FINANCIAL PERFORMANCE ANALYSIS OF BEXIMCO PHARMACEUTICALS LTD. AND SQUARE PHARMACEUTICALS LTD. Submitted to. M. Nurul Amin.

Transcription

1 FINANCIAL PERFORMANCE ANALYSIS OF BEXIMCO PHARMACEUTICALS LTD. AND SQUARE PHARMACEUTICALS LTD. Submitted to M. Nurul Amin Submitted by Date-31 st July, 2010 North South University

2 Financial Performance analysis of BEXIMCO Pharmaceuticals Ltd. and SQUARE Pharmaceuticals Ltd. There are a number of measures to analyze the company s financial performance. These are often considered as key issues for determining the company s prospects. To analyze the financial performance of two said pharmaceuticals company, let us explain some of the following fundamentals. Current Position Current position analysis measures the liquidity position of a company. This analysis measures the ability of the firm to meet its obligations. These ratios establish relation between cash and other current asset and current liabilities. Analysis of the current position any company is very important as it of special interest to short-term creditors as this analysis helps creditors to evaluate the creditworthiness of the firm. These ratios also illustrate the management s policy in managing liquidity position of the firm. In this portion, we will be looking into both BEXIMCO s and SQUARE s ability to meet their current liabilities. Current position analysis includes the following: Current ratio Quick ratio Current ratio: Current Ratio indicates the ability of a company to achieve its short-term obligations, where short-term obligations indicate those obligations that are due within a year or within the operating cycle. Current ratios are extent to which the assets that are expected to cash cover the claims of short-term creditors. Current Ratio = Current Assets / Current Liabilities 2

3 Current Ratio BEXIMCO SQUARE ,916,737,893/2,321,451,642 =2.98 3,843,512,855/2,640,868,554 = ,861,891,644/2,602,032,267 =1.10 4,411,836,436/3,500,845,103 =1.26 In this analysis, we can view that in 2008 the current ratios were 1.10 times for BEXIMCO Pharmaceuticals Ltd. It increased significantly the next year to 2.98 times. Illustrating that the current ratio more then doubled for BEXIMCO in 2009, indicating that they are in a very good position to meet their current obligations. On the other hand, SQUARE Pharmaceuticals Company current ratio was merely 1.26 times in 2008, which increased to 1.46 times in the year Although the current ratio increased by a small portion, SQUARE ability to meet its short-term obligations is fairly weak and is significantly lower than that of BEXIMCO s. Quick Ratio: Quick ratio is most important measure of liquidity, even more than the current ratio because inventories, the least liquid of the current assets, are excluded from this ratio. It is essential for a company to realize its ability to pay the short-term obligation, without inventory because they are the current assets on which losses are mostly made in the event of liquidation. Quick ratio = (Current assets Inventory) / Current Liabilities Quick Ratio BEXIMCO SQUARE ,193,784,609/2,321,451,642 1,744,757,624/2,640,868,554 =2.24 = ,356,603,561/2,602,032,267 2,385,100,114/3,500,845,103 =0.52 =0.68 3

4 In 2008, the quick ratio was an appalling 0.52 times for BEXIMCO Pharmaceuticals Company, which increased dramatically to 2.24 times in the next year. In 2008, the quick ratio of SQUARE pharmaceuticals company, is 0.68 times, which silently decreases the next year to 0.66 times. Current Position Both of these ratios provide the idea that BEXIMCO has been able to dramatically increase both its current ratio and quick ratio from the year 2008 to By examining SQUARE Pharmaceuticals s current ratio and quick ratio we can make out that SQUARE has maintained so far an almost constant liquidity position, which is fairly good, but when compared to BEXIMCO s current ratios its position Accounts Receivables Analysis A company s ability to collect its accounts receivable is called accounts receivable analysis. It includes the computation and analysis of the following: 1. Accounts Receivable turnover 2. Number of Days Sales in Receivables Accounts Receivable turnover: Accounts receivable turnover indicates the speed with which the credit sales or account receivables are transformed or turnover into cash. Therefore it can be said that receivable turnover ratio indicates how quickly the company is collecting cash from customers. This ratio is used to assess the efficiency of a company in collection cash. It measures the company s ability to manage their credit or in other words, the company's credit strategy. Receivable turnover = Sales / Average Accounts Receivable* 4

