HOCHSCHULE RHEIN-WAAL

RHEIN-WAAL UNIVERSITY OF APPLIED SCIENCES

FACULTY OF SOCEITY AND ECONOMICS

TERM PAPER WS 2014

Lecture “Financial Statement Analysis”

Prof. Dr. Philipp Schorn

GLAXOSMITHKLINE’S

FINANCIAL STATEMENT ANALYSIS

Prepared by: Thien Ai, Nguyen – 15838

Thi Trang Nhung, Nguyen – 15714

Thi Minh Loan, Doan – 16325

Tran Lam Thao, Tran – 16257

Due date: 05th January, 2015

I. ANALYSIS OF BUSINESS STRATEGY

1. Pharmaceutical industry

The global pharmaceuticals market is estimated by WHO to worth US$300 billion a year, a figure expected to rise to US$400 billion within three years1.

Pharmaceutical industry is an innovative luxurious one, often to be seen as “characterizing developed countries”, as we can see that in Europe, the countries with highest pharmaceutical production are Switzerland, United Kingdom and Germany (The Pharmaceutical

Industry in Figures). Thanks to advances in science and technology, the research-based pharmaceutical industry is entering an exciting new era in medicines development.

To examine the level of competitiveness of this industry, Porter’s five forces analysis of Pharmaceutical industry can be used.

Rivalry among existing firms: high

- One of the most competitive and fragmented industries with as many as 10,000 different players. Among them, few giant players have the higher competitive advantages than small ones

(R&D, value chains, reputation)

- Industry growth: High growth prospects. Overall trend is to increase until forever. Reason for that is

+ World population is increasing. Healthcare is forever the matter of concern for people

+ The increase of types of drugs for non-painful conditions like acne, baldness, etc., and for the unexpected appearances of new diseases, viruses

- Cost of each firm varies much, especially the firms produces generics who do not have to bear full R&D costs

Threat of substitute products : low

Generics products may have many possible alternatives but the prescriptions don’t. According to Global Pharmaceutical Industry Profile, prescription drugs occupy more than 90% of the pharmaceutical market. Therefore, pharmacy companies have not much worries about this

matter.

Threat of new entrant: medium-low

One of the most important key for success of pharmaceutical companies is drug scripts, which

often require very high R&D costs. The risk in this process is also very high. Time to develop a

drug is from 10 to 15 years, but not all can be brought to market. Only 2 of 10 marketed drugs

1 http://www.who.int/trade/glossary/story073/en

return revenues that match or exceed R&D costs (Phrma 2013 profile). For followers who

produce “me-too” drugs, this is not so important but that’s not the case for prescriptions

producers. Although R&D expenditures can be shared by outside contract research

organizations, this cost are still a huge barrier. Here, the giants have relatively big advantage,

specifically for high economies of scales.

However, creating brand cognizance is crucial for enduring survival. Once again, the known brand names are at the advantage. New entrances have to fight hard in this competitive

market and there is almost no place for small new comers to step in the top 10.

Distribution access: generally may be on the side of big players, but the small local firms may find their own ways to build their stable standing place.

The barriers for new entrance differ from countries to countries. This depends much on

government’s policy to protect patent. Also, government may put some fences from entry by quality regulations for new manufacturing operations. Sometimes, it was for consumer’s rights, but in many cases, it was authorities’ acts to protect the local producers.

Bargaining power of buyers: low

The end user of the product in this industry is different from the influencer. The consumer has no

choice but to buy what doctor says. Switching costs are high for many prescription drugs as there is no real alternative or consumers don’t know such replacements.

In pharma industry, number of buyer is large. Customers are dispersed and they have the

absolute demand of selected products, and therefore do not have much power in pricing of the products.

However, government may take a role in regulating price or protect consumers.

Bargaining power of suppliers: low

The chemical suppliers have very low bargaining power because the chemical market is

fragmented and the pharmacy companies can switch between their suppliers without incurring a very high cost.

