Finance Renata 09

BUS 635.1: Managerial Finance

Term paperOn

Rationalization of Stock Price through Financial Analysis

“A Case on Renata Limited”

Prepared forPrepared for

Dr. M. Masud Rahman

Course InstructorMBA Program

School of BusinessSchool of Business

North South UniversitySpring 2010

Prepared by

Group 2

No. Student ID Name1. 093-0345-460 Sabrina Mahzabin2. 093-0272-460 Md. Ashiqur Rahman3. 093-0273-460 Ahmed Rezwan Asif

Date of Submission

April 10, 2010

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April 10, 2010

ToDr. M. Masud RahmanProfessor North South UniversityMBA Program

Subject: Submission of the Group Term Paper

Dear Professor Rahman,

We are pleased to submit the group term paper: “Rationalization of Stock Price through Financial Analysis: A Case Renata Limited” that you have asked us to prepare in an effort to better understand different Financial Analysis techniques. The topic shall enable us to comprehend how Market value of the stock of any company is a more reliable indicator of that company’s performance rather than the book value.

We hope this case study on a specific company; in this case Renata Limited shall be accepted by you as our group term paper.

We greatly value the opportunity you gave us.

Sincerely,

Sabrina Mahzabin (ID: 093-0345-460) -------------------------------

Md. Ashiqur Rahman (ID: 093-0272-460) -------------------------------

Ahmed Rezwan Asif (ID: 093-0273-460) -------------------------------

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Table of Contents

Chapter One: (Introduction and Methodology)

1.1 Introduction and Overview of Renata Limited 06-071.2 Difference between book value and market value 071.3 Objective of the Report 071.4 Methodology 081.5 Nature & Sources of Data 081.6 Period of Data 08-091.7 Nature of Analysis 091.8 Standard of comparison 091.9 Limitations of the Study 09

Chapter Two: (Analysis and Interpretation of Balance Sheet)

2.1 Analysis of Balance Sheet 11-17

Chapter: Three (Cash Flow Analysis)

3.1 Analysis of Cash Flow and Interpretation 19-21

Chapter Four: (Ratio Analysis)

4.1 Liquidity Ratios 24-26

4.1.1 Current Ratio 244.1.2 Quick Ratio 25-26

4.2 Asset Management Ratios 26-30

4.2.1 Inventory Turnover Ratio 26-274.2.2 Days Sales Outstanding 27-284.2.3 Fixed Asset Turnover 28-294.2.4 Total Asset Turnover 29-30

4.3 Debt Management Ratios 30-32

4.3.1 Debt Ratio 30-314.3.2 Times Interest Earned (TIE) 31-32

4.4 Profitability Ratios 32-38

4.4.1 Net Profit Margin on Sales 32-344.4.2 Total Asset Turnover 34-354.4.3 Return on Asset (ROA) 35-36

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4.4.4 Financial Leverage 36-374.4.5 Return on Equity (ROE) 37-38

4.5 Market value Ratios 38-41

4.4.1 Price/Earning (P/E) Ratio 39-4.5.2 Market/Book Value (M/B) Ratio 40-41

5.0 Chapter Five: (Findings and Conclusion)

5.1 Overall Findings 43-445.2 Conclusion 44

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Chapter One: Introduction & Methodology

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1.1 Introduction and Overview of Renata Limited

The purpose of this report is to find out the discrepancy between book value and market

value of per share of Renata Ltd. For this reason we need to analyze financial statements. This

involves a thorough understanding of all the ins and outs of financial statements. Analysis of

financial statements basically involves finding different significant ratios such as liquidity ratios,

asset management ratios, debt management ratios, profitability ratios, and market value ratios.

These ratios indicate the company performance in respect to the industry or rival firms. These

ratios also indicate the trend of the company’s financial activities. Here in our project we are

using Square Pharmaceuticals Ltd. as a rival company to compare with Renata Ltd. To take

financial decisions analyzing financial statements is very important for a financial manager.

Moreover, it is also important to make reasoning for what makes book value differ from market

value of shares.

In this report we have studied the financial statements of two giant pharmaceuticals

companies from 2004 to 2008. Based on these 5 years analysis we have made analysis and

interpreted our findings.

Renata Ltd. - An Overview

The Company started its operations as Pfizer (Bangladesh) Limited in 1972. For the next

two decades it continued as a highly successful subsidiary of Pfizer Corporation. However,

by the late 1990s the focus of Pfizer had shifted from formulations to research. In accordance

with this transformation, Pfizer divested its interests in many countries, including Bangladesh.

Specifically, in 1993 Pfizer transferred the ownership of its Bangladesh operations to local

shareholders, and the name of the company was changed to Renata Limited The Company is in

the business of manufacturing, marketing and distribution of Pharmaceuticals, animal health

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medicines, nutritionals and vaccines. Medicines and health care Products Regulatory Agency,

UK has issued a certificate of GMP compliance of a manufacturer to Renata Limited for its

potent products facility at section 7, Mirpur, Dhaka for a period of 3 years from 4th May 2007.

