35705488 Company Analysis

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Company Analysis Square Pharmaceuticals Ltd.

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This report is prepared to achieve some objectives. This are-

Calculate ratios of Square Pharmaceutical Ltd. and analyze their financial situation.

Take in Square Pharmaceutical Ltd consideration and analyze that companies three years ratioanalysis and analyze them.

To have a look at investment portfolio, analysis of financial statements, riskanalysis, SWOT analysis, valuation ofSQUARE PHARMACEUTICALS LTD.

Developing & analyzing Common Size Income Statement

Determine ROA and ROE using DuPont system and analyze them.

Determine the financial weakness and strength of the company.

Determine whether investment in this company is profitable or not. If yes then Why.

The study mainly focuses on company analysis based on SQUAREPHARMACEUTICALS LTD.

Types of Data:

The report is mainly based on two types of data-

Primary dataSecondary data

Collection of Data:

Primary Sources of Data:

Interview and discussion with the officials and clients

Secondary Sources of Data:

Published documents and reports

Different books and journals

Annual Reports of the company (2007, 2008, 2009)

Printed record of the company

Objectives :

Methodology :


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This study may provide substantial benefits to the managers of any organization,

economists of any country, academician, business students, regulatory bodies, decision

makers, financial analysts and much other person having concern on insurance and

financial markets and institutions.

Every organization has their own secrecy that is not revealed to others. While collecting data

interviewing the employees, they did not disclose much information for the sake of the

confidentiality of the organization.

Another problem is that creates a lot of confusions regarding verification of data. The clients were

too busy to provide me much time for interview.

Benefits of The Study :

Limitation :


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Report Body


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Industry Analysis

With a USD 600mn industry and an average annual growth rate of 12%, the Bangladeshi

Pharmaceutical industry is the biggest (in volume) amongst all the LDCs. Primarily a generics industry

producing about 8,000 different brands which meet 97% of the domestic demand. Local companies

enjoy 86% market share. Of the 245 registered pharmaceuticals, the top ten players account for 65%

market share.

According to the WTO TRIPS agreement, LDCs are exempted from Patent Protection until 2016

allowing legal reverse engineering and sale of patented products. This provides a unique opportunity

for Bangladesh over India and China, who are under the patent regime.

Bangladesh has made significant progress in the export market. Between 2003 and 2006

pharmaceutical exports increased to about 61 countries from 51 and quadrupled in value from USD

7.9mn to USD 36.5mn. Since many companies have acquired international certifications like USFDA,

UKMHRA and TGA, Bangladesh can penetrate into regulated and unregulated markets.

Background of Square Pharmaceuticals Ltd.

In the Bangladeshi pharmaceutical industrywe have focused on SquarePharmaceuticals in our report.Square pharmaceuticals ltd. maintains a vastarray of partnerships with virtually every major company chain and mostindependent properties both domestically and internationally.

The company was founded in 1958 by Samson H. Chowdhury along with

three ofhis friends as a private firm. It went public in 1991 and is currently listed

on the Dhaka Stock Exchange. Square Pharmaceuticals Ltd., the flagshipcompany, is holding the strong leadership position in the pharmaceutical

industry of Bangladesh since 1985 and it has been continuously in the 1st

position among all national and multinational companies since 1985. Square

Pharmaceuticals Ltd. is now on its way to becoming a high performance global

player.


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Square

Pharmaceuticals

Limited is an

organizationwith equal

emphasis on

Leadership, Technology, Quality and Passion. Square Pharmaceuticals Ltd. is the

leading branded generic pharmaceutical manufacturer in Bangladesh producing

quality essential and other ethical drugs and medicines. It was established in

1958 and has been continuously in the 1st position among all national and

multinational companies since 1985. And now SQUARE Pharmaceuticals is set on

becoming a high performance global player in the field.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical

company in Bangladesh and it has been continuously in the 1st position among

all national and multinational companies since 1985. It was established in 1958

and converted into a public limited company in 1991. The sales turnover of SPL

was more than Taka 7.5 Billion (US$ 107.91 million) with about 16.92% market

share (April 2006 March 2007) having a growth rate of about 23.17%.


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Corporate History:


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MILESTONES/Chronology since Inception:

1958: Debut of Square Pharma as a Partnership Firm.

1964: Converted into a Private Limited Company.1974: Technical Collaboration with Janssen Pharmaceutica, Belgium, a

subsidiary of Johnson and Johnson International, USA.

1982: Licensing Agreement signed with F. Hoffmann-La Roche Ltd., Switzerland.

1985: Achieved first position in the Pharmaceutical Market of Bangladesh

among all national and multinational companies.

1987: Pioneer in pharmaceutical export from Bangladesh.

1991: Converted in to a Public Limited Company.

1994: Initial Public Offering of Square Pharmaceutical Shares.

1995: Chemical Division of Square Pharmaceuticals Ltd. starts production ofpharmaceutical bulk products (API).

1997: Won the National Export trophy for exporting pharmaceuticals.