5 Receivable Turnover BEXIMCO SQUARE ,868,254,915/599,014,066 = ,010,167,059/503,916,401 = ,366,597,928/418,903, ,257,843,739/1,510,502,334 =5.47 *(Beg A/R + End A/R)/2 From this ratio analysis we acquire that the ratio for BEXIMCO has slightly increased from 7.96 in 2008 to 8.13 in Indicating the company s rate of collecting cash from customer s is steadily improving at a minor pace but is still very poor. Glancing at SQUARE Pharmaceuticals s Accounts Receivable Turnover we can we see that the turnover ratio has remarkably increased from a mere 5.47 in 2008 to a in This means that SQUARE has become incredibly efficient in managing its credit. The reason behind this striking improvement may be due to a change in how credit is granted, collection practices or both. Number of Days Sales in Receivables: Number of Days Sales in Receivables is an estimate of the time (in days) that the accounts receivable have been outstanding. The number of days sales in receivables is often compared with a company s credit terms to evaluate the efficiency of the collection of receivables. Number of Days Sales in Receivables=365/Accounts Receivable Turnover Days Sales in Receivable BEXIMCO SQUARE 5

6 days days days days BEXIMCO was very inefficient in collecting receivables. It is normally accepted that receivables should be collected within 30 days or less, but in this case, it was being collected within days, by BEXIMCO, in The company was able to bring that level down slightly to days in 2009, but the company still has a long way to go in order to efficiently manage its credit. SQUARE was also extremely inefficient in collecting its receivables in 2008, with a staggering Number of Days Sales in Receivables of days. However, the company has dramatically decreased this ratio to days in 2009 showing that the company has been able to become extremely efficient in decreasing the amount of time that receivables are outstanding. Inventory Analysis Two measures to analyze the efficiency and effectiveness of inventory are the Inventory turnover and the number of days sales in inventory. Inventory Turnover: Inventory turnover measures the speed with which inventories move through operations. It is computed as follows: This ratio is used to assess the efficiency in managing (selling) the inventory. An increase in the inventory turnover is normally desirable. However, if the turnover is low it means that the company is either overstocking or building up a stock of obsolete merchandise. Too high an inventory indicates excess resources are being used up in working capital instead of being used to earn a return. If the turnover is too high, the company may lose sales because the goods are not in inventory when customers want them. To illustrate, the following data have been taken from annual reports of two pharmaceuticals companies: BEXIMCO Pharmaceuticals Limited and SQUARE pharmaceuticals Limited. 6

7 2009 SQUARE BEXIMCO Cost of goods sold 5,672,565,973 2,566,206,626 Inventories Beginning year of 2,026,736,322 1,505,288,093 End of year 2,098,755,231 1,722,953,284 Average 2,062,745,777 1,614,120,689 Inventory Turnover The Inventory turnover is 2.75 for SQUARE pharmaceuticals, which means inventory is turning over 2.75 times a year. The Inventory turnover is 1.59 for BEXIMCO pharmaceuticals, which is lower than the SQUARE pharmaceuticals. As SQUARE has high turnover than BEXIMCO, SQUARE is more efficient and effective in managing inventory. The number of days sales in inventory: It is a rough measure of the length of time it takes to acquire, sell and replace the inventory. It is computed as follows: The average daily cost of merchandise sold is determined by dividing the cost of goods sold by

