Square Pharma

Electronic copy available at: http://ssrn.com/abstract=2065057

Financial Ratio Analysis of Square Pharmaceuticals Limited Asif Ahmed ACA Trainee Accountants KPMG in Bangladesh Rahman Rahman Huq Chartered Accountants 9 Mohakhali C/A Dhaka – 1212. ACA Student The Institute of Chartered Accountants (ICAB) CA Bhaban, Kazi Nazrul Islam Avenue Dhaka, Bangladesh Contact E-mail: [email protected]

Electronic copy available at: http://ssrn.com/abstract=2065057

Financial Ratio Analysis of Square Pharmaceuticals Limited

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TABLE OF CONTENTS

Page No. Executive Summary 3

Chapter 1 Introduction 4 - 6

1. Introduction 4

2. Objectives of Study 4

3. Scope of Study 5

4. Methodology of Analysis 5

5. Limitations or Problem Statement 6

Chapter 2 Key Financial Highlights 7 - 11

2.1. Overview of the Organization 7

2.2. Key Financial Highlights 7

Chapter 3 Ratio Analysis 12 - 19

3.1. Liquidity Ratio Analysis; 12

3.2. Asset Management Ratio Analysis; 13

3.3. Debt Management Ratio Analysis; 15

3.4. Profitability Ratio Analysis; and 16

3.5. Market Value Ratio Analysis. 17

Conclusion 20

Recommendations 21

Bibliography 22

Annexure 23


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EXECUTIVE SUMMARY

This paper is mainly an analytical outcome of financial ratio analysis of Square

Pharmaceuticals Limited and pharmaceuticals industry. Eleven (11) ratios are selected

to judged the various aspects of efficiency of the company, including – Current ratio,

quick/acid test ratio, inventory turnover ratio, days sales outstanding ratio, debt ratio,

times interest earned ratio, net profit margin, return on total assets, earning per share,

price earnings ratio, book value ratio- market/book ratio. Formula used for calculating

these ratios are presented in the annexure – 1. For formulating the industry average

weighted average (on equity portion) of all the four pharmaceuticals companies listed

in the stock exchange are considered. Before presenting the core ratio analysis part

some key financial information of the company like – turnover, net profit, assets, EPS

and operating cash flows of past few years are analyzed. From the analyzed data we

found that Square Pharmaceuticals Limited perform better in all materials aspects

from the industry, except it’s liquidity position. Although Square Pharmaceuticals is

performing well in the industry, still it has some room for improvements, like –

improving the liquidity position, looking for expansion of business in new market

both inside and outside the country.


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CHAPTER 1 INTRODUUCTION

1.1. Introduction:

In Bangladesh the pharmaceutical sector is one of the most developed hi-tech sectors

within the country's economy. After the promulgation of Drug Control Ordinance -

1982, the development of this sector was accelerated. The professional knowledge,

thoughts and innovative ideas of the pharmaceutical professionals working in this

sector are the key factors for these developments. Due to recent development of this

sector it is exporting medicines to global market including European market. This

sector is also providing 97% of the total medicine requirement of the local market.

Leading pharmaceutical companies are expanding their business with the aim to

expand export market. Recently few new industries have been established with high

tech equipments and professionals which will enhance the strength of this sector.

1.3. Objectives of Study:

Business is spreading day by day. One of the most effective way to measure the

business performance is financial or ratio analysis. As the students of Business

Administration we should have proper knowledge on financial analysis to measure the

performance of the company. As the paper is on the financial analysis of an

manufacturing (power) company, main objective behind this analysis includes –

1. Build an overall understanding on the financial performance of the Square

Pharmaceuticals Limited.

2. Compare the financial performance of the company with the industry.

This chapter contains –

1.1. Introduction;

1.2. Objectives of Study;

1.3. Scope of Study;

1.4. Methodology of Analysis; and

1.5. Limitations or Problem Statement.


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3. Draw some conclusion on the financial performance and make some

recommendation.

1.4. Scope of Study:

This paper gives us the opportunity build up an overall understanding on the power

manufacturing sector as well as Square Pharmaceuticals Limited. However this paper

holds study about –

1. Financial information analysis of Square Pharmaceuticals Limited as well as

the whole pharmaceuticals industry through some selected ratios.

