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TABLE OF CONTENTS

4.1 Balance Sheet Analysis.............................................................................2 Pro Forma Statements....................................................................................9 Plug Variables .............................................................................................11 Scenario Analysis.........................................................................................12 11. Conclusion.............................................................................................14

4.01 Company Overview


Square Pharmaceuticals is a renowned Pharmaceutical Company of our country. It is currently the leading corporation in its field of expertise. Square Pharmaceuticals began its operations in the year 195 as a Partnership !irm. It con"erted into a Pri"ate #imited Company in 19$%. &he company became Public ' became listed in the (S) in the year 1991* since then there was no loo+ing bac+. &he supremacy of Square is such that the closest competitor

,eximco Pharmaceuticals is not e"en close in comparison to the mar+et share- the latter has only about half the mar+et share. Square Pharmaceuticals Limited has extended its range of services towards the highway of
global market. The company pioneered exports of medicines from Bangladesh in the year 19 ! and has been exporting antibiotics and other pharmaceutical products since then. This extension in business and services has increased the credibility of "#uare Pharmaceuticals Limited ten folds.

6.0 Financial Statement Analysis Square Pharmaceuticals Lt . &here are many financial analysis techniques which can measure the financial position of a company. In this section few of these techniques are discussed in an attempt to outline the financial health of Square Pharmaceuticals Lt . %.1 !alance Sheet Analysis "a#le$ !alance Sheet analysis #ase on !oo% &alue an 'ar%et &alue

3sset Current 3sset 5on current 3sset

,oo+ .alue / 0112 3mount #iabilities %*%11* 4$*%4$ Current #iabilities 5on/Current liabilities Share holder6s equity

3mount 4*511* %5*114 2 5*0%1*$10

&angible asset Intangible asset

*091*091*9 % 7 9%0%11 shares8

*%12*1%1*215

&otal 3sset

1()*0+)1(*)4(0 &otal #iabilities

1()*0+)1(*)4(0

3sset Current 3sset 5on current 3sset &angible asset Intangible asset &otal 3sset

9ar+et "alue / 0112 3mount #iabilities %*%11* 4$*%4$ Current #iabilities 5on/Current liabilities Share holder6s equity 15*091*091*9 % 7 9%0%11 shares8 01*44$*004*095 41)0+,)+-0)*1- &otal #iabilities

3mount 4*511* %5*114 2 5*0%1*$10 4$*254*0$%*111

41)0+,)+-0)*1-

&he abo"e table shows the balance sheet as it was presented in the annual report 0112 of Square Pharmaceuticals #td. 3ccording to this balance sheet the boo+ "alue of SPL shares for the day (ecember 41* 0112 should be &+.9%1.05. ,ut in reality the actual mar+et price on that day was much higher than that* &+. %111. It is good news for a company because the mar+et "alue is much higher than the boo+ "alue. &hat good news also gi"es a sign that the company has goodwill in the mar+et which can be considered as intangible asset of the company.

Fi.ure 1$ Comparison #etween !oo% &alue an 'ar%et &alue o/ SPL stoc% Assumptions o/ #alance sheet #ase on 'ar%et &alue$ 1. &he company has other subsidiaries and uses same fixed assets such as furniture and fixture* motor "ehicles etc in both companies. ,ut two companies follows two different depreciation method which ma+es the "alue of those assets lower than actual mar+et "alue. 0. &he balance sheet does not incorporate any intangible assets* li+e goodwill. Square Pharmaceuticals #td is a renowned and well established company and expanded its business in international mar+et. It has gained much reputation in both the mar+et. 4. 3s shareholders of SP# are highly satisfied about their performance and there is significant differences between boo+ "alue and mar+et "alue of share. So there is strong confidence in shareholders mind about the efficient performance of SP# ma+e high intangible asset.

