156 Corporate Finance
The data indicates that in terms of total assets the fastest (slowest) growth was reported by DRL (Ranbaxy)
with growth rates of 58.09 percent (4.63 percent) in 2001. In terms of long-term debt, the fastest (slowest)
growth was experienced by DRL (Sun Pharma) with a growth rate of 317 percent (–75 percent).The fastest
(slowest) growth in terms of equity was experienced by Glaxo (Ranbaxy) with a growth rate of 42 percent
(–1 percent). Thus, for all firms except DRL, the growth in assets is being financed by equity, either through
profit retention or issuing equity. Although Ranbaxy’s asset growth was the lowest (4.63 percent) it experienced
considerable growth in sales (23.55 percent) because of asset turnover comparable to other firms in the
industry group. Although Ranbaxy’s sales grew its profits (PBT or PAT) did not grow by the same rate. In
fact the profit after tax fell by 2 percent. In terms of overall performance DRL experienced the highest
growth rates in sales, PBT and PAT. CIPLA and Sun Pharma experienced moderate growth rates in sales,
assets and profits.
The growth rates in sales vary from 18 percent to 110 percent. But is growth necessarily good? Because
growth requires additional investments in inventory, receivables, property, plant and equipment, fast growth
can result in large outlay of cash, which may impose liquidity constraints on a company. For firms with debt
servicing obligations, growth can result in financial distress and ultimately force a company into bankruptcy.
Growth also imposes demands on managerial resources as a firm spreads its limited expertise too far.
In the second step, evaluate the current asset position of all the companies. Except for Glaxo and Ranbaxy,
all other firms experienced increases in current assets (as a fraction of total assets). In the case of Ranbaxy,
current assets remained at the same level whereas for Glaxo current assets declined from 63 percent to
52 percent. The decline was primarily because total assets grew at a faster rate in 2001 than in 2000. Likewise
inventory, receivables and debtors (as a fraction of total assets) declined. Cash is one of the important
components of current assets. Since idle cash does not generate revenues firms must balance the need to
have cash to meet liquidity demand and the opportunity cost. The cash position of all firms in 2001is given here:
Glaxo Ranbaxy Cipla Sun DRLCash/current assets (percent) 12.46 4.33 0.92 3.26 3.46
Cash/total assets (percent) 7.61 2.38 0.56 1.8 1.82
As can be noted, apart from Glaxo all other firms maintain relatively low cash balances. But in 2002,
DRL had 40 percent cash (as a fraction of current assets). Firms with large cash balances often become
takeover targets. Those companies that escape the takeover attempt, initiate stock repurchase program to
return cash to shareholders by purchasing shares back from shareholders at a premium.
Companies usually sell goods on credit thereby generating receivables. Some customers do not pay whereas
some delay payment. Since receivables do not generate revenue firms try to maintain them at predetermined
levels. A high level of receivables indicates that the firm has difficulty in collecting cash or that the firm is
generous in granting credit. Given here is the receivables position of all firms in 2001:
Glaxo Ranbaxy Cipla Sun DRLReceivables/total 29.24 34.22 34.13 28.21 36.04
assets (percent)
One may express receivables as a fraction of current assets. As can be seen all firms have more or less
similar levels of receivables.