Its manufacturing plant received ISO-9001 in 1999 for the general facility.

Renata Ltd. - Mission

“To provide maximum value to our customers, shareholders, colleagues, and communities

where we live and work.”

1.2 Nature of performance regard to the difference between book value

and market value

The market value or stock price per share of Renata Pharmaceuticals Ltd. is BDT

7789.25, almost 5 times higher than the book value per share of BDT 1436.80 as of December

31, 2008. So, this is good news for Renata Pharmaceuticals Ltd. Market value is determined on

the basis demand and supply, in contrary book value is the result of Company policy. Thus,

market value depends upon the expectations of buyers and sellers and book value depends on the

maintaining of inventories, creditors and accruals etc.

1.3 Objective of the Report

Identifying the discrepancy between the market value and book value of the share of

Renata Ltd. and then preparing a new balance sheet eliminating the difference.

Finding out the reasons behind the discrepancy of the market value and book value of the

share of Renata Ltd.

Forming an overall understating about the financial condition of the company over last

five years.

Analyzing the ratios of the selected company and the rival company based on financial

statements.

To make forecast on the basis of the trend in different ratios.

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To learn the methods of evaluating and rationalizing the financial aspects of the

company.

1.4 Methodology

We initiated our research through the gathering information about Renata Ltd. and

Square pharmaceuticals Ltd. We have collected secondary data from the balance sheet and

income statement of annual reports of 2004 to 2008. We have collected the company’s annual

reports from the Dhaka Stock Exchange’s library in soft version. We also have collected hard

copy of annual report, 2008 of Renata Ltd. from Dhaka Stock Exchange.

As we said earlier, we considered the last 5 season’s “Annual Reports” of both the

companies. The annual reports of 2004, 2005, 2006, 2007 and 2008 of Renata Ltd. were taken

into consideration for analysis whereas annual reports of 2003-2004,2004-2005,2005-2006,

2006-2007 and 2007-2008 of Square pharmaceuticals Ltd. were incorporated for making cross

sectional analysis.

1.5 Nature and Sources of Data

For the report we have only considered the secondary sources of data. We did not go for

any primary data. Our secondary sources mainly include the last 5 years “Annual Reports” of

both Renata Ltd. and Square Pharmaceuticals Ltd. which had been collected from the Dhaka

Stock Exchange. We also have collected monthly price data of shares of the companies from

Dhaka Stock Exchange We also took some data from Dhaka Stock Exchange’s website:

www.dsebd.org . Moreover, we also took data from Sqaure Pharmaceuticals Ltd And Renata

Limited web site.

1.6 Period of Data:

For this term paper we considered the last 5 season’s “Annual Reports” of both the

companies. The annual reports of 2004, 2005, 2006, 2007 and 2008 of Renata Ltd. and annual

reports of 2003-2004, 2004-2005, 2005-2006, 2006-2007 and 2007-2008 of Square

pharmaceuticals Ltd. were taken for analysis. The accounting period of Renata Ltd. starts on

January1 and ends at December 31 and the accounting period of Square Pharmaceuticals Ltd

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http://www.dsebd.org/

starts on April 1 and ends at March 31. We have taken the last 5 years data for our analysis

because through 5 years is a good length of period from which the financial trend of the

company can be understood. Actually, the more it can be the better it is but as we had time

limitation, we concentrated in this 5 years period which is also good enough to understand

company’s overall financial condition.

1.7 Nature of Analysis

For our analysis, we mainly focused on “Cross Sectional Study” to compare between the

two rival firms. We mainly relied on “Ratio Analysis”, “Cash Flow Statement Analysis”,

“Balance Sheet and Income Statement Analysis” which helped us to identify any specific trends

or fluctuations occurred during the periods taken into consideration for analysis.

1.8 Standard of Comparison

For the comparison with Renata Ltd we have taken Square Pharmaceuticals Ltd as rival

company for our analysis. We have chosen Square pharmaceutical Ltd as a rival firm because it

is one of the most competitive firms among the listing companies.

1.9 Limitations of the Study

As we were only 3 members working on this project, we found it very difficult to

accomplish the whole report in a very limited time.

Another limitation was collecting the industry averages for the ratio analysis. No such data

are readily available in context of Bangladesh. So, instead of the industry average data we

have to take the best available rival data.

The paper focuses on comparisons with only a single rival firm.

Because of time constraints we had to limit our analysis within the last 5 years of data.

In the financial statements of both the companies some information was not present.

Moreover many companies practice unethical accounting practices to get rid of tax that may

be different from the actual scenario. Also many times, these companies manipulate

financial statements to make their performance much more lucrative to the shareholders.

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Such practice if had taken place might have diluted our findings which are based on the

information available in the “Annual Reports”.

Chapter Two: Analysis and Interpretation

Of Balance Sheet

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2.1 Analysis of Balance Sheet

To conduct the analysis of balance sheets from year 2004 to 2008, we first made a

comparison of book values and market values. The following chart will represent the

discrepancy of Renata’s market value and book value over the period of 2004 to 2008.