%. &he equity of the company has been se"erely understated. &he company calculates its equity from 1991 when SPL was first listed with the (ha+a Stoc+ )xchange. ,ut according to the time "alue of money theory the "alue of money has increased a lot o"er these years. -. "a#le 1$ 0atio analysis o/ SPL (0021 0atio Current ratio Quick ratio Cash ratio (00* 1.0$ 1.$ 1.159 Short1term Solvency (00*1 (0061 (00-1 (006 1.%% 1. % 1.155 (001.2 1.19 1.1%1 (004 1.$$ 1.1 1.19$ (0041 (00+ 1.$1 1.9 1.1%0

Lon.1term Solvency Total Debt Times interest earned (TIE) Cash Coverage $.5 .$% 10.51 15.90 10.14 44.2% : 41.12: 41.15: 09.5 : 01.91:

$.$

.$

10.5

15.9

10.1

Asset 'ana.ement Inventory Turnover DSO (Days Sales outstanding ) 0.%1 0.2$ 0.$4 0.2$ 4.5%

14.25

14.54

1%. 2

15.25

1%.99

Total Asset turnover ro!it "argin #eturn on Asset #eturn on E$uity E S E ratio ( rice Earning) %ook &alue 'er share "arket %ook #atio

1.25

1. 4

1.2$

1.2

1.94

Pro/ita#ility Per/ormance 1%.%5 : 11. : 1$.%0 : 15%.54 1%.9$: 10.%4: 12.22: 1$.%5: 10.5%: 1 .01: 01.0$: 15. : 12.$9: 1$.51: 01.14:

00.55:

'ar%et1value 'easures 01 .$1 04%.$2 091.21

0$9.%$

0$.$1

11.19

9.21

10.9$

.%4

9%1.05

1041.1

10 5

.$

10 9.1 2 0.90

1025.1%

%.42

1.99

1.22

1.2

3nterpretation o/ 0atio$ !rom the trend it can be concluded that Square;s current assets are increasing and current liabilities are decreasing. So* its liquidity position is relati"ely stronger compare to others. It has got an inconsistent quic+ ratio which means that difference between assets and in"entories and also liabilities frequently fluctuates. SP#;s in"entory turno"er ratio is also inconsistent. So it means that company management is not able to manage its in"entory efficiently all the time. Its recei"able turno"er ratio is increasing. It means that company;s management has dealt proficiency with its collection policies. &he fixed asset turno"er ratio is decreasing. It means that company does not use its fixed assets efficiently and intensi"ely. &he total asset turno"er ratio of SP# is stable. It means that company is generating sufficient "olume of business gi"en its total in"estment. Its total

interest turn ratio is increasing. It means that company is not able to meet its annual interest cost. &he profit margin on sales is increasing. It means that company has low cost of debt and also operating expenses are going down signifying the company;s efficiency.<=3 is increasing. It means that company;s high ,)P plus low interest cost resulting from its low use of debt. Its <=) has increased more than <=3. It means that company;s greater use of equity. Financial stren.th an wea%nesses o/ SPL$ In this section the strengths and wea+nesses for the companies ha"e been summari>ed. Square Pharmaceuticals Lt . Stren.ths$ #iquidity position is relati"ely stronger compare to others. Company management has pro"en efficiency in managing its in"entory. Company;s management has dealt proficiency with its collection policies Company is generating sufficient "olume of business gi"en its total in"estment =perating expenses are going down signifying the company;s efficiency. 4ea%nesses$ Company does not use its fixed assets efficiently and intensi"ely. Company is not able to meet its annual interest cost. *. Financial Plannin. an 5rowth !inancial planning formulates the method by which financial goals of a company are to be achie"ed which has two dimensions? a time frame and a le"el of aggregation. &o identify which factors positi"ely contribute to the growth of the stoc+ price of Square Pharmaceuticals #td. 7SP#8* we ha"e analy>ed the trend of different "ariables from the fi"e year financial statement and detected the growth or reduction of e"ery item. 3fter that we ha"e selected few components which show a growing trend and positi"ely contribute to the growth of SP#. 5rowth 0ate

