2008 and 2010. Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn't necessarily a bad thing, so a company souldn’t focus on this ratio being above 1:1.

Receivables Turnover: In addition to examining total liquid assets relative to near-term liabilities, it is useful to analyze the quality (liquidity) of the accounts receivables. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Ratio 2008 2009 2010

Receivable

turnover

11.46 times 11.33 times 12.38 times

Given these annual receivables turnover figures, an average collection period is as follows:

Ratio 2008 2009 2010

Average Receivable

Collection Period

31.84 days 32.19 days 29.48 days

Interpretation:These results indicate that Renata pharmaceutical was collected its accounts receivables in about 30 days on average and collection period has decreased slightly over the recent years. To determine whether these receivables collection numbers are good or bad, it is essential that they be related to the company’s credit policy and to comparable collection figures for other companies in the industry.

Inventory Turnover: A ratio showing how many times a company's inventory is sold and replaced over a period.

Ratio 2008 2009 2010

Inventory

Turnover

1.68 times 1.78 times 2.36 times

Given the turnover values, we compute the average processing time as follows:

Ratio 2008 2009 2010

Average inventory

Processing period

217.2 days 205.5 days 154.6 days

Interpretation:Renata’s inventory turnover has decreased over the years. These numbers may indicate that Renata is improving its operations and getting more efficient with how it allocates capital, generates sales and manages inventory. 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.

Cash Conversion Cycle: A very useful measure of overall internal liquidity is the cash conversion cycle, which combines information from receivables turnover, the inventory turnover, and accounts payable turnover.

Ratio 2008 2009 2010

Payable

Turnover Ratio

18.49 times 23.48 times 80.65 times

Payable Payment Period= 365/ Payable Turnover

Ratio 2008 2009 2010

Payable

Payment Period

19.74 days 15.54 days 4.52 days

Therefore, the cash conversion cycle for Renata Pharmaceuticals equals

Year Receivable Days

Inventory Processing

days

Payable Payment

Period (days)

Cash Conversion

Cycle (days)

2008 32 217 20 229

2009 32 205 16 221

2010 29 155 5 179

Interpretation:The cash conversion cycle measures the time between outlay of cash and cash recovery. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line. So we can see that Renata’s cash conversion cycle has been decreased over the years which is positive sign and it shows improvement of efficiency but we have to compare with competitor to know the actual position.

Evaluating operating Performance:The ratios that indicate how well the management is operating the business can be divided into two subcategories:

•Operating efficiency ratios•Operating profitability ratios.

Operating Efficiency Ratios:

Operating efficiency ratios examine how the management uses its assets and capital, measured in terms of the tk. of sales generated by various assets or capital categories. These are

Total Asset Turnover:

The total assets turnover ratios indicate the effectiveness of the firm’s use of its total assets base (net assets equal gross assets minus depreciation on fixed assets).

Ratio 2008 2009 2010

Total Asset

Turnover

1.16 1.11 1.13

Interpretation: Renata Pharmaceuticals Ltd. has experienced a quite good and resilient total assets turnover over the years. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover

Ratio 2008 2009 2010

Net fixed asset turnover 3.41 times 3.23 times 2.57 times

Net fixed RatioThe net fixed assets turnover ratio reflects the firm’s utilization of fixed assets

Interpretation:Renata Pharmaceuticals Ltd. Net fixed assets turnover ratios, which indicate a decline trend in 2008, 2009 and 2010 fiscal year. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

Equity Turnover: In addition to specific assets turnover ratios, it is useful to examine the turnover for alternative capital components. An important one, equity turnover, is computed as follows:

Ratio 2008 2009 2010

Equity Turnover 2.10 times 2.01 times 1.96 times

Interpretation: Equity turnover is a measure of how well a company uses its stockholders’ equity to generate revenue. The higher the ratio is, the more efficiently a company is using its capital. Renata’s equity turnover ratio has decreased slightly over the years.

•Operating profitability ratios: The ratios in this category indicate two facets of profitability: •The rate of profit on sales (profit margin)•The percentage return on capital employed.

Gross Profit Margin:

Ratio 2008 2009 2010

Gross profit

Margin

50.59% 53.32% 52.74%

Interpretation:The gross profit margin ratio is used as one indicator of a business's financial health. It shows how efficiently a business is using its materials and labor in the production process and gives an indication of the pricing, cost structure, and production efficiency of your business. The higher the gross profit margin ratio the better. Renata Pharmaceuticals Ltd has experienced quite stability in this margin during the last several years.

Operating Profit Margin: Operating profit is gross profit minus sales, general, and administrative (SG&A) expenses. The operating profit margin is computed as:

Ratio 2008 2009 2010

Operating Profit

Margin

23.73% 24.85% 25.78%

Interpretation:Operating margin gives an idea of how much a company makes (before interest and taxes) on each Taka of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per Taka of sales. The higher the margin, the better. Renata Pharmaceuticals Ltd has experienced an increasing operating profit margin.

Net Profit Margin: This margin relates net income to sales.

Ratio 2008 2009 2010

Net Profit Margin 14.02% 15.47% 16.72%

Interpretation:Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Renata Pharmaceuticals Ltd has experienced an increasing trend in net profit margin.

Return on Equity:The return on equity (ROE) ratio extremely important to owner of the enterprise because it indicates the rate of return that management has on the capital provided by the owner after accounting for payments to all other capital suppliers.

Ratio 2008 2009 2010

Return on Equity 26.06% 27.34% 28.65%

Interpretation:Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The company’s efficiency to utilize its equity generating profit has been increased.

DEBT MANGEMENT RATIOS

Ratio2008 2009 2010

TOTAL DEBT RATIO 44.32% 42.68% 41.89%

Interpretation:Renata’s debt obligation over its asset has been decreased. So, its good for the company. The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

Ratio 2008 2009 2010

DEBT TO EQUITY

RATIO

78.89% 74.48% 72.1%

DEBT TO EQUITY RATIO

Interpretation:Renata’s debt obligation over its equity has been decreased. So, its good for the company. 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.

Time Interest Earned (TIE) Ratio:

Ratio 2008 2009 2010

Time Interest Earned (TIE) Ratio 8.40 9.27 10.61

Interpretation: The company can cover their interest in a better way nowadays. Ensuring interest payments to debt holders and preventing bankruptcy depends mainly on a company's ability to sustain earnings. However, a high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects

Ratio 2008 2009 2010

Price/Earning Ratio 27.48 36.09 32.50

Price/ Earning (P/E) Ratio:

Interpretation: In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E.

Ratios generally are not useful unless they are benchmarked against something else, like past performance or another company.

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