2. Make some conclusion and recommendation for Square Pharmaceuticals

limited based on the ratio analysis.

1.5. Methodology of Analysis:

For preparing this paper information are mainly collected from the annual paper of the

respective companies, stock analysis paper from various brokerage houses and

company’s website. The various ratios are calculated from the information provided

in the annual papers. Eleven (11) ratios are selected to judged the various aspects of

efficiency of the companies, including – Current ratio, quick/acid test ratio, inventory

turnover ratio, days sales outstanding ratio, debt ratio, times interest earned ratio, net

profit margin, return on total assets, earning per share, price earnings ratio, book value

ratio- market/book ratio. Formula used for calculating these ratios are presented in the

annexure – 1. In case of earrings per share (EPS), if the share price is more than Tk.

10 per share they are converted into the Tk. 10. For example – if the share price is Tk.

100 and EPS is Tk. 112, share price are converted into Tk. 10 and EPS assumed Tk.

11.2 respectively. When the financial year is not matched with the target company

they are back calculated or forward calculated through their quarterly financial

statement. For example – financial year of the Square Pharmaceuticals are ended at

March 2011, but the financial year of Beacon Pharmaceuticals are ended at December

2010. In that case first quarter financial statement for 2011 of Beacon pharmaceuticals


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are adjusted with the December 2010 statement along with first quarter financial

statement for 2010. Industry average is calculated through weighted average of equity

portion rather than simple average. As business size, market coverage and firms

financial strength are not same for all the company, simple average cannot truly

reflect the market condition. Calculations of ratios and industry average are presented

at annexure – 2.

1.6. Limitations or Problem Statement:

As this is the ratio analysis is on the financial data, which is full of judgment, there

are some inherent limitations of such analysis. These are as follows –

1. Ratios may not present the actual scenario of the organization unless and until

the information presented in the financial statement reflects the true and fair

view of the organization.

2. In the two financial years, which are come under ratio analysis, some company

may have expanded their business. This expansion need to be adjusted in ratio

analysis for comparability of information. But due to the lack of sufficient

information these cannot be adjusted in this analysis.

3. The industry average are calculated only through the companies listed in the

stock exchange but there are other companies in the pharmaceuticals industry

which are not listed in the stock exchange but may have significant share in

the market and perform better than the listed companies.

4. Financial year of all the company were not finished at the same time. So for

comparability of ratios we need to adjust the audited financial statement

though quarterly statement. As the quarterly statement are not audited they

may not have provide the true and fair view of the financial performance.


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CHAPTER 2 KEY FINANCIAL HIGHLIGHTS

2.1. Overview of the Organization:

SQUARE today symbolizes a name – a state of mind. But its journey to the growth

and prosperity has been no bed of roses. From the inception in 1958, it has today

burgeoned into one of the top line conglomerates in Bangladesh. Square

Pharmaceuticals Ltd., the flagship company, is holding the strong leadership position

in the pharmaceutical industry of Bangladesh since 1985 and is now on its way to

becoming a high performance global player. 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 11.46 Billion (US$ 163.71 million) with about

16.43% market share (April 2009– March 2010) having a growth rate of about

16.72% (Square Pharma Web).

2.2. Key Financial Highlights:

Before going to the main part of the paper, which is financial ratio analysis of Square

Pharmaceuticals Limited, some key financial data about the company can give deep

understanding on the company’s financial positions and performance.


2.1. Overview of the Organization; and

2.2. Key Financial Highlights.


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2.2.1. Turnover:

It may be observed that turnover (net of VAT) have been increased over the year from

the 2006-07 to 2010-10. In comparison to the last year turnover increased by 17.52 %

where the total industry increased by 23.80% (IMS paper, 2010). In the year 2007-08,

2008-09 and 2009-10 turnover increased by 10.09%, 18.93% and 16.72%

respectively.