From the chart we can see that, the market price of the share were greater than the book

values in the year 2004 to 2008. While preparing the new balance sheet based on the market

price we found that the Property, plant and Equipment (Fixed Asset) were underestimated and

some portion of others payable (debt) were overestimated. We have found some probable

reasons behind this which are given below:

Firstly, fixed asset (Property, plant and Equipment) is underestimated by Renata Limited,

because every year the value of the property, plant is increases. So here the value should

be increased.

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Secondly, the others payable factor is underestimated by the Renata Limited, because

they already established a very good network with the supply chain network, so their

liability will not be that much higher. That’s why we say that their Liability value should

be decreased.

Table: Balance Sheet based on Book value of the year 2004Balance Sheet Based on Book Value 2004

Assets Amount (Tk.) Liabilities Amount (Tk.)

Current Assets 573416439 Debt 467883564

Fixed Assets 476308575 Shareholder’s Equity 581840450

Total Assets 1049725014 Total Liabilities 1049725014

Table: Proposed Balance Sheet based on Market price of the year 2004Balance Sheet Based on Market Value 2004





We know that market price is greater than book value per share of Renata Limited in year 2004.

So we have prepared a new balanced sheet based on the market price of the year 2004.

Following are the probable reasons that we have found:

Undervaluation of Fixed Assets: The fixed assets have been undervalued because of

underestimated price calculation of the land price. The land price at Mirpur and

Rajendrapur is increasing swiftly nowadays. So the value may have been underestimated

at the time of calculation. So for 2004 the fixed asset will be 1669802905

Overvaluation of Debt: The others payable factor what we see in the balance sheet is so

high. It is over valuated. They have a very good relation with the distribution network

from the early days. A portion of its payable part has been minimized because of their

existing relationship with the supply chain network. So for the year 2004, the proposed

debt is 458054544.

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at the time of calculation.So for 2005 the fixed asset will be 1822818490





debt is 486862767.

13





















existing relationship with the supply chain network. So the proposed debt is 760019713.

14






















debt is 815807837.

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Total Assets 3162,232,934 Total Liabilities 3162,232,934

















debt is 1460208158.

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Overall Comments:

If we see the graph of market value and book value then we can easily understand that how good

Renata Limited is in the market price. It is gradually increases and from the 2007 it’s just double

then the previous year. That means that the trust of the investors is very high for the company.

They fell secure to invest in the company. If the fixed asset is increases and the debt are

decreases based on the market price then we are going to see that the real balance sheet, which

will be more realistic for the company and the investors.

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CHAPTER – 03

Cash Flow Analysis

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3.1Analysis of Cash Flow and InterpretationCash flow mainly refers to the inflows and outflows of cash for a company. The cash flow

analysis provides insights about how the firm’s operations have affected the cash position and

this analysis is done by examining the investment (uses of cash) and financing (sources of cash)

decision of the firm. For most businesses, the inflow and outflow of cash do not happen at an

equal rate. That’s why it is an important analysis, especially for businesses that are cyclical in

nature or subject to external forces.

After analyzing the cash flow statements of Renata Ltd. from the years 2004 to 2008, we

found some facts of the cash dealings of the company. For the purpose of discussion, we have

divided this analysis into three parts based on different types of activities considered to prepare

the cash flow statement. These parts are described below briefly.

Changes in Cash Flow from Operating Activities:

This section shows how much cash came into the company and how much cash went out of

the company during the normal course of business.

Comments: From the chart we can see that, in the year 2004 there was more cash inflow than

outflow from operating activities. Actually this was a common scenario for all five years. In year

2005, the amount of inflow was higher. But, it sharply decreased in year 2006. Reason may be

increase various operational expenses. There was a dramatic increase in the amount of cash

inflow in year 2007. That indicates past investment worked out. Again, the cash inflow of year

2008 was lower than year 2007.

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Changes in Cash Flow from Investing Activities:

This section shows that how much cash came into the company and how much cash went

out of the company from its investment activities during the time.

Comments: This chart shows completely different scenario from previous chart. There was

more cash outflow than inflow from investing activities started from year 2004 and the amount

of outflow gradually increased through out all five years. Infact, comparing year 2004 and year

2008, the change was massive. This indicates company’s tendency of heavy investment such as

acquisition of property, plant, equipment etc.

Changes in Cash Flow from Financing Activities:This section shows that how much cash came into the company and how much cash went

out of the company from its financing activities during the time.

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Comments: This chart shows rather interesting scenarios. From year 2004 to 2007 there was

more cash outflow than inflow from financing activities. This indicates that huge cash was spent

for financing activities like to pay dividends and to pay short term borrowings. But in year 2008

the scenario completely changed as there was large amount of cash inflow than outflow from

financing activities. This means the company built its cash base by paying little dividend, by

retaining more earnings and by taking more long term debts.