1998: Agro-chemicals & Veterinary Products Division of Square Pharma starts

its operation.

2001: US FDA/UK MCA standard new Pharmaceutical factory goes into

operation built under the supervision of Bovis Lend Lease, UK.

2004: Signing of agreement with ROVIPHARM, Vietnam to manufacture and

market Square products under license in Vietnam.

2004: Secured the top position for the best published accounts and report for

2003 in the manufacturing category for transparency and excellence in corporate

reporting.

2005: New State-of- the-Art Square Cephlosporins Ltd. goes into operation; built

under the supervision of TELSTAR S.A. of Spain as per US FDA/ UK MHRA

requirements.

2007: Square Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA approval.

2008: New SVPO (Small Volume Parenteral and Ophthalmic) plant starts

operation in Dhaka Unit.


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Organogram:The Board has approved an Organogram with modern features ensuring

clear lines of delegation of authority and reporting for accountability for effective

decision making evaluation of performance on merit for both rewarding anddisciplinary action. The Organogram of Square Pharmaceuticals Ltd. is as follows:


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Company analysis

Porters 5-Forces Model:

The 5 forces approach can be used in initial diagnosis and as an aid to

strategy development. Its main value is as a thought provoking aid to help arrive

at a shared understanding of the threats and opportunities facing the firm. Whilst

it is a powerful and simple tool for analysis, it doesn't look in great detail about

the choices or the ease or difficulty in following a particular course of action.

Over the past few decades, the pharmaceutical industry has been struck by

many challenges. There have also been opportunities such as: revolutionary

developments in information technology and the emergence of market

institutions. The pharmaceutical industry includes all companies that develop

drugs to consumers.

Now we will analyze how Michael Porters five external environmental

forces affect the profitability of a pharmaceutical industry as a whole.

Figure:Porters Five Forces Model for Industry Analysis.


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Threat of New Entrants:

Threat of new entrants in the pharmaceuticals industry is very low

because of the high cost of R&D and patent limitations required to enter the

industry. Even though, the economies of scale for production may not be verysignificant, other barriers to entry are high. To develop new drugs is a very costly

and timely process that requires a lot of research and development. Along with

high R&D costs, the heavy regulation of the pharmaceutical industry is another

barrier to entry. All drugs and chemicals used need to be approved and when the

drugs are not approved, the time and money used to develop them is lost by the

firm. The standards are very strict. The established firms have large budgets to

spend on marketing to uphold their brand, just another cost necessary for a new

entrant.

Industry Rivalry:

The pharmaceuticals industry is a highly competitive and aggressive

market. With strict govt. regulations, high costs with research and highly

competitive products in the market place, companies are left frantically trying to

release the next best miracle product to stay ahead. Advantages are gained by

first mover advantage (patents).

Bargaining Power of Suppliers:

It is essential to identify the suppliers for the pharmaceuticals industry.

The suppliers could be wide variety of the providers such as the raw materials

and intermediates, the manufacturing and production plants, the overseas head

offices who supply finished products, the local co-marketing partners who supply

products or third party suppliers anywhere along the supply chain. Also labor

can be considered as a supplier to industry. All suppliers provide different levels

of threat. It is not easy for the pharmaceuticals industry to change suppliers even

when they threaten to withhold supply. Labor can also be the significant supplier

because labor holds immense power when enquiring for more compensation or

reducing quality by working fewer hours. In the pharmaceuticals industry, each

supplier holds a certain level of power to be a threat, but it is not too high. The

threat from suppliers in the pharmaceuticals industry is not considered

significantly bigger than that in other industries as long as there is no


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considerable threat from the raw material suppliers. Thus, supplier power is low

in the pharmaceuticals industry.

Bargaining Power of Buyers:

Major consumers in pharmaceuticals industry include doctors, patients,

hospitals, drug stores and pharmacists. There are several significant indicators of

the threat of buyers in the pharmaceutical industry; they include the number of

buyers, product differentiation, and product significance of a buyers final cost.

Buyers do not pose a big threat to pharmaceuticals industry, because firms spend

most of their research and development on new patent drugs.

Since the industry has many buyers, and given that competition normally

occurs among consumers, (e.g. competition among hospitals and drug stores);

the power of the buyers in terms of the number of buyers in the industry is

relatively small. Although big retail stores possess some bargaining power in the

industry, they do not pose a big threat in the pharmaceuticals industry as they do

to the other industries.

Threat of Substitutes:

Threat of substitutes is low (with patents) and medium (after patent

expiry).

Overall, the pharmaceutical industry shows an upward trend in its core

markets. The industry remains highly valued has a favorable market position

with strong financial make-up and strong earnings growth. Its future potential

demand trend is positive and despite increased competition the industry still

shows a continuing upward growth momentum.


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SWOT analysis:

The following SWOT analysis captures the main strengths and weaknesses

within the company, and describes the opportunities and threats of the company.

Strengths:Highly experienced Senior Executives some of whom has local andInternational significant pharmaceutical literature.Good reputation with high image.Efficient, skilled, experienced and dedicated staff members

Large customer Base and product development capabilities and outstandingProfessional services.

