square pharma financial analysis.doc

8/14/2019 square pharma financial analysis.doc

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FFINANCIALINANCIALAANALYSISNALYSIS::

Submitted To:

Submitted By:

Submission Date:


2/25

To,

Dear Sir,

We are pleased to work on our group term paper: Predicting Stock Price: Square

Pharmaceuticals Ltd. This stimulating work has helped us to better understand the

different variables affecting the stock price of a firm. This indepth financial anal!sis will

trul! be useful for each of us in our own field of work.

We will thus greatl! value the opportunit! !ou gave us in this course. "n case of an!

#uestions regarding our findings please do contact an! of the group members $ we will

remain obliged to clarif! wherever necessar!.

Thanking %ou,


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EEXECUTIVEXECUTIVESSUMMARYUMMARY

The ob&ective of this report is to pro&ect the Stock 'rice of a specific compan!, as in this

case Square Pharmaceuticals Limited through different financial anal!sis, which

started off with identif!ing variables affecting the stock price and then through Stock

(aluation.

This anal!sis is done mainl! based on the information collected from the annual report

issued b! Square Pharmaceuticals Limitedin the fiscal !ears )**+)** $ )**)**-.

Dail! arket "nde/ and Stock price was collected from DSE.

The different growth rate anal!sis for the compan!0s sales $ profitabilit! led to choose

an optimum growth rate, which in this case is the Sustainable 1rowth 2ate or S12.

3sing this &ustified growth rate, pro forma statements 45alance Sheet $ "ncome

Statement6 were prepared along with different scenario anal!sis. The anal!sis suggested

that S'7 maintains a sustainable growth without re#uiring an! e/ternal financing

e/cepting for the case of a highl! optimistic scenario.

"t has been observed empiricall! that a good number of variables affect the variations of

Stock 'rice $ the proceedings have been discussed in the report. This research also

revealed that apart from #uantitative variables, some compan! specific and market

specific information including dividend declaration, 8/date, etc. also affect the stock

price valuation.

"n conclusion it can be stated that as aBlue Chipshare SPLshows a sustainable constant

growth potential and it reflects a high confidence level from the investors.


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TTABLEABLEOFOFCCONTENTSONTENTS

4.1 Balance Sheet Analysis.............................................................................8

Pro Forma Statements..................................................................................13Plug Variables .............................................................................................15

Scenario Analysis.........................................................................................15

7.Beta........................................................................................................17

8.E!ecte" #eturn o$ SP% using &AP'............................................................18

(.)i*i"en" )eclaration+ Firm S!eci$ic ,e-s an" 'aret ,e-s............................1(

10. ST!" #aluation.....................................................................................................$$

11. &onclusion............................................................................................./3


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1.0 !om%any &er&ie'

S#uare 'harmaceuticals is a renowned 'harmaceutical 9ompan! of our countr!. "t is

currentl! the leading corporation in its field of e/pertise. S#uare 'harmaceuticals began

its operations in the !ear ;.

The compan! became 'ublic $ became listed in the DS8 in the !ear ;;, since then

there was no looking back. The supremac! of S#uare is such that the closest competitor

5e/imco 'harmaceuticals is not even close in comparison to the market share? the latter

has onl! about half the market share.

S#uarePharmaceuticals Limited has extended its range of services towards the highway of

global market. The company pioneered exports of medicines from Bangladesh in the year 19!

and has been exporting antibiotics and other pharmaceutical products since then. This extension

in business and services has increased the credibility of "#uare Pharmaceuticals Limited ten

folds.

$.0 Problem Statement

'rospective investors are alwa!s ver! interested to know how a compan! is going to

perform financiall! in order to benefit their investment decisions.

There are man! variables which can affect the actual financial position and the stock

value of a particular compan!. ost of these variables are not controllable or predictable.

"t is not ver! eas! to figure out how these variables affect the compan! value and the

stock price.

This case stud! was undertaken in order to identif! some of these variables and see how

the! affect the compan!0s market value and its stock price. @lso to tr! to pro&ect the

future stock price depending on these variables. Different financial anal!sis andtechni#ues have been emplo!ed to &ustif! the prediction about the stock price


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(.0 b)ecti&e o* the Study

The specific ob&ectives aimed for this report are:

To focus on some crucial information b! anal!sis and interpretation of S'7 such

ratio anal!sis, pro forma statement anal!sis etc.