Changes in Net Cash Inflow or Outflow:This section shows that how much net cash came into the company and how much net cash

went out of the company during the time.

Comments: This chart shows the net cash inflow or outflow during the period. In year 2004,

2006 and 2007 there were net cash outflows for the company. This may indicates heavy

investment in fixed asset consumption. On the other hand, there were cash inflows in year 2005

and year 2008 which indicate that, previous investments worked out and also company managed

their inventory system well which may got pilled in previous years.

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CHAPTER – 04

Ratio Analysis

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4. Ratio Analysis

To evaluate a firm’s financial condition and performance, the financial analyst usually performs

analyses on various aspects to find out the financial health of the firm; among which ratio

analysis is one of the most important and commonly used methods. Ratio analysis is a tool

frequently used during the analysis to relate two pieces of financial data by dividing one quality

by the other. In this study various ratio analyses will be done to understand the financial

condition of the company and to compare this condition with its rival firm to get a clear picture.

The analysis of financial ratios involves two types of comparison:

First, the analyst compares a present ratio with past and expected future ratios for the

same company. The current ratio (the ratio of current assets to current liabilities) for the

present year could be compared with the current ratio for the previous year-end. When

financial ratios are arranged over a period of years, the analyst can study the composition

of change and determine whether there has been an improvement or deterioration in the

firm’s financial condition and performance over time.

The second method of comparison involves comparing the ratios of one with those of

similar rivalry firms or with industry averages at the same point in time. Such a

comparison gives insight into the relative financial condition and performance of the

firm. It also helps us identify any significant deviation from any applicable industry

average (or standard).

Here we will discuss and calculate different types of ratios. Then we will compare the ratios of

Renata Pharmaceuticals Ltd with Square Pharmaceuticals Ltd. The reason for doing this is

that the industry average is not available in perspective of Bangladesh.

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4.1 Liquidity Ratio:

Ratios that show the relationship of a firm’s cash and other current assets to its current

liabilities are known as liquidity ratios. Different types of liquidity ratios are discussed below.

4.1.1 Current Ratio:The ratio that relates current assets to current liabilities is the current ratio. The current

ratio indicates the ability of a company to pay its current liabilities from current assets and

shows the strength of the company’s working capital position.

The ratio is calculated as follows:

Current Ratio = Current Assets / Current Liabilities

Table: Current Ratios of Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s current ratio increased in year 2005 than 2004.

Then it started to decrease from 2006 to 2008. However, comparing to the ratio of Square, in

year 2004, 2005 and 2006, it gradually increased. But then it decreased in 2007 and 2008. None

of the companies have touched the benchmark of 2. The poor ratio of Renata from 2006 to 2008

may be attributed to the increased liabilities thus increased investment during the year.

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Company 2004 2005 2006 2007 2008

Renata 1.60 1.61 1.49 1.38 1.15

Square 1.62 1.66 1.78 1.44 1.26

4.1.2 Quick Ratio:

Inventories typically are the least liquid of a firm’s current assets – they are the assets on

which losses are most likely to occur in the event of liquidation. Therefore, it is important to

measure the firm’s ability to pay off short term obligations without having to rely on the sale of

inventories. This is why quick ratio is used.

Quick ratio= (Current Assets- Inventories)/ Current Liabilities

Table: Quick Ratios of Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s quick ratio increased in year 2005 than 2004.

Then it started to decrease from 2006 to 2008. However, comparing to the ratio of Square, in

year 2004, 2005 and 2006, it gradually increased. But then it decreased in 2007 and 2008. In this

period, Renata didn’t touch the benchmark of 1. In year 2004, square almost touched the

benchmark and in year 2005 and 2006, it was above the benchmark. But, in 2007 and 2008 it

came below the benchmark. Now, Renata’s quick ratio indicates increased amount of

inventories which may result in increase amount of output.

Overall, both renata’s current ratio and quick ratio was decreasing from year 2006 to 2008.

This indicates less cash holdings of the company. Also there may be increased current liability

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Company 2004 2005 2006 2007 2008

Renata 0.59 0.68 0.52 0.45 0.42

Square 0.98 1.08 1.19 0.84 0.68

and inventory. These will ultimately result in further investment and higher degree of output.

That may contribute for higher profit.

4.2 Asset Management Ratio

A set of ratios that measure how effectively a firm manages its assets compared to its

sales. These ratios are designed to find out whether the total amount of each type of asset as

reported on the balance sheet appear reasonable, too high, or too low considering current and

projected sales levels. Asset Management Ratio is done based on inventory turnover ratio, day’s

sales outstanding and fixed asset and total asset turnover ratio.

4.2.1 Inventory Turnover Ratio:The ratio is calculated as follows:

Inventory Turnover ratio= Sales /Inventories

Table: Inventory Turnover Ratios for Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s inventory turnover ratio is fluctuating over the

period. It increased from 2004 to 2005. Then it decreased in 2006. It increased in 2007 but again

it decreased in 2008. On the other hand, Square’s inventory turnover ratio was decreasing from

2004 to 2008, just once it increased in 2007. Overall it states that, sometimes Renata does get

pilled inventories but then it manages well.