2.2.2. Net Profit:

7,500,8118,257,844

9,820,79711,462,578

13,471,424

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2006-07 2007-08 2008-09 2009-10 2010-11

Turnover (BDT)

1,303,243 1,381,863

1,890,0532,087,872

2,532,055

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2006-07 2007-08 2008-09 2009-10 2010-11

Net Profit (BDT)


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Like the turnover, net profit also increased all over the last five years. In from 2007-

08 to 2010-11 net profit increased by 6.06%, 36.76%, 10.48% and 21.26%

respectively. But key point here is that the rate of increment from year to year is not

so much consistent, although increment of turnover is very much consistent from one

year to another. This also indicate that increment of expenditures were not consistent

from these years.

2.2.3. Assets:

10,486,94012,703,127 13,251,243

15,029,500

19,444,410

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2006-07 2007-08 2008-09 2009-10 2010-11

Total Assets (BDT)

6,804,4298,291,291

9,407,73010,255,189

12,422,196

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

2006-07 2007-08 2008-09 2009-10 2010-11

Fixed Assets (BDT)


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Increase of both total assets and fixed assets indicates that the company is expanding

along with its increased sales and company has the capabilities to cope with the

increased demand of the market in future. From 2009-10 to 2010-11 company’s total

assets and fixed assets increased by 29.38% and 21.31% respectively.

2.2.4. Earnings per share:

Over the years Square Pharmaceuticals’ earning per share has been increasing. For

2009-10 to 2010-11 EPS of Square Pharmaceuticals increased by 21.42%. As its’ EPS

is also higher than the industry average (presented at the later part of the paper), it can

be said that Square Pharmaceuticals could use it equity efficiently in generating profit.

66.43 70.44

96.35106.43

129.07

0

20

40

60

80

100

120

140

2006-07 2007-08 2008-09 2009-10 2010-11

Earnings Per Share (EPS)


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2.2.5. Operating Cash flow per share:

Although operating cash flow increased from 2006-07 to 2009-10, it decreased in the

recent year by 16.75%. It is not an ideal situation for the company where increased

amount of sales fails to bring increased cash for the organization.

96.0886.20

164.87176.51

146.95

0

20

40

60

80

100

120

140

160

180

200

2006-07 2007-08 2008-09 2009-10 2010-11

Net Operating Cash Flow Per Share (BDT)


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CHAPTER 3 RATIO ANALYSIS

3.1. Liquidity ratio:

Liquidity ratio refers to the ability of a firm to meet its short term financial obligations

when and as they fall due (Foster, 1986). Two frequently used liquidity ratios are

current ratio and quick ratio. These two ratios of Square Pharmaceuticals along with

industry average are presented below:

2010-11 2009-10Square 1.50 2.05Ind. Avg 2.04 2.37

0.00

0.50

1.00

1.50

2.00

2.50

Current Ratio


3.1. Liquidity Ratio Analysis;

3.2. Asset Management Ratio Analysis;

3.3. Debt Management Ratio Analysis;

3.4. Profitability Ratio Analysis; and

3.5. Market Value Ratio Analysis.


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From the presented chart and information it is found that both current and quick ratio

of the Square Pharmaceuticals are well below the industry average. This indicates that

company may fall in problem to pay its current debt in the emergency situation. As a

result debtor may want to increase their cost (interest rate) for this company which

will make the company difficult to manage working capital.

3.2. Asset Management Ratio:

Inventory turnover measures the number of times on average the inventory is sold

during the period. Its purpose is to measure the liquidity of the inventory (Weygandt,

Kieso, Kimmel, 2007). Day’s sales outstanding measures the number of times, on

average, receivables are collected during the period (Weygandt, Kieso, Kimmel,

2007).

2010-11 2009-10Square 0.85 0.90Ind. Avg 1.02 1.42

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Quick Ratio


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From the information presented above it is found that Square Pharmaceuticals

perform better both in inventory turnover ratio and days sales outstanding ratio.

Inventory of Square Pharmaceuticals takes less times to be sold and its efficiency of

collecting the receivables (DSO) are also higher compared to the industry. And both

of the efficiency has been increased in the year 2010-11 compared to the year 2009-

10.