To identif! the variables that can affect the stock price of S'7.

To find out the recent financial situation or trend of S'7.

To pro&ect the future financial state of the compan!.

To predict the future stock price of S'7 share based on these pro&ected financial

performance data

+.0 ,ethodology

"n this case stud! various methods and techni#ues have been used to help reach and

solidif! the findings. This section outlines reasoning for choosing and using these

methods

+.1 Statistical -nalysis Technique

This case used some important concepts of corporate finance such as ratio anal!sis, proforma statement, growth rate anal!sis, scenario anal!sis, etc. to clarif! how each variable

affects the stock price of S'7. @ccounting theories and practices were also closel!

applied. "t is also worth! to mention that man! tables and graphs were used to give visual

aid for #uick understanding of the scenarios. These tables and graphs help the reader to

#uickl! identif! &ustification behind our conclusion about various scenarios.

+.$ Data Ty%ePrimary Data:@ll S'7 annual reports, the primar! data were used in most parts in the

order to calculate important factors. The dail! share price for both 1la/oSmith and DS8

"nde/ were also collected from the Dhaka Stock 8/change in order to help with the

anal!sis.


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Secondary Data:"nformation was also collected from the "nternet and the different dail!

newspapers. 8/amples of such data are S'7 histor! and other basic compan!

information, medicine companies that are enlisted in share market etc. @lso, an! firm

specific or market specific news which can affect the share price of S'7.

+.( Data Source

=ew different data sources were used to collect the necessar! data, like 4a6 @nnual

2eports )**+ A )**- 4b6 the "nternet and 4c6 Bewspapers. The ma&or source was Dhaka

Stock Echangefrom where the annual )**+ )**- reports, dail! stock price for SPL

and DSE /ndewere collected. The "nternet and newspapers were also helpful to collect

information about the recent incidents.

+.+ Time Period taken under !onsideration

=or this case stud!, a time period of > !ears )**+)**- was taken under consideration. "n

most cases, these > !ears data were used as the basis for growth pro&ection. Though it is

not a lot, it is good enough to identif! some trends in data to make some realistic

predictions about the future of SPL.

.0 Limitation o* Study

The following limitations can be found in this case stud!:

@s it is an academic research restricted to a period of onl! C months not all the

possible variables were considered in deducing the financial position of S'7.

S'7 9orporate ffice said that the! cooperate and share information onl!

with the share holders and other stakeholders? and thus, the! have limitations

to distribute information to general public 4who are not in the categor! of

stakeholders6.


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.0 2inancial -nalysis

There are man! financial anal!sis techni#ues which can measure the financial position of

a compan!. "n this section few of these techni#ues are discussed in an attempt to outline

the financial health of Square Pharmaceuticals Ltd.

>. Balance Sheet -nalysis

Table: Balance Sheet analysis based on Book #alue and ,arket #alue

5ook (alue )**

@sset @mount 7iabilities @mount

9urrent @sset >,>,-C+,>C+ 9urrent 7iabilities C,Share holderEs e#uit!4-;>)>** shares6 -,>,*>*,*,>*


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a )*),C)>,*> +,-,C> +,),+C

-

Net Income 135$(3$503014 134543+43(0 1345384358 135354434 13+43$834+ 13(413$453$01

)i*i"en" +C,)

* ;,,>-*,*; ;,>;),+;;,*>- -,-,+-,C

Total 0ssets1385$3+1+30

4

13+$53$83+

8 1+358031$+3501 1+3+(381038( 1(35$3(+3((5 1$340(31$43+$0

&urrent %iabilities >,C;,-,)< >,),)-,C+,*-< >,**-,,)+,


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The balance sheets indicate the compan! has e/cess fund, which can be financed

distributed to pa!off long term debt and reduce the obligations of interest

e/penses.

Plug #ariables

The pro forma statements from the above section indicate the firm will have e/cess fund

if it will grow at F rate. The compan! can decrease its long term debts b! the e/tra

fund, thus will decrease the debt e#uit! ratio. @s the compan! decided to maintain a

constant retention rate, it ends up with e/tra fund at the end of the !ear. "n the current

recession of econom!, it will be risk! to do an! new investment. So, the compan! can

pa!off its debt which will give an encouraging signal to the shareholders. The table

below lists the change is capital structure of the compan!.