Resources are available in BangladeshSquare pharmaceutical Ltd is able to make benchmarking medicinesIncreasing presence in the marketRegulatory performance is strong and positiveEmployee mobility is lower than that of its rival .

Weakness:Non-availability of high technologyEverything is not organized.Time consuming decision making processIncorrect method for collecting resources and inventory managementLack of asset management and debt.Minimum profit in comparison with others.

Opportunities:Government SupportBanking and information technologyCredit line with well known foreign bank can gear up its foreign exchangebusiness.Entering in new arena product helps to grow customers' confidence.Opportunity to take market share away from rivals by offering newInnovative product or services.Opportunity to enter into the global market.


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Threats:Hiking price of raw materials: More and more factories, especially small ones, areFacing closure due to price hike of raw materials. As we are just entered in the

market it will be a great threat for us.

Inadequate Power supply: The industry sources also blamed lack of adequate power

Supply for making the industry more vulnerable. We have to face the same problem

Here and for this many industries are shutting down now days.

Mergers and Acquisition

Frequent Currency Devaluation

Competitors are much in pharmaceutical industries.

Competitors are offering innovative new product and services regularly.

Matching them is really hard.

Compliance with Accounting Principles:

The financial statement, prepared in accordance with the International

Accounting Standards (IAS) as adopted by The Institute of Chartered

Accountants of Bangladesh (ICAB) as Bangladesh Accounting Standards (BAS),

give a true and fair view of the state of affairs of the company and its subsidiaries

and of the results of its operations and its cash flow and comply with the

Companies Act 1994, the Securities and Exchange Rules 1987 and other

applicable laws and regulations.

The elements of financial statements have been measured on "Historical

Cost" convention in a going concern concept and on accrual basis in accordance

with generally accepted accounting principle (GAAP) and practice in Bangladesh

in compliance with the Companies Act 1994, the Securities and Exchange Rules

1987, listing regulations of Dhaka Stock Exchange Ltd. (DSE) & Chittagong Stock

Exchange Ltd. (CSE) and International Accounting Standards (IAS) as adopted by

The Institute of Chartered Accountants of Bangladesh (ICAB), as Bangladesh

Accounting Standard (BAS).


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Specific accounting policies were selected and applied by the company's

management for significant transactions and events that have a material effect

within the framework of BAS-1 ''Presentation of Financial Statements'' in

preparation and presentation financial statements. The previous years' figures

were presented according to the same accounting principles. Compared to theprevious year, there were no significant changes in the accounting and valuation

principles affecting the financial position and performance of the company.

However, changes made to the presentation are explained in the note for each

respective item. Accounting and valuation methods are disclosed for reasons of

clarity. The company classified the expenses using the function of expenses

method as per BAS-1.

Application of Bangladesh Accounting Standards (BAS):

The following BASs are applicable for the financial statements for the year

under review:

BAS - 1 Presentation of Financial Statements

BAS - 2 Inventories

BAS - 7 Cash Flow Statements

BAS - 8 Accounting Policies, Changes in Accounting Estimates and ErrorsBAS - 10 Events after the Balance Sheet Date

BAS - 12 Income Taxes

BAS - 14 Segment Reporting

BAS - 16 Properties, Plant and Equipment

BAS - 17 Leases

BAS - 18 Revenue

BAS - 19 Employee Benefits

BAS - 21 the effects of Changes in Foreign Exchange Rates

BAS - 23 Borrowing Costs

BAS - 24 Related Party Disclosures

BAS - 26 Accounting and Reporting by Retirement Benefit Plans

BAS - 27 Consolidated Financial Statements and Accounting for

Investment in Subsidiary

BAS - 28 Accounting for Investment in Associates

BAS - 33 Earnings per Share

BAS - 37 Provisions, Contingent Liabilities and Contingent Assets

BAS - 38 Intangible Assets


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What DoesDiscounted Cash Flow - DCF Mean

A valuation method used to estimate the attractiveness of an investment opportunity.

Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts

them (most often using the weighted average cost of capital) to arrive at a present value,

which is used to evaluate the potential for investment. If the value arrived at through DCF

analysis is higher than the current cost of the investment, the opportunity may be a good

one.

Calculated as:

Essentially, it's about how to create shareholder value, which is what makes companies

thrive. It shows executives and corporate finance practitioners how to value companies using

the discounted cash flow (DCF) approach and apply that information to make wiser business

and investment decisions, such as corporate portfolio strategy, acquisitions, or performance

management.