&o predict the performance of any firm in the future* it is "ery important to understand the growth of that company. &he following table shows the company;s* growth o"er the last se"en year 7011% / 011 8. "a#le ($ 5rowth rates an their .eometric mean 5rowth 0ates 678 Sales !ixed 3sset =perating Cost Current 3sset <etained )arning 5on/current #iability Current #iability (i"idend )PS (0021(00* 11.11: 01. 5: 01.41: 01: 00.% : 40.41: 4$.9 : /01: 9 (00*1(006 04: 09.1 %0.9 : /9: 0%.1$: /5.9 : 14.1%: 10.11: / 9 (0061(001%.01: 14: 12. 9: 0%: 45.$$: $4.%2: 15.94: 40: /1 (00-1(004 59O'9A: 14: 0.14+, 01. 0: 0.64404.0%: 0.(4-4 $1: 0.+-(1 $ .12: 9$5: 55.91: 01: 0 0.((60.-264 0.(-60 0.1,12 0.(-(0

&he growth rates that ha"e been shown in the chart* we can find that geometric mean of sales growth is 1%.49 :. 3s the world economy is experiencing the recession and the impact of recession is also started affecting our economy* so it will be a highly optimistic choice if we expect that the company will grow at the rate of 1%:. =n the other hand* the other growth rates that ha"e been calculated also gi"e us the indication that we can not consider them as company growth rate gi"en @(P growth of ,angladesh is 5.%5: and world economy is in recession. #et;s see what the other "ariables that we can consider as growth rate for the company. Sustainable growth &aria#les 5rowth @(P 5.%5: <ate 9: ,r 2:

If the Square pharmaceuticals #td. maintains constant retention ratio and the return is also expected to be constant in future then the company can expect to grow at 2: growth rate.

&hough the rate is higher than @(P growth but considering the future opportunity to ha"e higher return and the sustainable growth rate we are ta+ing the growth rate in between these two. 3t the same time* +eeping a constant retention ratio will gi"e an indication to the share holders that the company does not ha"e any liquidity problem and company is efficient enough in in"estment decision. ,ecause at the present situation of world economy and our economy* while new in"estment is ris+y SP# is not retaining profit unnecessarily rather distributing to shareholders. It will increase shareholders confidence regarding the company and thus will increase the share price. Pro Forma Statements 3ccording to the @rowth <ate section of this case* a single growth rate 72:8 has been selected at the o"erall growth rate for SP#. 3ssuming a constant growth rate* the table below shows the pro forma income statement for coming 5 years. "a#le $ Pro Forma income statement /or the ne;t - years

(01( 11*5 0*154*10 Sales C=@S Gross Profit =perating )xpenses Operations Profit/(Loss) =ther Income =ther Cost (epreciation EB ! &ax $* 11* 2 *1$9 4,771,174,959 0*424*2 5*10$ 2,397,389,833 % *100*255 $0%*55$*%21 %95*0%1*51 2,125,614,609 010*40%*590

(011 11* 0%*4% *$0 % $*4$5*41$*$1$ 4,459,042,018 0*01 *%91*220 2,240,551,246 290*5%%*$41 5 4*$92*$4$ %$0* %0*541 1,986,555,709 1 9*1 *%1%

(010 (00, 75rowth 0ate < *78 11*11$*014*$$ 9*%5%*%15*09 2 5*559*215*41 5*9% * %*$29 2 3,894,699,99 0 1*942*215*25 9 1,956,984,23 1 $90*049*12% 519* 0%*101 %1%*0$%*590 1,735,134,69 2 1$5*152*145

(002

* 45* 90* 1

1 5*195*9 $*0$

3,639,906,53

4,167,328,989 0*124*455* $0 2,093,973,127 2%1*$95*91$ 5%5*511* 11 %40*5$4*114 1,856,594,121 12$*21 *14%