8 The number of days sales in inventory for BEXIMCO and SQUARE is computed as shown below: Average daily Cost of goods sold 2009 SQUARE BEXIMCO 5,672,565,973/365 15,541, ,566,206,626/365 7,014, Average inventory 2,062,745,777 1,614,120,689 number of days sales in inventory days days It takes the BEXIMCO almost 98 days more than the SQUARE to move its average inventory. Another sign is that it is not performing as well as the SQUARE. Leverage Ratios to Evaluate Financial Risk Leverage ratios are used to measure the extent to which an entity has been financed by debt. That is they indicate the degree to which resources or assets have been obtained by incurring liabilities, or debt financing. As a company increases its use of debt financing, it also increases the probability of encountering financial distress, a relationship referred to as financial risk. One can monitor this risk by measuring how leveraged the business has become. Three ratios are commonly used to evaluate the amount of financial risk borne by a particular entity. 1. Debt to Asset ratio 2. Ratio of liabilities to Stockholders equity 3. Number of times interest charges are earned Debt to Asset ratio: 8

9 The debt to asset ratio is a leverage ratio that indicates the long run solvency on relative amount of financial risk incurred by a business. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. The ratio is computed as follows: Debt to asset ratio for BEXIMCO and SQUARE is computed as shown below: 2008 Debt to Asset ratio BEXIMCO 4,369,463,296 14,819,665, SQUARE 4,286,086,715 12,703,127, Debt to Asset ratio SQUARE 3,301,845,222 13,251,242, BEXIMCO 9006,226,810 19,891,933, In 2008, Debt to asset ratio was 0.29 for the BEXIMCO Pharmaceuticals, which means 29% total assets are financed by creditors and the remaining 55% are financed by owners. In 2009, this ratio increased to 0.42 which has increased the financial risk. Whereas, financial risk was lower for the SQUARE pharmaceuticals Ltd. as the debt to asset ratio was dropped down to 0.34 (2009) from 0.42 (2008). So, in 2009, SQUARE pharmaceuticals Ltd. has gained a better position compared to BEXIMCO Pharmaceuticals Ltd. Ratio of liabilities to Stockholders equity: The ratio of liabilities to Stockholders equity measures how much of the company is financed by debt and equity. It is computed as follows: 9

10 To illustrate, the ratio of liabilities to stockholders equity for BEXIMCO Pharmaceuticals Limited and SQUARE pharmaceuticals Limited are computed as follows: 2008 Ratio of liabilities to stockholders equity BEXIMCO 4,369,463,290 10,450,202, SQUARE 4,286,086,715 8,417,040, Ratio of liabilities to stockholders equity SQUARE 3,301,845,222 9,949,397, BEXIMCO 9,006,226,810 10,885,706, BEXIMCO s ratio of liabilities to stockholders equity increased from 0.42 to 0.83 during 2009, which increased its financial risk. Whereas, SQUARE s ratio of liabilities to stockholders equity decreased from 0.51 to 0.33 during This is an improvement and indicates that its creditors have an adequate margin of safety. Profitability Analysis Profitability ratios measure the company's ability to generate a return on its resources. 1. Gross profit percentage: (Gross profit / Net sales) * 100 This ratio Indicates, gross profit is what percentage of net sales. Gross profit percentage SQUARE BEXIMCO 10

11 % 47% % 50% From the above calculation we can see that gross profit percentage is higher for the BEXIMCO than that of SQUARE in both 2008 and Gross profit for BEXIMCO was 47% of sales in 2008 which was 3% higher than the SQUARE, and in 2009 the gap increased drastically from 3% to 8%. 2. Net Profit margin: (Net profit / Net sales)x 100 This ratio indicates, net profit is what percentage of net sales. Net profit margin SQUARE BEXIMCO % 13.6% % 12.8% A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Here, we can see that net profit margin was higher for the SQUARE than that of BEXIMCO in the two successive years. So we can say that SQUARE pharmaceuticals is more profitable than its competitor BEXIMCO. 3. Ratio of net sales to assets: (Net turnover / total assets): Measure of a firm's efficiency in managing its assets in relation to the revenue generated. Higher this ratio, the smaller the investment required to generate sales revenue and, therefore, higher profitability of the firm. Also called total assets turnover SQUARE BEXIMCO Net turnover/ total 9,820,796,568 4,868,254,915/ assets /13,251,242,856 19,891,933,422 = 74% 24% The ratio of net sales to assets showed that, SQUARE has achieved higher turnover than that of BEXIMCO. It also depicts that SQUARE has utilized their limited resources most efficiently and effectively to achieve highest possible growth. 4. Rate earned on total assets: Net Income/Total assets: measure of the earning power of assets. The ratio reveals the firm's profitability on its business operations and thus serves to measure management's effectiveness. It equals net income divided by average total assets; also called rate earned on total assets. 11