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Computation of Financial Ratios:

We divided the financial ratios into five the major categories that will help us

understand the important economic characteristics of SQUARE

PHARMACEUTICALS LTD. We focus on describing the various ratios and

computing them using the financial data of that company. The five categories are:

1. Common size statement

2. Internal liquidity (solvency)

3. Operating performance

a) Operating efficiencyb) Operating profitability

4. Risk Analysis

a) Business risk

b) Financial risk

1.Common size statement:

Common size statements normalize balance sheet and income statement

items to allow easier comparison of different size firms. A common size balance

sheet accounts as a percentage of total assets. A common size income statement

expresses all income statement items as a percentage of sales. Common size

ratios are useful to quickly compare two different size firms and to examine

trends over time within a single firm. Common size statements also give an

analyst insight into the structure of a firms financial statement that is, the

proportion of assets that are liquid, the proportion of liabilities that are short-term obligations, or the percentage of sales consumed by production costs.


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For SQUARE PHARMACEUTICALS LTD, the common size statement shows

2.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.


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Current ratio:

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

Interpretation:

These current ratios experienced a decline of 2007-08 and consistent with

the 2008-09 and 2006-07 .As always it is important to compare these values with

similar figures for the firms industry and the aggregate market. If the ratios

differ from the industry results, it is necessary to determine what might explain

it.

Quick ratio:

Some observers believe that current asset not gauges the ability of the firm to

meet current obligation because inventories and some other assets included in

current assets might not be very liquid. As an alternative, they prefer the quick

ratio, which relates current liabilities to only relatively liquid current assets as

follows:

Year Calculations CR

2008-2009 3843513/2640869 1.45

2007-2008 4411836/3500845 1.26

2006-2007 368251/2555566 1.44

Current Ratio = Current Assets / Current Liabilities


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Interpretation:

These quick ratios for square pharmaceuticals Ltd. were small, but were

fairly constant except 2008-2009. This indicates that now the company has an

ability to meet up the quick debt and liquid cash in hand.

Cash ratio:

The most conservative liquidity ratio is the cash ratio, which

relates the firms cash and short term marketable securities to its

current liabilities as follows:

Quick Ratio = {Cash and Cash Equivalents +Marketable Securities +

Account Receivables}/Current Liabilities

Years Calculations Quick Ratio

2008-2009 791,269,742/2,640,868,554 0.302007-2008 585,791,340/3,500,845,103 0.17

2006-2007 482,969,816/2,555,566,286 0.19

Cash Ratio = (Cash + Marketable Securities)/Current

Liabilities


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Interpretation:

The cash ratios of 2008-09 was better than the previous two years butquite low and it would be cause for concern except that such cash ratios are

typical for a fast-growing firm with larger inventories being financed by accounts

payable to its suppliers. In addition, The Company has strong lines of credit

available on short notice at various banks. Still, as an investor, it would to

conform how the company can justify such a low ratio and how it is able to

accomplish this.

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. One way

to do this is to calculate how often the companys turnover, which implies an

average collection period. The faster these accounts are paid, the sooner the

company gets the funds that can be used to pay off its own current liabilities.

Receivables turnover is computed as follows:

Years Calculations Cash Ratio

2008-2009 313,707,740/2,640,868,554 0.12

2007-2008 225,545,694/3,500,845,103 0.06

2006-2007 160,105,179/2,555,566,286 0.06

Receivable Turnover = Net Annual Sales/Average

Receivables


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We compute the average receivables figure form the beginning receivables

figure plus the ending value divided by two.

For 2008-2009 = 11,366,597,928/ {(477,562,002+360,245,646)/2}

= 11,366,597,928/418,903,824

= 27.13 times

For 2007-2008 = 9,565,715,902/ {(360,245,646+322,864,637)/2}

= 9,565,715,902/ 341,5551,41.5

= 28.00 times

For 2006-2007 = 8,711,034,758/ {(322,864,637+288,732,137)/2}

= 8,711,034,758/305,798,387

= 28.47 times

Given these annual receivables turnover figures, an average collection

period is as follows:

For 2008-2009 = 365/27.13 = 13.45 days

For 2007-2008 = 365/28.00 = 13.04 days

Average Receivable Collection Period = 365/Average

Receivable Turnover


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For 2006-2007 = 365/28.47 = 12.82 days

Interpretation:

These results indicate that square pharmaceutical was collected its accounts

receivables in about 13 days on average and collection period has increased

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 companys

credit policy and to comparable collection figures for other companies in the

industry.

Inventory Turnover:

Other current assets that should be examined in terms of its liquidity are

inventory based upon the companys inventory turnover and implied processing

time. Inventory turnover can be calculated relative to sales or cost of goods sold.

The preferred turnover ratio is relative to cost of goods sold because it does not

include the profit implied in sales.

For square pharmaceutical Ltd. The inventory turnover ratios as follows:

For 2008-2009 = 5,672,565,973/ {(2,098,755,231+2,026,736,322)/2}

= 5,672,565,973/2,062,745,777

= 2.75 times

For 2007-2008 = 4,856,061,933/ {(2,026,736,322+1,544,191,798)/2}

= 4,856,061,933/1,785,464,060

Inventory Turnover = Cost of Goods Sold/ Average Inventory


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= 2.72 times

For 2006-2007 = 4,268,447,662/ {(154,191,798+1,342,364,478)/2}

= 4,268,447,662/1,443,278,138

= 2.96 times

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

follows:

For 2008-2009 = 365/ 2.75 = 133 days

For 2007-2008 = 365/2.72 = 134 days

For 2006-2007 = 365/2.96 = 123 days

Interpretation:

Inventory turnover of square pharmaceuticals in 2008-09 and 2007-2008

was almost same. This seems like a good turnover figure but it is essential to

examine this figure relative to an industry norm and/or the companys prime

competition. An abnormally high inventory turnover that could mean inadequate

inventory that could lead to outages, backorders, and slow delivery to customers

.On the other hand low inventory turnover value and processing time indicate

that capital is being tied up in inventory and could signal obsolete inventory.