2 1* 11*9%9*41

2 1,828,957,22

5 $%$*950*%99 %2$*%21*1%1

422* 12*425 1,621,621,20

8 15%*450*%$4

1)-6,),**)-(et Income (i"idend 3ddition to <etained )arnings 1),(+)(,0)01* $24*151*51$ 1*051*14 *511 1)*,*)46*)+0$09*114*552 1*1$ *454*2%9 1)6*,)2*-),26 5 2*95$*595 1*191*919*491 * 5%9*%90*1%5 1*101*% 5*%1 0

1)46*)(62)*4

514*5%%*1$1

954*20%*$ %

"a#le $ Pro Forma #alance sheet /or the ne;t - years (01( Current 3ssets !ixed 3ssets "otal Assets Current #iabilities 5on/current #iabilities &otal #iabilities Common Stoc+ <eser"es <etained )arnings brought forward <etained )arnings "otal 9quity "otal Lia#ilities an 9quity )xcess !und *04$*9 4*04$ 1*1$ *454*2%9 1+)-4()2--)4( ( 12)*0*)2*-)+0 , 0* 15*%$1* 10 2*1%5*1$4* %5 1*191*919*491 1()+*4)-01)6* + 1*)411),--)(0 + 1*9 0*%0$*555 $*10%*52 *%44 1*101*% 5*%10 11)(2()-2()(2 ( 16)1,6)124),* , 1*01$*1$1*12 5*121* 54*2%9 954*20%*$ % 10)(6()0,6)2* 0 1-)0--)4-6)04 0 511*$%5*%52 %*029*500*0$ 91*441*% 1 ,)+02)+*()126 1+)2+,)-12)02 0%2*121*219 1()*0+)1(*)4(0 1 4*1%4* 19*125 1*045*214*194 2)41*)040)*05*519*% 5*955 11*420*90 *55 0 1-)2,()414)-0 * %*429*22 *025 2 5*0%1*$10 5*1$5*119* 2 0*909*215*111 1*012* 14*%42 (011 5*45 *20%*00 11*121* 1%*%0 1 1-)4(,)-(2)64 2 %*050*011*91 2 5*0%1*$10 5*142*%54*541 0*909*215*111 1*012* 14*%42 (010 (00, 65rowth 0ate < *78 5*010*$%%* 0 5*151*111*54$ 9*222*% 1*119 14),20)1(4),0 1 %*10 *4$1*1 5 2 5*0%1*$10 %*914*$10*$92 0*909*215*111 1*012* 14*%42 9*%90*$99*1% 14)-4+)210)-2 + %*11 *112*55 2 5*0%1*$10 %*294*459*121 0*909*215*111 1*012* 14*%42 (002 %*201*$$%*9 2 * 21*$ 1*454 1+)-,()+46)++ , 4*2%5*91%*0$1 2 5*0%1*$10 %*541*1%5* 20 0*909*215*111 1*012* 14*%42 (00* %*%11* 4$*%4$ *091*091*9 % 1()*0+)1(*)4(0 4*511* %5*114 2 5*0%1*$10 %*0 $*1 $*215 0*909*215*111 1*012* 14*%42

&he abo"e table shows the pro forma balance sheets for the coming 5 years. &here are some assumptions are made in preparing the pro forma income statement and balance sheet. Initially all assets* including fixed assets* accounts payable "ary directly with sales. #ong term debt and common stoc+ won;t "ary with sales as management decision is to +eep a constant long term debt and common stoc+. 3s the company decided to maintain a constant retention rate* the company will pay di"idend e"ery year at the same rate. &he balance sheets indicate the company has excess fund* which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. Plu. &aria#les &he pro forma statements from the abo"e section indicate the firm will ha"e excess fund if it will grow at 2: rate. &he company can decrease its long term debts by the extra fund* thus will decrease the debt equity ratio. 3s the company decided to maintain a constant retention rate* it ends up with extra fund at the end of the year. In the current recession of economy* it will be ris+y to do any new in"estment. So* the company can payoff its debt which will gi"e an encouraging signal to the shareholders. &he table below lists the change is capital structure of the company. "a#le $ 9;pecte chan.e in capital structure o/ Square Pharmaceuticals Lt . (01( 3nitial 0atio 0evise 0atio =e#t>9quity 44.54: =e#t>9quity 19: 01: 01: 00: 0%: 0$. 1: 40.5$: 41.$1: 41.$9: 0 .$ : 0$. 1: (011 (010 (00, (002 (00*

&he abo"e table shows that the debtAequity ratio of the company;s capital structure will go down from the current (6.207 to 1,7.