12 2009 SQUARE BEXIMCO Net Income / Total 1,890,052,929/8,917,287,969 6,24,740307/17,336,007,973.5 Assets = SQUARE has got better return on asset utilized. BEXIMCO has utilized more assets than that of SQUARE but Net Turnover is less. Their return on assets is only 3.6% due to less turnover, which couldn t provide a better growth after exhausted operational expenses. 5. Rate earned on stockholder's equity (Net Income/Average total stockholders equity) 2009 SQUARE BEXIMCO Net 1,890,052,929/9,183,219, ,740,307/(21,335,908,759/2) Income/Average total stockholders equity = 21% 6% SQUARE management has run their operations more effectively to secure the interest of the stakeholders of the company. So that it can provide a better growth of the shareholders. 6. Earnings Per Share on Common Stock (EPS): Earnings per share (EPS) on common stock measures the share of profits that are earned by a share of common stock. Generally accepted accounting principles (GAAP) required the reporting of earnings per shares in the income statement. As a result earnings per share (EPS) is often reported in the financial press. It is computed by the following formula: Earnings Per Share on Common Stock (EPS) = (Net Income-Preferred Dividend)/ Number of Common shares This means, more earnings per share indicates more profit of the company Earnings per share (EPS) on common stock for BEXIMCO and SQUARE are computed as shown below: 12

13 2009 SQUARE BEXIMCO Earnings per share (EPS) The earnings per share of SQUARE Pharmaceuticals is better than that of BEXIMCO Pharmaceuticals. 7. Price Earning (P/E) Ratio: Price Earnings (P/E) Ratio on Common stock measures a company s future earnings prospects. It is computed as follows: Price Earning (P/E) Ratio = Market price per share of common stock /EPS That is, more prices earnings ratio indicates less future prospects of the company SQUARE BEXIMCO Price-Earnings (P/E) ratio The future earnings prospects per share of SQUARE Pharmaceuticals is better than BEXIMCO Pharmaceuticals. 7. Dividend Per Share: It measures the extent to which earnings are being distributed to common shareholders. Dividends are two types; cash dividend and Bonus dividend. It is computed as follows: Dividend per Share = Dividends/ Number of common Shares This indicates that more dividend means more profitable company. Dividend per Share on common stock for BEXIMCO and SQUARE are computed as shown below: 2009 SQUARE BEXIMCO Dividend per Share 65%(40% + 25% B) 15%B SQUARE has good amount of earnings distribution per share than that of BEXIMCO 13

14 8. Dividend Yield: The dividend yield on common stock measures the rate of return to common stock holders from cash dividends. It is of special interest to investors whose objectives is to earn revenue from their investments. It is computed as follows: Dividend Yield = Dividend Per Share of Common Stock/Market Price per share of Common Stock Dividend Yield for BEXIMCO and SQUARE are computed as shown below: 2009 SQUARE BEXIMCO Dividend Yield 0% 1.36% SQUARE Pharmaceuticals has more rate of return per share (cash dividend) than that of BEXIMCO pharmaceuticals. Conclusion As per the information quoted from the financial report of 2009 of two companies, performance analysis has been carried out. It is observed that, SQUARE Pharmaceuticals has better position than BEXIMCO Pharmaceuticals. 14

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