Average Inventory Processing Period = 365/ Average Annual Turnover


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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.

For 2008-2009 = 5,672,565,973/ {(124,222,699+100,953,258)/2}

= 5,672,565,973/112,587,978.5

= 50.38 times

For 2007-2008 = 4,856,061,933/ {(100,953,258+60,601,743)/2}

= 4,856,061,933/80,777,500.5

= 60.12 times

For 2006-2007 = 4,268,447,662/ {(60,601,743+79,390,166)/2}

= 4,268,447,662/69,995,954.5

= 60.98 times

Payable Turnover Ratio = Cost of Goods Sold/ Average Trade Payable

Payable Payment Period= 365/ Payable Turnover


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For 2008-2009 = 365/50.38 = 7 days

For 2007-2008 = 365/60.12 = 6 days

For 2006-2007 = 365/60.98 = 6 days

Therefore, the cash conversion cycle for Square Pharmaceuticals equals:

Interpretation:

Square Pharmaceuticals Ltd. has experienced stable receivables days in

2008-09 and 2007-08 but in 2006-07 it differs (32-13)=19 days. Inventoryprocessing days were almost same in 2008-09 and 2007-08 but in 2006-07 it

differs (134-123) =21 days and the payable payment period were almost same in

three fiscal years. Overall the result has been a small decrease in 2008-2009

compared to 2007-08 in its cash conversion cycle but it differs quietly in 2006-07

fiscal as (139-129) =10 days.

Year Receivable

Days

Inventory

Processing

days

Payable

Payment

Period (days)

Cash

Conversion

Cycle (days)

2008-2009 13 133 7 139

2007-2008 13 134 6 141

2006-2007 32 123 6 129

Cash Conversion Cycle = Receivable Days + Inventory Processing Days - Payable

Payment Period


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Evaluating operating Performance:

The ratios that indicate how well the management is operating the business

can be divided into two subcategories:

1) Operating efficiency ratios

2) Operating profitability ratios.

1)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 firms use

of its total assets base (net assets equal gross assets minus depreciation on fixed

assets). It is compute as follows:

For 2008-2009 = 9,820,796,568/ {(13,251,242,856+2,703,127,420)/2}

= 9,820,796,568/7,977,185,135 = 1.23 times

For 2007-2008 = 8,257,843,739/ {(12,703,127,420+10,486,940,004)/2}

= 8,257,843,739/11,595,033,710 = 0.71 times

For 2006-2007 = 7,500,811,349/ {(10,486,940,004+9,298,987,312)/2}

= 7,500,811,349/9,892,963,656 = 0.75 times

Total Asset Turnover = Net Sales/Average Total Assets


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Interpretation:

Square Pharmaceuticals Ltd. has experienced a quite good total assets

turnover in 2008-09 which is 1.23 times compared to other two fiscal years. So

we can say that the effectiveness the firms uses the total assets increase (1.23-0.71) =0.52 times than the previous fiscal year.

Net Fixed Asset Turnover:

The net fixed assets turnover ratio reflects the firms utilization of fixed

assets. It is computed as follows:

Calculation of fixed assets- 2008-2009:

For 2008-2009 = 9,820,796,568/ {(4,088,432,171+4,899,679,832)/2}

= 2.19 times

Net Fixed Asset Turnover = Net Sales/Average Net Fixed Assets


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For 2007-2008 = 8, 257, 843, 739/ {(4,088,432,171+3,531,003,509)/2}

= 2.17 times


For 2006-2007 = 7,500,811,349/ {(2,273,761,161+3,531,003,509)/2}

= 2.58 times

Interpretation:

Square Pharmaceuticals Ltd. Net fixed assets turnover ratios, which

indicate a decline trend in 2007-2008 and in 2008-2009 compared to the 2006-2007 fiscal. An abnormally low turnover implies capital tied up in excessive fixed


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assets, which an abnormally high turnover ratio can indicate a lack of productive

capacity to meet sales demand or it might imply the use of old, fully depreciated

equipment that may be obsolete.

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:

For 2008-2009 = 9,820,796,568/ {(9,949,397,634+8,417,040,705)/2}

= 9,820,796,568/9,183,219,170 = 1.06 times

For 2007-2008 = 8,257,843,739/ {(8,417,040,705+7,333,257,612)/2}

= 8,257,843,739 / 7,875,149,159 = 1.04 times

For 2006-2007 = 7,500,811,349/ {(7,333,257,612+6,402,014,772)/2}

= 7,500,811,349 / 3,986,736,192 = 1.88 times

Interpretation:

Square Pharmaceuticals Ltd has experienced a small decline in this ratio

during the past several years. In our later analysis of sustainable growth, we

Equity Turnover = Net Sales/Average Equity


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examine the variables that affect the equity turnover ratio to understand what

caused any changes.