2. Competitive Company Strategy

Differentiation is the primary competitive strategy that GSK is focusing on. In particular,

GSK can increase their profit significantly by following elements

GSK is the company leading in R&D in the world. It has spent a huge expenditure on

R&D in order to produce new product lines that are able to improve the treatments for patients.

In 2012, £3.9 billion (accounting for 13.1% of total turnover) was spent for R&D with the staff

of over 12,500 people researching in this area. There are three primary parts that R&D focuses

on including Pharmaceuticals, Vaccines and Consumer Healthcare. With an effective strategy,

R&D brought to the company 13% of internal rate of return in 2013.

- Pharmaceuticals: This area is accounted for 80% expenditure of R&D. GSK realized that

discovering new medicines for new treatments or future treatments takes much long time,

expensive and uncertain process. The primary aim of GSK in R&D therefore is to innovate new

medicines to offer the better choice for patients with the existing treatments and concentrate on

the areas where science shows potential chances leading to significant medical advances. To be

more effective in researching, GSK cooperated with other companies and shared the internal

risks of R&D. The markets that GSK focuses on in this area are USA. In particular, USA market

with an aging population, epidemic of chronic diseases as well as the economic uncertainty in

recent years requires for higher quality care, lower costs and better health outcomes. Thus, it is a

great opportunity for GSK in developing new products.

- Vaccines (accounted for 15% of R&D’s expenditure): GSK invests in development of new

prophylactic and therapeutic vaccines. To gain this goal, technology is the core key. More

specific, GSK purchased the Swiss-based company Okairos as a technology platform. This

investment also takes long time and uncertainty of its success. GSK therefore focuses on areas

where brings scientific opportunities. Europe is the market that GSK most focused on. The

approval for a significant number of new products in Europe gave the motivation in developing

increasingly in this market. Furthermore, the price reduction of government of France, Germany

and UK leads to the unreasonable investment in new medicines.

- Consumer Healthcare: The development times and the costs for consumer healthcare are

shorter and less than pharmaceuticals and vaccines. However, this area brought 13% of global

sales to GSK. The key strategy is that GSK focused on strategic products such as NiQuitin

Strips, Sensodyne Repair & Protect, and Women’s Horlicks.

II. ACCOUNTING ANALYSIS

Annual Report Presentation

The financial reporting framework that has been applied by GSK in the preparation of the

periodic reports is moderately flexible within the International Financial Reporting Standards

(IFRS) as adopted by the European Union and IFRSs as issued by the International Accounting

Standards Board (IASB). After reviewing the financial statements of the company for the five-

year period, there is no accounting distortion found, all the estimates and assumptions that affect

the amount of assets, liabilities, revenue and expenses in the financial statements are reasonable

and prudent and be the closest equivalent IFRS measures.

The Board considers that GSK applies the principles and provisions of the UK Corporate

Governance Code maintained by the Financial Reporting Council and assures that the Annual

Report, taken as a whole, is fair, balanced and understandable, and provides the information

necessary for shareholders to assess the Group’s performance, business model and strategy.

There are some reconciliations made over years due to the differences among the law and rules

applied by the countries that GSK has business. Taking taxation rate as an example,

Reconciliation of Taxation rate

The company is required under IFRS to create a deferred tax asset in respect of unrealised inter-

company profit arising on inventory held by the company at the year-end by applying the tax rate

of the country in which the inventory is held (rather than the tax rate of the country where the

profit was originally made and the tax paid, which is the practice under UK and US GAAP).

As a result of this difference in accounting treatment the company tax rate on current period

inter-company profit under IFRS reduced by 1.8% in 2013 (2012 – 1.1% increase; 2011 – 0.7%

decrease) arising from changes in the location of work-in-progress and finished goods.