2010-11 2009-10Square 3.03 2.97Ind. Avg 2.12 2.05

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Inventory Turnover Ratio

2010-11 2009-10Square 20.93 16.18Ind. Avg 35.26 32.94

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Days Sales Outstanding Ratio


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3.3. Debt Management Ratio:

Debt management ratio refers percentage of the total assets provided by the creditors

of the company’s the ability of the company to meet interest payments as they come

due. If both of the ratios are favorable, it will become easier for the firm to find debt

at lesser cost (interest rate). Two frequently used debt management ratios are debt

ratio and time interest earned ratio. These two ratios of Square Pharmaceuticals along

with industry average are presented below:

2010-11 2009-10Square 0.21 0.23Ind. Avg 0.29 0.35

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Debt Ratio

2010-11 2009-10Square 10.42 7.76Ind. Avg 6.08 5.35

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Time Interest Earned (TIE) Ratio


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From the information presented above it is found that Square Pharmaceuticals has less

debt compared to the industry. On the other hand its’ time interest earned ratio is also

much higher than the industry average, which indicates that the company has higher

ability to pay for its’ debt and the ability also has been increased in the recent year.

3.4. Profitability Ratio:

Profitability ratios measure the income or operating success of an enterprise for a

given period of time. Income, or lack of it, affects the company’s ability to obtain debt

and equity financing. It also affects the company’s liquidity position and the

company’s ability to grow. As a consequence, both creditors and investors are

interested in evaluating earning power – profitability. Profitability is frequently used

as the ultimate test of management’s operating effectiveness (Weygandt, Kieso,

Kimmel, 2007). Two commonly used profitability ratios are net profit margin and

return on total assets ratio. These two ratios of Square Pharmaceuticals along with

industry average are presented below:

2010-11 2009-10Square 18.80% 18.21%Ind. Avg 16.38% 14.77%

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%18.00%20.00%

Net Profit Margin


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Square Pharmaceuticals has earned more return both in terms of revenue and total

assets compared to the industry. Its’ indicate that Square Pharmaceuticals able to

utilize its’ assets more efficiently than most of the other companies of the industry.

3.5. Market Value Ratio:

Earnings per share (EPS) is a measure of the net income earned on each share of

common stock. A measure of net income earned on a per share basis provides a useful

perspective for determining profitability (Weygandt, Kieso, Kimmel, 2007). And the

EPS of Square Pharmaceuticals indicate that its’ profitability per share is better than

the industry.

2010-11 2009-10Square 13.50% 14.21%Ind. Avg 9.00% 8.94%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Retun on Total Assets Ratio


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The price earnings (PE) ratio is an often quoted measure of the ratio of the market

price of each share of common stock to the earnings per share. The price earnings

(PE) ratio reflects investor’s assessment of the company’s future earnings (Weygandt,

Kieso, Kimmel, 2007). Although the PE ratio of Square Pharmaceuticals is lesser in

the recent years compared to the industry, but in a stock market like ours, where

investors’ does not take much informed decision, it cannot be said that the investor’s

assessment of the company’s future earnings was negative.

2010-11 2009-10Square 12.90 10.60Ind. Avg 11.65 9.43

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Earings Per Share

2010-11 2009-10Square 25.21 33.97Ind. Avg 62.25 35.59

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Price Earnings Ratio


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Book value ratio used to compare a stock's market value to its book value. It is

calculated by dividing the current closing price of the stock by the latest quarter's

book value per share. A higher P/B ratio implies that investors expect management to

create more value from a given set of assets, all else equal. This ratio also gives some

idea of whether an investor is paying too much for what would be left if the company

went bankrupt immediately.

So, from the above information it is found that investors are expecting management of

Square Pharmaceuticals to create more value from a given set of assets as they are

paying more than the industry average for its’ share.

2010-11 2009-10Square 32.52 36.01Ind. Avg 30.97 34.15

28.00

29.00

30.00

31.00

32.00

33.00

34.00

35.00

36.00

37.00

Book Value Ratio


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Conclusion

From the data analyzed and presented above it can be conclude that Square

Pharmaceuticals Limited perform better in all materials aspects from the industry.