Table : E%ected change in ca%ital structure o* Square Pharmaceuticals Ltd.

'1 '11 '1' ''4 ''( ''*

8nitial 9ebt.6uit7#atio 33.53 3/.5 31.1 30.( /8.8 /.80

#e;ised 9ebt.6uit7#atio 1( /0 /1 // /4 /.80

The above table shows that the debtHe#uit! ratio of the compan!0s capital structure will

go down from the current $.80< to 15


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ro'th 6ate 1$.00< 10.00< 4.00< .00< (.00-,->,;-- ;,*-C,+)-,C -,-C,);,) >,>*,+,*; C,;>,;;*,>CC C,+>,>+,)>- C,+C,;+),*+>

Bew DebtH8#uit! 2atio C*F );.>-F )-.+-F )-.>F ).+F

"n the above scenario anal!sis, we have taken the F growth rate in normal situation. "f

we want to be optimistic enough to predict that the econom! will have a high growth and

the compan! will also able to grow at *F to )F. n the other hand, the situation can


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also be worse enough to have a growth lower than the normal and the compan! ma! face

a growth of


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5elow graph for dail! change in S'7 stock price $ DS8 "nde/ reveals the strongrelationship.

Daily Change In SPL Price DSE In!e"

%&'

%()

%('

%1)

%1'

%)

'

)

1'

1)

(''!%*anuary%1+

(''!%*anuary%(9

(''!%,ebruary%1)

(''!%-arch%')

(''!%-arch%(1

(''!%.pril%'9

(''!%.pril%(+

(''!%-ay%1&

(''!%-ay%(

(''!%*une%1(

(''!%*une%(!

(''!%*uly%1)

(''!%*uly%&'

(''!%.ugust%1+

(''!%"eptember%'&

(''!%"eptember%19

(''!%/ctober%'+

(''!%/ctober%(9

(''!%0ovember%1+

(''!%0ovember%(9

(''!%ecember%1!

(''%*anuary%'

(''%*anuary%(+

(''%,ebruary%1'

(''%,ebruary%(2

(''%-arch%1(

(''%-arch%&1

(''%.pril%12

(''%-ay%'+

(''%-ay%('

(''%*une%'+

(''%*une%((

(''%*uly%'

(''%*uly%(&

(''%.ugust%'!

(''%.ugust%(!

(''%"eptember%11

(''%/ctober%')

(''%/ctober%(1

(''%0ovember%')

(''%0ovember%('

(''%ecember%1+

( ' ' 9 * ' )

"PL change3 "4 change3

2igure $: Daily !hange in SPL Price ? DSE /nde @04708=

8.E%ected 6eturn o* SPL using !-P,

The general idea behind 9@' is that investors need to be compensated in two wa!s:

time value of mone! and risk. The time value of mone! is represented b! the riskfree

42f6 rate in the formula and compensates the investors for placing mone! in an!

investment over a period of time. The other half of the formula represents risk and

calculates the amount of compensation the investor needs for taking on additional risk or

risk premium. This is calculated b! taking a risk measure 4beta6 that compares the returns

of the asset to the market over a period of time and to the market premium 42m2f6.

64I+

(i+

i )))) +=

We have determined market return 2m for !ear )**- taking the Juarterl! change in DS8

"nde/. The average market return in )**- has been found to be .+F. "f we post all the


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values in the above e#uation 4considering 2fK.Ce's

"t has been empiricall! observed that, movement of Share 'rice of a specific compan! is

significantl! influenced b! the -nnoun.eent of i*ien e.laration, +ir

pe.ifi. esand aret es. "n case of dividend declaration, one important issue

is "i*ien ateaffecting share price.

@n attempt was made to find whether share price of SPLbehaved in accordance with the

influence of these variables.

-nalysis o* Stock Price 2luctuation during the year $004:

The last #uarter of the !ear )**+ was more or less stable which was reflected in the

following !ear until ;H*


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Daily SPL Cl#$e Price %&''()'*+

'

1'''

('''

&'''

+'''

)'''

2'''

(''!%*anuary%1+

(''!%*anuary%&'

(''!%,ebruary%19

(''!%-arch%'

(''!%-arch%(

(''!%.pril%12

(''!%-ay%'2

(''!%-ay%((

(''!%*une%'!