Annual Report Review and Auditing

Reviews on GSK’s annual reports are conducted by PricewaterhouseCoopers in accordance with

International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)) and ‘Review of

Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the

Auditing Practices Board for use in the United Kingdom. The independent review report

concludes that in all material respects, in accordance with the accounting policies, nothing has

come to the attention that causes the belief that annual reports are not prepared well.

III. FINANCIAL ANALYSIS

1. Profitability Analysis

Table 1. GSK’s Profitability ratios

Table 5.5 Key profitability ratios 2009 2010 2011 2012 2013

Gross profit margin 74.0% 73.3% 73.2% 70.1% 67.6%

EBITDA margin 25.1% 8.1% 25.8% 22.9% 22.5%

NOPAT margin 17.4% 4.4% 16.1% 15.5% 17.8%

Net profit margin 20% 7% 20% 18% 21% Source: Excel file _ Financial Analysis

Gross Profit Margin

Gross Profit Margin is the ratio measuring company’s manufacturing and distribution

efficiency during the production process. In the case of GSK, this ratio is quite high ranging from

66% - 74% over five years (2009-2013). It proved that after GSK pays off his inventory cost, he

still has a large of money to cover his operating cost. However it is noted that these figures

decrease continuously during the studied time. In other words, the efficiency of using its raw

materials, labor and manufacturing-related fixed assets is declining. In comparison with others

competitors such as Bayer AG, Pfizer Inc, and Roche Holding AG Divident Right Cert, it is

obvious that GSK is less efficient in cost management.

EBITDA margin

EBITDA margin provides investors with a clear view of a company’s core profitability

without including the effects of capital structure, tax rates and depreciation policies. Overall,

profitable operation of GSK is quite stable at 23%, except the year of 2010 (8.1%). More

particularly, the operating expenses in 2010 were especially high. Compared to its competitors, it

is easily seen that this ratio of GSK is seemed as a lowest percentage. It proved that the GSK

managed the operating cost was not so efficient.

NOPAT margin

NOPAT margin shows the operating for leveraged companies. Taking a look at GSK, this

figure is quite low (around 15%) when compared with competitors such as JNJ (over 30%) and

ROG (around 23%). Moreover, it is especially low in 2010 (4.4%) because of the high tax-paid.

However the figure is high compared to ABOT, BAYN, and MRK. It proved that this company

did take much loan.

Net Profit Margin

Net profit margin is an indicator of how efficient a company is and how well it manages

its costs. The higher margin is the more effective the company is in converting revenue into

actual profit. In considering to GSK, this ratio decreases from 2009 to 2010 but then improves

slightly in the last periods. Moreover, its net profit margin is higher than the average of the

industry. It represents that there is a good signal of recovering in its business activities.

2. Efficiency analysis

Table 2. Efficiency ratios

PP&E Turnover

- PP&E Turnover ratios of GSK in recently years are lower than Industry’s ratio, as well as,

these figures are even much lower than its respective opponents’.

- From 2009 until 2013, GSK’s sales has been slightly decrease, meanwhile management board

decided to invest more in renewal plant, property and equipment.

R&D Turnover

- This ratio of GSK is still below the average rate of industry, maintaining a downward trend

despite the small reduction on R&D expense. This can be explained by the keeping increasing

level of outputs from preceded researchs rooted from previous years without significantly

additional expenditure. In comparison with such decreased amount, the greater loss of sales from

year to year has not been made up.

- Its close competitor, JNJ, reversly, presented a higher ration, even much more than industry

average and steadily goes up year by year.

- In the future, this science-based industry still requires GSK an approximate amount of

investment into R&D, which is an essential activity. Yet, with a stable development, R&D

expenditure will only witness a slight change.

Cash Conversion Cycle

- Due to its bargain power, GSK succeeded in prolonging the days payable, coupled with

reducing the time for collection receivables from its customer. GSK’s Cash conversion cycle is

much lower than the one of industry, as well as one of its rivals – JNJ. AZN is still more

effective than GSK in this aspect.