Though its financial strength is higher than the most of the company, its’ liquidity

position is below the industry. This may create financing problem for the company.

Other than that its’ strong financial position, higher margin on sales, capabilities of

managing debt, accounts receivables and inventories make it an attractive company to

the investors who make informed decision.


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Recommendations

Although Square Pharmaceuticals is performing well in the industry, still it has some

room for improvements, as its’ performance is not so much higher than the industry.

For improving its operational and financial efficiency Square Pharmaceuticals can –

1. Increase its liquidity position slightly to make it equal to the industry.

2. Setup benchmarking in some key categories, (i.e. - turnover), and try to

achieve them as fast as possible.

3. Searching for new finances to expand its business to maintain an equivalent or

more growth to the industry.

4. Looking for new market segment within the country as well as outside the

country to expand its market.


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References:

1. Annual Paper, March 2011, Square Pharmaceuticals Limited.

2. Annual Paper, December 2010, Ranata Pharmaceuticals Limited.

3. First Quarter Financial Statement, March 2011, Ranata Pharmaceuticals

Limited.

4. Annual Paper, December 2010, Beximco Pharmaceuticals Limited.

5. First Quarter Financial Statement, March 2011, Beximco Pharmaceuticals

Limited.

6. Annual Paper, June 2010, Beacon Pharmaceuticals Limited.

7. Third Quarter Financial Statement, March 2011, Beacon Pharmaceuticals

Limited.

8. Financial Statement Analysis, Second Edition, Prentice-Hall International Inc.,

George Foster, Stanford University, 1986.

9. Accounting Principles, 7th Edition, John Wiley & Sons Inc., Weygandt, Kieso,

Kimmel, 2007.


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Annexure – 1: Formula used for ratios:

Current Ratio =

Quick Ratio =

Inventory Turnover Ratio =

Days Sales Outstanding Ratio =

Times Interest Earned Ratio =

Net Profit Margin =

Return on Total Assets =

Earnings per share (EPS) =

( . )

Price Earnings (PE) Ratio =

Market / Book Ratio =


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Annexure – 2: Calculations of ratio and industry average:

Ratio CalculationsMarch 2011 and March 2010

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010Current ratio 1.50 2.05 1.10 1.17 2.54 2.98 2.89 2.64 2.04 2.37Quick ratio 0.85 0.90 0.44 0.86 1.38 2.38 0.45 0.22 1.02 1.42Inventory turnover ratio 3.03 2.97 1.86 1.69 1.67 1.49 0.38 0.40 2.12 2.05Days sales outstanding ratio 20.93 16.18 34.30 32.18 46.19 52.04 44.81 28.52 35.26 32.94Debt ratio 0.29 0.23 0.43 0.43 0.25 0.45 0.37 0.37 0.29 0.35Times interest earned ratio 10.42 7.76 8.25 7.06 2.59 3.16 1.76 1.17 6.08 5.35Net profit margin 18.80% 18.21% 16.73% 15.47% 16.20% 12.83% 4.35% 5.22% 16.38% 14.77%Return on total assets 13.50% 14.21% 16.65% 15.67% 4.92% 3.14% 0.66% 0.62% 9.00% 8.94%Earnings per share 12.90 10.60 47.11 33.39 5.17 3.50 0.13 0.31 11.65 9.43Price earrings ratio 25.21 33.97 27.42 36.08 25.96 44.57 511.54 - 62.25 35.59Market/book ratio 32.52 36.01 129.16 120.51 13.42 15.60 6.65 - 30.97 34.15

Total share holder's equity:2011 Weight Weight

RANATA 3,279,028,000 0.092 0.107BEXIMCO 15,974,086,451 0.447 0.391BEACON 2,674,537,918 0.075 0.082SQUARE 13,817,708,990 0.387 0.421

35,745,361,359 1 127,865,361,218

Market value ratio

20102,971,470,000

10,885,706,614 2,286,852,753

11,721,331,851

Weighted Avg

Liquidity ratio

Asset Management ratio

Date management ratio

Profitability ratio

Ratio Category RatiosSQUARE RANATA BEXIMCO BEACON

Documents

Square Pharma