Following an analysis of companys record of operating efficiency based upon

its ability to generate sales from its assets and capital, the next step is to examineits profitability in relation to sales and capital.

2)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:

Gross profit equals net sales minus the cost of goods sold. The gross profit

margin is computed as:

For 2008-2009 = 4,148,230,595/9,820,796,568

= 42.23%

For 2007-2008 = 3,401,781,806/8,257,843,739

= 41.19%

For 2006-2007 = 3,232,363,687/ 7,500,811,349

= 43.09%

Gross Profit Margin = Gross Profit/Net Sales


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Interpretation:

This ratio indicates the basic cost structure of the firm. An analysis of this

ratio over time relative a comparable industry figure shows the companys cost

price position. Square Pharmaceuticals Ltd has experienced quite stability in thismargin during the last several years. As always, it is important to compare these

margin and any change with the industry and strong competitor. Notably, this

margin can be impacted by a change in the companys product mix toward higher

or lower profit margin items.

Operating Profit Margin:

Operating profit is gross profit minus sales, general, and administrative

(SG&A) expenses. The operating profit margin is computed as:

For 2008-2009 = 2,368,437,227/9,820,796,568

= 24.11%

For 2007-2008 = 1,709,305,818/8,257,843,739

= 20.70%

For 2006-2007 = 1,825,752,239/7,500,811,349

= 24.34%

Operating Profit Margin = Operating Profit/Net Sales


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Interpretation:

The variability of the operating profit margin over time is a prime indicator

of the business risk. Square Pharmaceuticals Ltd has experienced a constant

operating profit

Margin in 2008-09 and 2006-07 but in 2007-08 it has decreased about 4.00%. It

is clearly shows that the companys ability to control its SG&S expense as it has

experienced strong sales growth.

Net Profit Margin:

This margin relates net income to sales. In the case of SquarePharmaceuticals Ltd, this is the same as operating income after taxes because the

company does not have any significant non operating adjustments. The net

income used is earnings after taxes but before dividends on preferred and

common stock. This margin is computed as follows:

For 2008-2009 = 1,890,052,929/9,820,796,568

= 19.25%

For 2007-2008 = 1,381,863,093/8,257,843,739

= 16.73%

For 2006-2007 =1,303,242,840/7,500,811,349

= 17.37%

Net Profit Margin = Net Income /Net Sales


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Interpretation:

Square Pharmaceuticals Ltd has experienced an increasing trend in net

profit margin. In 2008-09 fiscal year net profit margin is very high than the

previous fiscal year. This analysis has computed based on sales and earningsfrom continuing operation because our analysis seeks to derive insights about

future expectation.

Return on Owners Equity:

The return on owners equity (ROE) ratio extremely important to owner of

the enterprise( the common stockholder) 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.

For 2008-2009 = 1,890,052,929/ {(8,417,040,705+ 9,949,397,634)/2}

= 20.58%

For 2007-2008 = 1,381,863,093/ {(7,333,257,612+8,417,040,705)/2}

= 17.55%

For 2006-2007 =1,303,242,840/ {(6,402,014,772+7,333,257,612)/2}

= 18.98%

Return on Owners Equity = Net income/Average Total Equity


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Interpretation:

From the calculation we can see that Square Pharmaceuticals Ltd has

experienced an increase of 3.03% in 2008-09 compared to the 2007-08 fiscal

year. And decrease 1.43% in 2007-08 compared to 2006-07 fiscal year.

Risk analysis:

Risk analysis examines the uncertainty of income flows for the total firm and for the

individual sources of capital (that is debt, preferred stock, and common stock). This involves

examining the major factors that cause a firms income flow to vary. More volatile income

flows mean greater risk (uncertainty) facing the investor. The total risk of the firm has twointernal components:

a) Business risk

b) Financial risk

a)Business risk:

Business risk is the uncertainty of income caused by the firms industry. In turn, thisuncertainty is due to the firms variability of sales caused by its products, customers, and

the way it produces its product. Specifically, a firms operating earnings vary over time

because its sales and production costs vary.

Business risk generally measured by the variability of the firms operating income over

time. In turn, the earnings variability measures by the standard deviation of the historical

operating earnings series. The standard deviation of operating earnings divided by the

average operating earnings is the coefficient of variation (CV) of operating earnings:

Business Risk = f (Coefficient of variation of operating earnings)

Standard deviation of operating earnings (OE)

= --------------------------------------------------------------------------------------

Mean operating leverage


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Square Pharmaceuticals: Risk Analysis

Business Risk Analysis:

Business risk related to the inability of the firm to hold its competitive position and maintain

stability and growth in earnings. Here earning variability is low that is less risky but sales

variability is high that is highly risk.