- From 2011 until the end of 2013, an innovation in supply chain has been initially applied,

motivating a more effective inventory management, leading to a dramatical decrease in day’s

inventory.

2011 2012 2013 2011 2012 2013 2011 2012 2013 2011 2012 2013

PP&E/Sales 31.9% 33.2% 33.5% 19.1% 21.8% 22.6% 22.7% 23.9% 23.4% 27.50% 27.51% 28.47%

PP&E turnover 3.13 3.01 2.99 5.23 4.59 4.42 4.41 4.18 4.27 3.59 3.51 3.32

R&D/Sales 14.64% 15.01% 14.80% 16.44 18.74 18.75 11.61 11.40 11.47 14.19 14.51 14.05

R&D Turnover 6.83 6.66 6.76 6.08 5.34 5.33 8.61 8.77 8.72 7.05 6.89 7.12

Trade receivables turnover 4.82 4.89 5.76 4.05 3.41 3.34 6.30 6.06 6.11 5.19 5.06 5.07

Days’ receivables 74.72 73.67 62.53 90.19 106.89 109.3 57.12 59.43 58.92 71.74 74.03 74.74

Inventories turnover 1.90 2.01 2.18 3.41 2.76 2.65 3.44 3.10 2.87 2.86 2.62 2.43

Days’ inventories 189.28 178.81 164.99 107.03 132.42 137.72 104.54 116.12 125.57 138.72 151.01 158.75

Trade payables turnover 1.03 1.02 1.05 0.67 0.58 0.53 3.54 3.70 3.64 2.39 2.20 2.25

Days’ payables 349.76 351.45 343.25 534.11 615.76 679.32 101.72 97.38 98.81 150.64 163.40 160.25

Cash Conversion Cycle -85.76 -98.96 -115.73 -336.89 -376.45 -432.31 59.95 78.17 85.68 59.81 61.64 73.23

GSK AZN JNJ Peers

- There would be a continuous reduction on day’s inventory which implements a lower CCC.

3. Liquidity analysis

Analysis of liquidity

The financial ratios determining company’s liquidity are showed on the five-year period, with

the comparison to the same statistics from the competitors Johnson & Johnson (JNJ),

AstraZeneca (AZN) and the industry average. The industry average was calculated from ten

biggest pharmaceutical companies ranked by the revenue in 2013.

Table 3. Liquidity ratio

2009 2010 2011 2012 2013

Current ratio

GSK 1.57 1.35 1.16 1.04 1.05

JNJ 1.82 2.05 2.38 1.9 2.2

AZN 1.35 1.5 1.49 1.37 1.27

Industry 1.68 1.67 1.64 1.65 1.71

Quick ratio

GSK 1.20 1.03 0.85 0.73 0.69

JNJ 1.34 1.62 1.88 1.34 1.59

AZN 1.25 1.4 1.37 1.22 1.15

Industry 1.20 1.20 1.22 1.20 1.21

Cash ratio

GSK 0.40 0.40 0.38 0.34 0.34

JNJ 0.73 0.84 1.08 0.61 0.82

AZN 0.56 0.66 0.48 0.55 0.57

Industry 0.41 0.42 0.42 0.44 0.43

Operating cash flow ratio

GSK 0.71 0.55 0.45 0.30 0.53

JNJ 0.76 0.71 0.63 0.63 0.68

AZN 0.67 0.64 0.50 0.50 0.46

Industry 0.63 0.66 0.66 0.60 0.62

According to the figures above,

- GSK’s liquidity has improved significantly over the past five years in all four ratios.

- Up to 2013, the current ratio demonstrates that GSK’s financial structure is reasonably enough

to cover the firm’s current liability.

- Restricting to the assets easily transferable to cash, the cash and marketable securities could

provide enough money for 34% of company’s current obligations. If it includes the trade

receivable, the measurement is up to 69%.

In summary, the company has enough current assets to meet current obligations in operation and

the board manages the liquidity well by taking all the advantages of the available capital while

maintaining the good-enough liquid assets level.