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Company 2004 2005 2006 2007 2008

Renata 1.72 2.13 1.53 1.96 1.6

Square 3.54 2.76 2.63 2.76 2.4

4.2.2 Days Sales Outstanding (DSO):The DSO ratio is calculated by dividing accounts receivable by average sales per day

which indicates the average length of time it takes the firm to collect its credit sales. It is also

called the average collection period, is used to evaluate the firm’s ability to collect its credit

sales in a timely manner. DSO is calculated as follows:

Daily Sales Outstanding (DSO) =Receivables/Average sales per day= Receivables/ [Annual sales/360]

Table: DSO Ratios of for Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s DSO ratio increased from year 2004 to year 2008.

Just once it decreased in year 2007. Where, Square’s DSO ratio increased from year 2004 to

year 2005. But then it decreased in year 2006 and year 2007. Again it increased in year 2008.

So, this indicates Renata may be offering flexible credit terms to improve relationship and grow

strong channels.

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Company 2004 2005 2006 2007 2008

Renata 27.96 days 36.81 days 37.61 days 28.05 days 40.66 days

Square 14.99 days 15.76 days 14.22 days 13.53 days 13.75 days

4.2.3 Fixed Asset Turnover Ratio: The fixed asset turnover ratio is calculated by dividing sale by net fixed assets assets.

The fixed assets turnover ratio measures the turnover of all the firm’s fixed assets. It is

calculated as:

Total Assets Turnover Ratio = Sales/ Net fixed assets.

Table: Fixed Asset Turnover Ratios of Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s

from year 2004 to year 2008. Almost same trend worked for Square; just once it increased in

year 2005. This may be because of relatively high investment in the purchase of fixed asset

which may result in contributing higher profit in future.

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Company 2004 2005 2006 2007 2008

Renata 2.84 2.67 2.42 2.17 1.87

Square 1.42 2.06 2.00 1.28 1.15

4.2.4 Total Asset Turnover Ratio:The total asset turnover ratio is calculated by dividing sale by total assets. The total

assets turnover ratio measures the turnover of all the firm’s assets. It is calculated as follows:

Total Assets Turnover Ratio = Sales/ Total assets

Table: Total Asset Turnover Ratios of Renata & Square of the years 2004 to 2008

From the above chart we can see that, Rnata’s

year 2004 to year 2008. Just once it increased in year 2005. For Square it decreased from year

2004 to 2008 except in year 2007. For Renata, this may indicate piled up inventories but which

will contribute to future sales.

Overall, Renata’s Asset Management Ratios indicate that, there may be pilled up

inventories which will contribute in future output. Renata’s credit facility also seemed to be

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Company 2004 2005 2006 2007 2008

Renata 1.29 1.26 1.06 1.16 0.98

Square 0.80 0.67 0.65 0.72 0.65

flexible but that may be due to the intention of building relatioship. Also, Renata has a tendency

of investing in heavily in the purchase of fixed assets which will ultimately help in future

growth.

4.3 Debt Management Ratios:

This ratio measures how effectively a firm is managing its debts. This ratio helps the

analyst to:

A. Check balance sheet ratios to determine the extent to which borrowed funds have been used

to finance assets and

B. Review income statement ratios to determine how well operating profits can cover fixed

charges such as interest

Debt Management ratios include analysis of two types of ratio: debt ratio and times interest

earned ratio.

4.3.1 Debt Ratio:It measures the percentage of the firm’s assets financed by creditors. It is computed as follows:

Debt ratio= Total debt/ total assetsTotal debt includes both current liabilities and long term debts. Creditors prefer low debt

ratios, because the lower the ratio, the greater the cushion against creditor’s losses in the event

of liquidation. The owners on the other hand can benefit from leverage because it magnifies

earnings, and thus the return to stockholder. But, too much debt often leads to financial

difficulty, which eventually might cause bankruptcy.

Table: Debt Ratios of Renata & Square of the years 2004 to 2008

From

the above

chart we

can see that, Renata’s total debt ratio increased from year 2004 to 2008 except in year 2005 and

year 2007. In case of Square, it also increased from year 2004 to year 2008 except in year 2008.

For Renata, it looks like firm has raised its debt capital. But, the dividend payment also

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Company 2004 2005 2006 2007 2008

Renata 19.63% 15.09% 20.93% 16.77% 26.03%

Square 16.72% 24.06% 25.12% 24.19% 28.1%

increased over the years. This will increase shareholder’s confidence. Renata seemed to utilize

the advantage of debt financing as EPS increased over years. Also, increase debt will contribute

in further investment.