(''!%*une%()

(''!%*uly%1(

(''!%*uly%&'

(''!%.ugust%12

(''!%"eptember%'2

(''!%"eptember%(+

(''!%/ctober%1!

(''!%0ovember%')

(''!%0ovember%((

(''!%ecember%1'

(''%*anuary%'&

(''%*anuary%((

(''%,ebruary%'!

(''%,ebruary%(2

(''%-arch%1&

(''%.pril%'(

(''%.pril%(1

(''%-ay%'

(''%-ay%(!

(''%*une%1(

(''%*uly%'(

(''%*uly%('

(''%.ugust%')

(''%.ugust%(2

(''%"eptember%11

(''%/ctober%'2

(''%/ctober%(&

(''%0ovember%1'

(''%0ovember%(2

(''%ecember%(&

(''9%*anuary%1+

"PL 5lose

2igure (: -nalysis o* stock %rice *luctuation during the year $004708

Then the price remained stable until 1thAuly04. n +thOul!0 * the 5oard of Directors

has recommended cash dividend P


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n )H*H*-, The 5oard of Directors has recommended cash dividend P >*F and stock

dividend P CF in onl! one da!. This shows a rather efficient

form.

Then again a decrement was found due to the CE7Di&idend Datephenomenon , as the

Shareholders were willing to dispose their shares after getting the dividend. The record

date was >H*-H*-. @s a result share price decreased b! around )-F from CH*-H*- to

-H*-H*- 4 da!6. This also shows a rather efficient form.

@s a whole, it can be observed that, the stock price of a specific compan! is significantl!

influenced b! the 8/ dividend Date phenomenon on dividend declaration, =irm specific

news and arket news. "t can be predicted that 8/ Date phenomenon will occur in

somewhere around in the )nd week of @ugust for S#uare 'harmaceuticals 7td..


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10.ST!" #ST!" #-L-T/>-L-T/>

"n this section we shall make a pro&ection of market stock price of Square

Pharmaceuticals Ltd.. "t has a securit! specific beta risk of 0.4088(and the e/pected

return for the compan! is (.+(C


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=or growth rate, we took the gK22R28 as 4 but slightl! improved in )**. The firm should be

concerned to promote cash sales, ma! be, b! means of cash discount.

"n asset management ratios we can see inventor! turnover ratio, DS and total asset

turnover slightl! deteriorated in )**. Mowever the all the ratios are better than 5e/imco

s

P

=

0

Div 64DivDiv * +=


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'harmaceuticals 7td. @lso the DS of S#uare pharmaceuticals indicates that it collects

the sales faster than 5e/imco 'harmaceuticals 7td.

Debt management ratios give a clear idea about long term solvenc! of S#uare

'harmaceuticals 7td. The debt ratio increased slightl! in )**. T"8 and 9ash coverage

ratio are better than 5e/imco 'harmaceuticals 7td.

'rofit margin 2atio, 2@ and 28 of S#uare pharmaceuticals 7td has deteriorated

compared to the previous !ears. @lthough the decrease rate is not so high still it is a

problem for S#uare and the! need to tr! to improve these ratios.

5oth 'H8 and H5 ratios have improved to demonstrate that investors have more trust in

the firm. There must be some good news not reflected in the accounting ratios. =or

e/ample, in an inflationar! econom! inventories being piled up might indicate profit

potentials of the ne/t !ear as the cost of production of the ne/t !ear would go down

compared to industr! due to cost savings in inventories.

=rom the total anal!sis, we can summariGe that for the last !ear )**, even though

S#uare 'harmaceuticals 7td. deteriorated in all the ratios, but still holding the better

position compared to 5e/imco 'harmaceuticals 7td @the best alternati&e *orgone=and

this has been reflected through the increment in share price and in 'H8 and H5 ratios.

The firm gained the trust of the investors. S#uare 'harmaceuticals 7td might have a good

news that is not reflected in other ratios but investors know.

Therefore we can come to the conclusion that S#uare 'harmaceutical 7td is a better

compan! to invest on.


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square pharma financial analysis.doc