On the other hand, other benchmarks show much less efficiency and improving in trend. In

details,

- Industry’s liquidity ratios are relatively stable in the whole period.

- JNJ- the most sizeable company in the industry proves less efficiency in liquidity management

with high ratios and fluctuating in a large range over years.

- AZN- the main competitor in UK also illustrates the same pattern for the concern ratios as JNJ

but more satisfactory.

4. Solvency analysis

Table 4. Long-term Solvency ratios

2009 2010 2011 2012 2013

Liabilities-to-equity

GSK 3.52 3.42 3.83 4.84 5.39

AZN 1.66 1.42 1.27 1.26 1.41

JNJ 0.87 0.82 0.99 0.87 0.79

AVERAGE 1.98 1.72 1.65 1.71 1.55

Net debt-to-equity

GSK 2.14 1.93 2.07 2.72 3.07

AZN 0.11 0.41 0.40 0.43 0.45

JNJ 0.29 0.30 0.34 0.25 0.25

AVERAGE 0.96 0.80 0.73 0.75 0.56

Interest coverage ratio

GSK 11.08 4.80 10.63 9.28 10.16

AZN 10.02 11.63 13.62 9.06 7.60

JNJ 35.93 38.25 22.65 26.89 33.10

Liabilities to equity

- Very high comparing to selected competitors and the industry on average (often at least 2-3

times higher)

- Increasing over time by reducing absolute value of Equity and increase sharply their liabilities

- GSK seems to finance their operation mainly by liabilities.

- In the long run, they may face high interest expense, increase proportion of short-term debt in

total liabilities, which means they may have liquidity problem in the future if do not have enough

liquid assets.

Net debt to equity

- This shows out clearer the proportion of liabilities coming from borrowing from creditors,

which is for GSK often about 55-60% of total liabilities. The parallel trend of this ratio to

Liabilities-to-equity ratio indicates that the result of increase in liabilities mainly results from

increase in debt, here we can see from balance sheet is the increase of long-term debt.

- They seem to exploiting cheap borrowings. They can borrow that much, maybe because of their

high creditability

Interest coverage ratio

- GSK have relatively high Interest coverage ratio, which means it can easily service debt interest

payments. That could be the reason why GSK can borrow that much and may even borrow more.

- Comparing to 2 selected competitors, they are at similar situation to AZN but much lower than

that of JNJ

- Seeing that they have decreasing Interest coverage ratio, that could somehow show the effect of

increasingly heavy debt on the ability to cover debt interest. In the future, creditors should have

more concern about this fact. This means GSK cannot take more and more debt for too long

time.

IV. FORECASTING

CONDENSED STATEMENTS OF

EARNINGS

2013 2014 2015 2016 2017 2018 2019 2020

Sales 26.505,0 27.128,1 28.061,5 29.114,1 30.118,8 31.037,7 31.922,5 32.768,7

Net Operating Profit after Tax 4.721,2 4.696,5 4.717,8 4.749,2 4.913,1 5.063,0 5.207,3 5.345,4

Net profit (after tax) 5.628,0 5.490,5 5.592,4 5.640,6 5.867,6 6.021,6 6.183,4 6.347,5

- Investment profit after tax -292,1 -164,7 -212,6 -164,1 -209,1 -158,8 -202,8 -151,5

+ Interest expense after tax -614,7 -629,3 -662,0 -727,3 -745,4 -799,8 -773,3 -850,7

= Net operating profit after

tax 4.721,2 4.696,5 4.717,8 4.749,2 4.913,1 5.063,0 5.207,3 5.345,4

of which: Net Other Expense after

Tax 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

= Net other expense (income) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

x (1 – Tax rate) 84,7% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0%

= Net Other Expense after

Tax 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

+ Net Investment Profit after Tax 292,1 164,7 212,6 164,1 209,1 158,8 202,8 151,5