Scenario Analysis In this case study* the growth rate of *7 has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. !or scenario analysis* both optimistic and pessimistic scenarios are being considered.

"a#le $ Scenario analysis /or #oth optimistic an pessimistic situations Optimistic 1(.007 10.007 :ormal *.007 Pessimistic -.007 +.007

5rowth 0ate 3ncome Statement

9*0% *2 %*9 Sales 5*%4 *2 9*4 C=@S @ross Profit =perating )xpenses Operations Profit/(Loss) =ther Income =ther Cost (epreciation EB ! &ax :et 3ncome (i"idend <etained )arnings $5 4* 19*995*$ 04 1* 95*524*1 12 1,914,422,5 16 $22*1 4*90% %9 *24$*1% 495*%20*494 1,697,397,9

9*1 4*$0 *1 14 5*4%1*$$ *1 0$ 4*2%1*959*9 2 1* $1*204*5 2 1,880,236,4 00 $$5*191*45% % 9* 41*1%5 4 *%11*4 $ 1,667,087,2

* 45* 90*

*$21*245*9

*515*529*1 51 5*111*2%4*2 91 4*514* 45*0 $1 1*2%4*051*0 $ 1,760,584,9 93 $00*2$2*459 %5 *$59*14$ 4$4*$94*4$0 1,560,999,8

11 0$ 5*195*9 $*0 5*19 * $5*1 $ 4*$49*91$*5 40 1* 11*9%9*4 12 1,828,957,2 25 $%$*950*%99 %2$*%21*1%1 422* 12*425 1,621,621,2 41 4*521* 21* 9$ 1*222*199*2 2 1,794,771,1 09 $4%* 59*909 %$2*5$5*149 421*255*4$9 1,591,310,5

00 23 08 31 54 1$1*5$5*195 15 *$ 1*110 15%*450*%$4 151*%$2*421 1% *5 0*022 1)-+-)2+()* 1)-02)40*)1 1)46*)(62)* 1)4+,)24+)1 1)41()41*)0(1 461 ** 542*5%1*%%2 502*9%0*%90 514*5%%*1$1 514*9%5*11$ %9%*4%$*150 99 *091*05 9 1*%$%*$09 954*20%*$ % 945* 9 *155 91 *121*%05

!alance Sheet %*9%1*05$* Current 3ssets !ixed 3ssets &otal 3ssets Current #iabilities 5on/current #iabilities !ota" Lia#i"ities Common Stoc+ <eser"es <etained )arnings !ota" E$%it& &otal 1 9*0 $*0%5*9 10 14)((*)-0() *10 4*901*9%$*5 15 %* 54*101*1 1 9*101*%01*1 0 1+),*+)440) 16( 4* 51*909*$ 14 %*201*$$%*9 2 * 21*$ 1*4 54 1+)-,()+46) ++, 4*2%5*91%*0 $1 %*$40*%0 *0 5 *215* 55*5 44 1+)++2)(2+) *,1 4*$25* 5 2*4 %*5%%*191*5 09 *5%1*109*2 1% 1+)024)((1) (4+ 4*$15* 21*% 5$