4.3.2 Time Interest Earned (TIE) Ratio:The TIE ratio measures the extent to which earnings before interest and taxes (EBIT),

also called operating income, can decline before the firm is unable to meet its annual interest

cost. Failure to meet this obligation can bring legal action by the firm’s creditor, possibly

resulting in bankruptcy. The TIE ratio is computed by dividing earnings before interest and taxes

(EBIT) by interest charges. It measures the ability of the firm to meet its annual interest

payments. The TIE ratio is defined a follows:

Table: TIE Ratios of Renata & Square of the years 2004 to 2008

From the above chart we can see that, Renata’s

2005. Then it started to decrease till year 2008. Similarly, Square’s the TIE ratio increased from

year 2004 to year 2005 and then it started to decrease till year 2008. For Renata, it may increase

risk but as Renata was successful in capitalizing the advantage of debt financing, it will

contribute in future growth of the company.

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Company 2004 2005 2006 2007 2008

Renata 7.26 13.78 10.17 9.57 8.40

Square 11.95 12.57 11.30 7.71 4.86

Overall, Renata successfully capitalized the advantage of debt financing as both dividend

and EPS increased over the years. Also, increased debt will contribute in further investments and

further growth of the company.

4.4 Profitability Ratios

A group of ratios that are showing the effect of liquidity, asset management, and debt

management on operating results are the basic of profitability ratio. Profitability is the net result

of a number of policies and decisions. Profitability ratios are of three types- Net profit margin on

sales, Return on Asset (ROA) and Return on Equity (ROE).

4.4.1 Profit Margin on Sales :The ratio measures net income per dollar of sales. It is calculated by dividing net income

by sales. It is defined as follows:

Profit Margin on Sales = Net Income/ Sales

Table: Profit Margin Sales Ratio for Renata & Square of the years 2004 to 2008

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Company 2004 2005 2006 2007 2008

Renata 10.76% 11.97% 12.56% 13.26% 14.02%

Square 20.55% 23.55% 19.14% 17.37% 16.73%

Comment

The net profit margin ratio tells us the amount of net profit per Taka of sales a business has

earned. That is, after taking account of the cost of sales, the administration costs, the selling and

distributions costs and all other costs, the net profit is the profit that is left, out of which they

will pay interest, tax, dividends. It provides a good opportunity to compare Renata’s "return on

sales" with the performance of Square.

The Net Margin on Sales for Renata Pharmaceuticals Ltd has been in a very high growth over

the last five years. From the year 2004 to 2008 it is increasingly rapidly from 10.16% to 14.02%.

It indicates the company is growing more efficiently. Moreover, for every taka in sales, this

business is generating a little more than 10 to 14 percents net profit from the year 2004 to 2008.

A higher profit margin indicates that Renata is more profitable company that has better control

over its costs compared to its competitors. Profit margin is displayed as a percentage; a 14%

profit margin in 2008, for example, means the company has a net income of Tk0.14 for each

taka of sales. In addition, it also indicates that Renata Pharmaceuticals Ltd is generating enough

sales volume to cover minimum fixed costs and still leave an acceptable profit.

In comparison with Square Pharmaceuticals Ltd, it is found that the Net Margin on Sales figure

for Renata Pharmaceuticals Ltd is much lower than that of Square Pharmaceuticals Ltd. That

means Renata is in weaker position than Square. But from 2006 to 2008 Renata reduced the gap

significantly and nowadays they are very close to touch the Square profit margin ratio. But if we

looks t the trends for both Pharmaceuticals company then we see that Renata is increasing trends

whereas Square has a decreasing trends. So Renata can attack a large number of investors

because of their increasing trends on net profit margin on sales.

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4.4.2 Total Asset Turnover Ratio:The total asset turnover ratio is calculated by dividing sale by total assets. The total

assets turnover ratio measures the turnover of all the firm’s assets. It is calculated as follows:

Total Assets Turnover Ratio = Sales/ Total Assets

Table: Total Asset Turnover Ratios of Renata & Square for the years 2004 to 2008Company 2004 2005 2006 2007 2008

Renata 1.29 1.26 1.09 1.18 0.98

Square 0.80 0.67 0.65 0.72 0.65

Comment:

The total asset turnover ratio measures the ability of a company to use its assets to generate

sales. The total asset turnover ratio considers all assets including fixed assets, like plant and

equipment, as well as inventory and accounts receivable.

The total asset turnover ratio for Renata Pharmaceuticals Ltd is increasing rapidly from 2007 to

2007 except 2006 and 2008, because in 2006 and 2008 the total asset turnover ratio is going

down to some extent. It is because of the total asset, which is increasing a lot in these two years.

We will see the positive effect in the coming year. On the other hand, sales also increases but

equivalently vat also increases so net sales goes down. So the total asset turnover ratio for

Renata Pharmaceuticals Ltd is not bad as they show.

In comparison with Square Pharmaceuticals Ltd, it is found that the total asset turnover ratio

figure for Renata Pharmaceuticals Ltd is much higher than Square Pharmaceuticals Ltd. That

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means in comparison with the rival firms the health of the Renata Pharmaceuticals Ltd is much

satisfactory then the Square Pharmaceuticals Ltd.