= Investment and Interest

income 345,0 232,0 299,4 231,1 294,5 223,6 285,6 213,3

x (1 – Tax rate) 84,7% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0%

= Net Interest Expense

after Tax 292,1 164,7 212,6 164,1 209,1 158,8 202,8 151,5

– Interest Expense after Tax -614,7 -629,3 -662,0 -727,3 -745,4 -799,8 -773,3 -850,7

= Interest expense -726,0 -886,3 -932,3 -1.024,3 -1.049,8 -1.126,5 -1.089,1 -1.198,1

x (1 – Tax rate) 84,7% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0% 71,0%

= Interest Expense after

Tax -614,7 -629,3 -662,0 -727,3 -745,4 -799,8 -773,3 -850,7

= Net Profit 5.628,0 5.490,5 5.592,4 5.640,6 5.867,6 6.021,6 6.183,4 6.347,5

CONDENSED BALANCE

SHEETS

2013 2014 2015 2016 2017 2018 2019 2020

Ending Net Working Capital

Operating cash 1948,16 2.193,0 2.257,6 2.342,4 2.386,2 2.455,7 2.492,3 2.554,1

+ Trade receivables 6265 5.021,4 3.863,2 4.963,4 3.796,0 4.877,5 3.707,4 4.785,3

+ Inventories 4056 4.208,2 4.235,1 4.379,4 4.381,8 4.491,5 4.475,2 4.565,3

+ Other current assets 78 562,8 1.695,0 865,3 1.886,8 1.017,2 2.003,1 1.097,5

– Trade payables 6075 8.963,6 9.080,0 9.727,7 9.789,2 10.323,2 10.362,6 10.871,5

– Other current liabilities 2206 979,2 840,1 572,8 575,1 401,5 1.266,4 223,0

= Ending Net Working Capital 4066,16 2.042,5 2.130,8 2.250,0 2.086,4 2.117,1 1.048,9 1.907,6

+ Ending Net Non-Current

Operating Assets

Non-current tangible assets 9678 9.733,4 10.073,4 11.058,7 11.405,0 12.364,7 12.721,1 13.685,1

+ Non-current intangible assets 7970 15.721,0 15.054,3 17.457,6 16.778,6 19.122,9 18.440,5 20.774,0 + Derivatives (assets net of liabilities) 0 0,0 0,0 0,0 0,0 0,0 0,0 1,0

– Deferred tax liabilities (net of assets) -2046 -1.871,1 -1.951,8 -2.244,6 -2.291,8 -2.367,3 -2.442,7 -2.682,0

– Other non-current liabilities (non-interest-bearing) 2074 1.899,6 1.829,8 1.934,4 1.260,6 1.298,0 1.867,4 1.794,6

= Ending Net Non-Current

Operating Assets 17620 25.426,0 25.249,7 28.826,4 29.214,8 32.556,9 31.737,0 35.347,5

+ Ending Investment Assets

Excess cash 4921,84 2.039,2 3.206,1 1.873,7 2.987,1 1.624,4 2.718,7 1.338,2

Minority equity investments 1030 1.398,9 1.525,8 1.627,9 1.597,9 1.688,5 1.736,0 1.789,3

+ Other Non-Operating investments 686 700,9 725,1 771,4 803,5 841,1 850,6 872,8

= Ending Investment Assets 6637,84 4.139,0 5.457,0 4.272,9 5.388,5 4.154,0 5.305,3 4.000,4

= Total Business Assets 28324 31.607,5 32.837,5 35.349,3 36.689,7 38.828,0 38.091,2 41.255,5

Ending Debt

Current debt 1736 4.897,2 5.580,0 6.259,8 6.543,3 6.856,8 6.261,8 7.427,2

+ Non-current debt 18270 18.097,9 18.610,3 20.317,3 20.695,2 22.370,0 21.995,3 23.658,5