Standard deviation ofEBIT/ sales

CV = ------------------------------------------------------

Mean of EBIT/ sales

Earning variability Sales Variability

SD of EBIT 460.47 SD of Sales 633.23

Mean of EBIT 2046.18 Mean of Sales 4706.48

CV 0.23 CV 0.13

Financial Risk:

The uncertainty of future incomes due to the companys financing.

Debt to total capital ratio:

2007 2008 2009

Long term debt 492,569,379 602,584,615 449,757,608

Total capital 7,333,257,612 8,417,040,705 9,949,397,634

6.72% 7.16% 4.52%

Debt to total Capital: Debt to total capital ratio decrease up to year 2008 after that it

decreases.


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Time interest earned ratio:

A coverage ratio computed by dividing earnings before interest and tax (EBIT) by interest

charges; measures the ability of the firm to meet its annual interest payment. From year

2006 to 2008 the ratio decreases.

Financial Leverage 2007 2008 2009

% change in EPS .117866639 .060312885 .367694592

% change in EBIT .155389823 .068124977 .385613505

The Decomposition of ROE (DuPont System):

DuPont analysis (also known as the DuPont identity, DuPont Model or the DuPont

method) is an expression which breaks ROE (Return on Equity) into five parts. The name

comes from the DuPont Corporation that started using this formula in the 1920s.

One of the more useful measures of the financial performance of a company is the

DuPont Equation. To understand the factors affecting a firms ROE including its

trend and its performance relative to competitors, analysts often decompose

ROE into a product of a series of ratios. This model allows the stock analyst, as

well as the investor, to examine the profitability of a company using information

from both the income statement as well as the balance sheet.

Calculation of DuPont system in 2008-2009:

ROE = Net Income / Common Equity

= (Net profit pretax profits) (Pretax profits EBIT) (EBIT Sales) (Sales Assets) (Assets Equity)

= Tax burden Interest burden Margin on sales Asset Turnover Equity Multiplier or Financial Leverage
http://en.wikipedia.org/wiki/Return_On_Equityhttp://en.wikipedia.org/wiki/Return_On_Equity


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Tax burden:

The ratio of net income after tax to pretax profit is the tax burden ratio. Its

value reflects both the government tax and the policies pursued by the firm in

trying to minimize its tax burden. It is calculated as follows:

Tax burden = Net profit pretax profits

For 2008-09 = 1,890,052,929/2,511,259,217

= 0.75

Interest burden:

The ratio of pretax profits to EBIT is the interest burden. The companys pretax

profits will be greatest when there is no interest payment to be made to debt holders. It

is calculated as follows:

Interest burden = Pretax profits EBIT

For 2008-09 = 2,511,259,218/2,368,437,227

=1.06

Margin on sales:

This margin means the firms operating margin or return on sales. Profit

margin shows operating per tk. of sales. It is calculated as follows:

Margin= EBIT SalesFor 2008-09 =2,368,437,227/9,820,796,568

= 0.24

Assets Turnover:

The ratios of sales to total assets, is known as total asset turnover (ATO). It

indicates the efficiency of firms use of assets in the sense that it measures the

annual sales generated by each tk. of assets. It is calculated as follows:


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Assets Turnover =Sales Assets

For 2008-09 =9,820,796,568/13,251,242,856

= 0.74 times

Equity Multiplier or Financial Leverage:

The ratio of assets to equity is a measure of firms degree of financial

leverage. This financial leverage is also referred to as the equity multiplier

whereby the two ratios margin on sales and total assets turnover equal return on

total assets (ROTA) and ROTA times the financial leverage multiplier equals ROE.

It is calculated as follows:

Equity Multiplier or Financial Leverage =Assets Equity

For 2008-09 =13,251,242,856/9,949,397,634

=1.33

The operating financial results of the Company for the year 2008-2009 as

compared to previous year are summarized here under:

It may be observed that the Gross Turnover increased by 18.51% during the

year as against 9.81% in the previous year. The growth in gross profit had

positive impact on net profit. The Earning per Share of Tk. 156.56 is based onincreased outstanding 12,072,240 shares of Tk. 100 each. However, if the original


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issued capital at the time of IPO is considered, the EPS would stand at Tk. 945.03

in 2008-2009 as against Tk. 690.93 in 2007-2008.

Calculation of DuPont system in 2007-2008:

Tax burden:

Tax burden = Net profit pretax profits

For 2007-08 = 1,381,863,093/1,868,634,190

= 0.74

Interest burden:

Interest burden = Pretax profits EBIT

For 2007-08 =1,868,634,190/1,709,305,818

=1.09

Margin on sales:

Margin= EBIT Sales

For 2007-08 =1,709,305,818/ 8,257,843,739

= 0.21

Assets Turnover:

Assets Turnover =Sales Assets

For 2007-08 =8,257,843,739/12,703,127,420

= 0.65 times

Equity Multiplier or Financial Leverage:


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Equity Multiplier or Financial Leverage =Assets Equity

For 2007-08 =12,703,127,420/8,417,040,705

=1.51

The operating financial results of the Company for the year 2007-2008 as

compared to previous year are summarized here under:

It may be observed that the Gross Turnover increased by 9.81% during

the year under review over the previous year of 22.94% and the Gross Profit

increased by 5.24% during the current year as against 26.04% in the previous

year. The slower growth in gross profit was due to higher rate of increase in cost

of raw materials, packing materials & factory overhead with negative impact on

gross profit.