4.4.3 Return on Asset (ROA):It is the ratio of net income to total assets. It provides an idea of the overall return on investment

earned by the firm. The ROA after interest and taxes are computed as follows:

Return on Total Assets (ROA) = Net Income / Total Assets

Table: ROA ratios of Renata & Square for the years 2004 to 2008

Company 2004 2005 2006 2007 2008Renata 13.86% 15.11% 13.63% 15.59% 13.70%Square 16.50% 15.88% 12.54% 12.43% 10.88%

Comment:

Return on Assets is a stable indicator of how profitable a company is before leverage. It is also a

measure of the productivity of an enterprise’s total resources, and is used to assess managerial

performance as it measures a manager’s ability and efficiency in creating wealth.

The table shows that the ROA for Renata Pharmaceuticals Ltd. is increasing rapidly from 2007

to 2007 except 2006 and 2008, because in 2006 and 2008 the ROA is going down to some

extent. It is because of the total asset, which is increasing a lot in these two years. We will see

the positive effect in the coming year. On the other hand net income also increases but

equivalently tax also increases a lot so the net income ultimately increases that much. For that

ROA figure goes down, so we are going to see the higher ROA in the coming year.

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In comparison with Square Pharmaceuticals Ltd, it is found that the ROA ratio figure for Renata

Limited is lower than Square Pharmaceuticals Ltd except the year 2006 and 2008, where Renata

was better position. Considering this, it can be state that Renata is not in a good position on

generated earnings from invested capital (assets) in compare to the Square Pharmaceuticals Ltd.

But from 2008 Renata did very well and ROA position is much higher than Square in the year

2008.

4.4.4 Financial Leverage Ratio:This is the ratio of total asset to common equity. It measures how much a firm is levered.

Financial Leverage = Total Asset / Common Equity

Table: Financial Leverage Ratios of Renata & Square for the years 2004 to 2008

Company 2004 2005 2006 2007 2008Renata 1.72 1.65 1.81 1.69 1.90Square 1.28 1.42 1.45 1.43 1.51

Comment:

The table shows that the financial leverage for Renata Limited. is decreasing rapidly from 2004

to 2007 except 2006 and 2008, because in 2006 and 2008 the financial leverage ratio is going up

to some extent. It is because of the total asset, which is increasing a lot in these two years. We

will see the positive effect in the coming year. And the financial leverage is going down as well.

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In comparison with Square Pharmaceuticals Ltd, it is found that the financial leverage ratio

figure for Renata Limited is upper than Square Pharmaceuticals Ltd. But it is because of the total

asset that is in the working process and the positive in nature for the future. Whereas if we look

at the trend for the both of the company then we see that financial leverage ratio is decreasing

trends for the Renata Limited, which is very good. On the other hand for Square

Pharmaceuticals Ltd it is increasing which is very bad for Square.

4.4.5 Return on Equity (ROE):This is the ratio of net income to shareholders’ equity. It measures the rate of return on

stockholder’s investment. The return on equity (ROE) or the rate of return on stockholder’s

return is measured as follows:

Return on Equity (ROE) = Net income / Common Equity

Table: ROE Ratios of Renata & Square for the years 2004 to 2008 (%)

Company 2004 2005 2006 2007 2008Renata 23.86% 24.88% 24.65% 26.29% 26.06%Square 21.13% 22.55% 18.21% 17.77% 16.42%

C omment:The amount of net income returned as a percentage of shareholders equity. Return on equity

measures a corporation's profitability by revealing how much profit a company generates with

the money shareholders have invested.

The table shows that the ROE for Renata Limited. Ltd has been in a very high increasing growth

over the last five years. By relating these earnings to the shareholder equity, an investor can

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quickly see how much cash comes from existing assets. Like for Renata the ROE of 2008 is

26% that means 26 percents of assets are created for every taka originally invested. But in the

year 2006 and 2008 the ROE figure goes down because Renata paying higher EPS in this two

years so the common equity or the shareholders investment rate goes up tremendously then the

Net income. That indirectly shows that investors trust is high for these company and the Renata

Limited can get credit more investors any time.

In comparison with Square Pharmaceuticals Ltd, it is found that the ROE ratio figure for Renata

Limited is much higher than Square Pharmaceuticals Ltd. It is generally accepted that a

company with a higher ROE is a better investment than one with a lower ROE since it has a

stronger ability to generate cash flows internally. As we know that investors usually look for

companies with returns on equity that are high and growing, and for Renata they fulfill both of

the features for ROE, so Renata Limited will influence a large number of investors.

Overall Comments:

All the profitabilty ratio shows a positive trends for the renata it is becasuse of the good

inventory management system, higher net income, good asset management and the total equity

of the Renata Limited. That basically tells that it is a very profitable company. The figure of the

EPS also shows that because of their profitability in nature they also provide higher EPS. It is a

very good company for investment and the shareholders also have the trust for the company.