+ Preference shares 0 0,0 0,0 0,0 0,0 0,0 0,0 1,0

= Ending Debt 20006 22.995,1 24.190,4 26.577,1 27.238,5 29.226,7 28.257,1 31.086,7

+ Ending Group Equity

Ordinary shareholders' equity 7931 7.596,0 7.453,8 7.473,9 8.052,4 8.180,3 8.378,6 8.665,5

+ Minority interests 387 1.016,2 1.193,3 1.298,3 1.398,8 1.421,0 1.455,4 1.505,3

- Net assets held for sale

0,0 0,0 0,0 0,0 0,0 0,0 1,0

= Group Equity 8318 8.612,2 8.647,1 8.772,2 9.451,2 9.601,2 9.834,1 10.169,8

= Total Capital 28324 31.607,4 32.837,5 35.349,3 36.689,7 38.828,0 38.091,2 41.256,5

Forecasted ratio

2014-12 2015-12 2016-12

2017-

12 2018-12 2019-12 2020-12

Sales 27.128 28.062 29.114 30.119 31.038 31.923 32.769

Net profit margin (ROS) 20,24% 19,93% 19,37% 19,48% 19,40% 19,37% 19,37%

× Asset turnover 0,63 0,63 0,62 0,61 0,61 0,61 0,61

= Return on assets (ROA) 12,84% 12,55% 12,02% 11,97% 11,90% 11,87% 11,86%

× Financial leverage 5,21 5,16 5,39 5,38 5,31 5,36 5,35

= Return on equity (ROE) 66,86% 64,80% 64,76% 64,40% 63,21% 63,63% 63,46%

Ratio 2014-12 2015-12 2016-12

2017-12 2018-12 2019-12 2020-12

Net operating profit margin 17,3% 16,8% 16,3% 16,3% 16,3% 16,3% 16,3%

× Net operating asset turnover 1,10 1,02 1,00 0,97 0,94 0,95 0,94

= Return on Operating Assets 19,11% 17,20% 16,25% 15,75% 15,35% 15,44% 15,26%

Return on Operating Assets 19,11% 17,20% 16,25% 15,75% 15,35% 15,44% 15,26%

x (Operating Assets/Business Assets) 0,82 0,85 0,86 0,87 0,87 0,88 0,88

+ Return on Investment Assets 3,06% 4,43% 3,37% 4,33% 3,33% 4,29% 3,26%

x (Investment Assets/Business Assets) 0,18 0,15 0,14 0,13 0,13 0,12 0,12

= Return on Business Assets 16,22% 15,30% 14,41% 14,22% 13,83% 14,07% 13,86%

Spread 19,15% 18,11% 17,28% 16,99% 16,66% 16,76% 16,72%

× Net financial leverage 2,54 2,73 2,91 2,95 2,96 2,96 2,97

= Financial leverage gain 48,64% 49,50% 50,35% 50,18% 49,38% 49,56% 49,61%

ROE = Return on Business Assets + Financial

leverage gain 64,86% 64,80% 64,76% 64,40% 63,21% 63,63% 63,46%

V. RECOMMENDATION

All in all, to deal with the unexpected future, GSK still has much to do.

They should continue good asset management by Increasing efficiency ratio, make use of

leverage

- Shorten days in inventories,

- Reduce PPE, sell off some inefficiently operating parts

- Take the best advantage of their bargaining power to increase CCC

- Save R&D expenditure by outsourcing and contract researches.

- Make use of cheap debt for lowering WACC

- Cash is liquid but costly. So keep cash as it is like right now.

But try to reduce expenses or save money by lowering PPE, R&D expenses, etc. is not the key to

solve the problem. More importantly, profit margin is the key for development. There could be

some strategy that GSK should revise or they could learn from the market

- GSK can pay more attention to consumer care products. It is proved that though it’s small

in size, it brought back for GSK about 13% of their revenue. This not only requires lower R&D

but also promotes GSK’s brand name. Most of us come to know about GSK by products like

Sensodyne, Panadol.