Cost of power and laboratory consumables increased at over 30% which

increased overhead. Operating & financial expenses also increased. Net profit

margin slightly declined over previous year due to increase in interest and

administrative expenses, and provision for corporate taxes and deferred taxes.

The Earning per Share of Tk. 154.23 is based on increased outstanding 8,942,400

shares of Tk. 100 ach. However, if the original issued capital for cash at the time


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of IPO is considered, the EPS would stand at Tk. 690.93 in 2007-2008 as against

Tk. 651.62 in 2006-2007.


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Chapter 3Conclusion


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Findings:

Square Pharmaceuticals Limited (SPL) is leading the Pharmaceuticals sector from the very

beginning. DPL grow as pharmaceutical industry matured and yet today it is one of the

fastest growing sectors of the country with a growth rate close to 15%.

The positives that differentiate are the market leader; it controls approximately 20% of the

market share.

Second, the company is about to enter the European market by next year.

Third it has a large and diversified portfolio of investment and businesses that gives it very

sustainable earnings. Strong brand image, a large distribution network, large product

portfolio and creative marketing make us optimistic about the future potential of the

company.

The pharmaceuticals market is an Oligopoly in nature despite the presence of more than 250

companies. The top 15 players control around 73% of the market share.

Though the sector is reaching maturity as indicated by the stable sales growth for last few

years. However, new opportunities of export are opening up and 3 year CAGR of revenue

was 15%.

Their DDM model gives us a fair value of BDT4925 for December 2009 whereas their PE

based relative valuation technique gives us BDT3971 for the same period.

On the other hand when they value SPL by using the sum of the parts, we arrive at a value of

BDT6332 for December 2009. Considering the assumption and market perception they back

the DDM approach and their bet is that SPL stock will reach a price of 4 ,925 by December

2009.


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Conclusion

This report has two identical parts. In the first part we have calculated three years ratio

Of Square pharma annual report of financial year 2007-2009. We have calculated their

ratios and shown DuPont analysis. Analyzing companies performance compare to the

square pharmaceutical company also measured in this part of the report.

In the liquidity ratio we can see that both current ratio and quick ratio improved over time

marginally. The situation was almost stable.

Inventory turnover, Total Asset Turnover, Fixed Asset Turnover all had been relatively stable

throughout the three years. Average Collection period is also very good. The only problem

here is the Average collection period which is way high. However, such a situation is actuallypretty much normal for big companies.

Here Debt ratio has improved over time and TIE has remained pretty much stable.

Apart from Gross Profit Ratio, most of the Profitability ratios have actually decreased in

2005-06. Although the decrease rate is very minimal still it is a problem for Square and they

need to try to improve these ratios.

Both P/E ratio and M/B ratio declined in the year 2005-06. But this happened mostly not

because of the companys failure but for the fact that the whole market was not so friendly

for investment in that year.

From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been doing pretty

good throughout the years. It is true that last year there return did decline but it is still pretty much

satisfactory. Therefore, we can conclude that Square Pharmaceuticals Ltd. is a good enough

company to invest on.


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Recommendations

After completing our study, we found some problems that should be kept in

control. Recommendations are suggested on the basis of problems.

Following troubles found in analysis:

Management should emphasis to reduce the differences between Average

collection Period and average payment period. It will result liquidity of the

company.

Management should try to boost up its quick and current rations & the

earnings per share.

Company should reduce its dependency on debt because it is very risky.

Management can increase their profit before tax if they if they can cut the

financial cost and use less debt capital.

Continue to seek intellectual property rights protection in developing

nations. Protecting the pharmaceutical property rights will eliminate

copy-cat drugs and lost profits in those countries.

Given the increase in life expectancy, continue to pursue research in

pharmaceutical products, which enhance the quality of life for the aging

population.

Global awareness of pharmaceutical benefits will produce opportunities

for the pharmaceutical industry to expand.


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References

Dewan MostafizurRahman

Lecturer

Department of Finance

Faculty of Business Studies

University of Dhaka

Square Pharmaceuticals Limited

Square Centre,

48, Mohakhali C/A,

Dhaka1212

http://www.squarepharma.com.bd/

http://www.yahoo.com/

http://www.google.com/

http://en.wikipedia.org/wiki/

http://www.banglapedia.org/
http://www.yahoo.com/http://www.yahoo.com/http://www.google.com/http://www.google.com/http://en.wikipedia.org/wiki/http://en.wikipedia.org/wiki/http://www.google.com/http://www.yahoo.com/

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