4.5 Market Value Measures

The market value ratios represent a group of ratios that relates the firm’s stock price to its

earnings and book value per share. These ratios give management an indication of what

investors think of the company’s past performance and future prospect. If the firm’s liquidity,

asset management, debt management, and profitability ratios are all good then market value

ratios will be high which will lead to an increase in the stock price of the company.

Market value ratio is of two types- Price/Earnings Ratio and Market/Book value Ratio.

4.5.1 Price/Earning (P/E) Ratio : This is the ratio of the price per share to earnings per share. It shows the dollar amount

investors will pay for $1 of current earnings. It is computed by market price per share and

earnings per share (EPS). 38

P/E ratio = Market price per share/ Earnings per share

Price/Earnings ratio is higher for firms with high growth potentials and low for riskier

firms. The investors consider the firm with high leverage more risky than firm with low

leverage. However if the ratio of the firms is increasing it means that it is gaining trust of the

investors.

Table: Price/Earnings Ratios of Renata & Square for the years 2004 to 2008

Company 2004 2005 2006 2007 2008

Renata 25.44 18.02 14.81 25.80 20.80Square 20.94 26.83 17.46 16.79 26.60

From the above chart we can see that, Renata’s P/E ratio decreased from year 2004 to year

2008 except for year 2007. In case of Square, it increased from year 2004 to year 2005. Then it

decreased in year 2006 and 2007 and again it increased in year 2008. For Renata, this indicates

that, risk is decreasing which makes the company more dependable.

4.5.2 Market/Book value:The ratio of a stock’s market price to its book value gives another suggestion of how

investors regard the company. Companies with relatively high rates of return on equity generally

sell at higher multiples of book value than those with low returns. The formula for Market/Book

Value is given below:

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Market / Book ratio = Market price per share / Book value per share

The following table shows the Market / book ratio of Renata & Square for the last five years,

from 2004-2008.

Table: Market Value Ratio of Renata & Square for the years 2004 to 2008

Company 2004 2005 2006 2007 2008

Renata 2.93 2.59 2.53 5.65 5.42Square 3.22 1.90 1.76 3.06 2.46

From the above chart we can see that, Renata’s M/B value ratio decreased from year 2004

to year 2005 and year 2006. Then it jumped in year 2007 and became more than double. It again

decreases little in year 2008. For square, it decreased from year 2004 to year 2005 and year

2006. Then increased in year 2007 and again decreased in year 2008. For Renata, this large

increase of M/B value ratio in year 2007 and year 2008 indicates that it succeeded to gain more

investor’s trust.

Overall, through the period, Renata’s risk got reduced in the market. Also, it succeeded to

gain more investor’s trust which will help Renata to look for further sources of investments.

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CHAPTER – 05

Findings and Conclusion

5.1 Overall Findings on Renata Limited

Analyzing the liquidity ratios we can see that Renata Limited is holding less cash in

hand. Both the current ratio and the quick ratio are lower than the benchmark. Though it

indicates increase in liability and higher inventory holding but it will ultimately contribute to

future investment and higher output.

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Analyzing the asset management ratios we found out that increasing trend in inventory

piling, but it will ultimately result in higher amount of production in future. Then again, Renata

invested heavily in fixed asset. It also tells a higher future output. Another fact is Renata

maintains flexible credit terms. These are mainly due to the tendency of maintaining good

relationship in corporate channels. So that it will contribute to the future growth of the company.

Analyzing the debt management ratios we can summarize that the company has raised its

debt capital but it was also successful in utilizing the advantage of debt financing as dividend

and EPS shows increasing trends largely. Then again, this increased debt will help to make

further investment.

Analyzing the profitability ratios we can summarize that profit margin sales increasing

rapidly for last five years, which shows the promising trends means a handsome amount of net

income in every year in comparison to sales. From the ROA we can tell that their investing

heavily on fixed asset and company also getting higher output over the years. After that, ROE

shows that fluctuating result over the period, but ultimately it increases, that means the company

is generating higher profit with the money shareholders have invested.

Analyzing the market ratios, we can summarize that for P/E and M/B value ratio

Renata’s risk got reduced in the market. That indicates Renata have gained more trust among the

investors. This will help Renata to look for further sources of investment.

5.2 Conclusion:

From the overall analysis we see that the market value of Renata Limited is much higher than

the book value. It is a very good sign for a company. But it is better for Renata Limited because

of the trends, for last five years the data shows the market value is three to five times higher than

the book value. They also provide a good portion of their net income as dividend to the

shareholders. Moreover, we all know that a company’s overall condition can measure by the

market price of the share. Finally, the main thing is that they are a lot of giant competitor in the

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market. So for make a stable and increasing growth of their market price of share Renata

Limited can look more on their liquidity position because they hold less cash which might be

very risky for Renata Limited and the field of inventory management issue they can be more

efficient. Despite of that few facts they are doing very good in the market as the market value is

higher than the book value which shows their business activity and trends is gaining more and

more investors trust.

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Finance Renata 09