29*%21*$15 $4*2$5*224 %1*01 *505 0%*514*$94 1 *29 * $1 4,800,417,1 4,714,695,3 4,586,112,7 4,500,391,0 4,414,669,3 21 0*909*215*1 11 1*012* 14*% 42 87 0*909*215*1 11 1*012* 14*% 42 85 0*909*215*1 11 1*012* 14*% 42 51 0*909*215*1 11 1*012* 14*% 42 16 0*909*215*1 11 1*012* 14*% 42

99 *091*059 9 1*%$%*$09 954*20%*$ 5 945* 9 *155 91 *121*%05 5,135,809,6 5,117,983,0 5,091,243,1 5,073,416,4 5,055,589,8 96 66 ,)2+()6*2)4 -+ %*1%1*2$1*2 19 22 ,)6**)+--), 0* 4*91%*991*% 44 92 ,)-*+)20*)4+ 4*2$%*%2$*0 % 62 ,)4*0)(-,)1 *, 4*$14*9$0*1 $%

#iabilities and ,),+6)((6)2 )quity 1* )xternal !und %*091*025* 5eeded 5ew (ebtA)quity <atio 41: 9%

09.% :

0 .$ :

0 .1%:

02.$1:

In the abo"e scenario analysis* we ha"e ta+en the 2: growth rate in normal situation. If we want to be optimistic enough to predict that the economy will ha"e a high growth and the company will also able to grow at 11: to 10:. =n the other hand* the situation can

also be worse enough to ha"e a growth lower than the normal and the company may face a growth of 5: or e"en 4:. In that case the good news for the company is that if the company will ha"e to grow at 5: then company doesn;t ha"e to face any loss as the rate is much closer to @(P growth rate. 3fter analy>ing the scenario of different situation we can say that the proBected growth rate is appropriate for the company which will help the company to operate in the mar+et e"en if the situation is worse. It gi"es a positi"e indication towards the company and increases the shareholders confidence to in"est in the company;s share. 11. Conclusion 3fter analy>ing all the ratios* we ha"e found out the following information about Square Pharmaceuticals #td? In the liquidity ratios we can see that both current ratio and quic+ ratio are below the benchmar+ and for the last fi"e years the both the ratios ha"e been deteriorated. &his re"eals that the company is not holding the short1term solvency. Cuge in"entories ha"e been piled up in last year that consumed cash. 9ost alarming is cash ratio which has drastically gone down since 011% but slightly impro"ed in 0112. &he firm should be concerned to promote cash sales* may be* by means of cash discount. In asset management ratios we can see in"entory turno"er ratio* (S= and total asset turno"er slightly deteriorated in 0112. Cowe"er the all the ratios are better than ,eximco Pharmaceuticals #td. 3lso the (S= of Square pharmaceuticals indicates that it collects the sales faster than ,eximco Pharmaceuticals #td. (ebt management ratios gi"e a clear idea about long term sol"ency of Square Pharmaceuticals #td. &he debt ratio increased slightly in 0112. &I) and Cash co"erage ratio are better than ,eximco Pharmaceuticals #td. Profit margin <atio* <=3 and <=) of Square pharmaceuticals #td has deteriorated compared to the pre"ious years. 3lthough the decrease rate is not so high still it is a problem for Square and they need to try to impro"e these ratios.

,oth PA) and 9A, ratios ha"e impro"ed to demonstrate that in"estors ha"e more trust in the firm. &here must be some good news not reflected in the accounting ratios. !or example* in an inflationary economy in"entories being piled up might indicate profit potentials of the next year as the cost of production of the next year would go down compared to industry due to cost sa"ings in in"entories. !rom the total analysis* we can summari>e that for the last year 0112* e"en though Square Pharmaceuticals #td. deteriorated in all the ratios* but still holding the better position compared to ,eximco Pharmaceuticals #td 6the #est alternative /or.one8 and this has been reflected through the increment in share price and in PA) and 9A, ratios. &he firm gained the trust of the in"estors. Square Pharmaceuticals #td might ha"e a good news that is not reflected in other ratios but in"estors +now. &herefore we can come to the conclusion that Square Pharmaceutical #td is a better company to in"est on.

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