Financial Statement Analysis of Square Pharmaceuticals Ltd

Financial Statement Analysis of Square Pharmaceuticals Ltd

Background

Financial Statement includes the Balance Sheet, Income statement and other statement which

determine the company’s performance. Financial ratio analysis is the calculation and

comparison of ratios which are derived from information in company’s financial statements.

Financial ratios are the analyst’s microscope. It allowed them to get a better view of the firm’s

financial health than just looking at the raw financial statements.

BRIEF HISTORY

Square Pharmaceuticals Ltd. is a renowned company in Bangladesh. It is a flagship company in

the pharmaceutical industry which has reached this mountain of success by fighting many

potential competitors like BEXIMCO Pharma, INCEPTA, ACME, RENETA, OPSONIN, SK+F,

SANOFI-AVENTIS etc. It initially started as a Partnership in 1958. It was incorporated as a

Private Ltd. Company in 1964 and converted into Public Limited Company in 1991. Its initial

public offering started in Dhaka and Chittagong stock exchange simultaneously in 1995. Their

mission is to produce and provide quality & innovative healthcare relief for people, maintain

stringently ethical standard in business operation also ensuring benefit to the shareholders,

stakeholders and the society at large.

Vision

They view business as a means to the material and social wellbeing of the investors,

employees and the society at large, leading to accretion of wealth through financial and moral

gains as a part of the process of the human civilization.

Mission

Their Mission is to produce and provide quality & innovative healthcare relief for people,

maintain stringently ethical standard in business operation also ensuring benefit to the

shareholders, stakeholders and the society at large.

Objectives

Their objectives are to conduct transparent business operation based on market mechanism

within the legal & social frame work with aims to attain the mission reflected by our vision.

Corporate Focus

Their vision, our mission and our objectives are to emphasize on the quality of product, process

and services leading to growth of the company imbibed with good governance practices.

Corporate History

Year of Establishment (Initially as a Partnership) : 1958

Incorporated as a Private Limited Company : 1964

Technical Collaboration Agreement with

Janssen Pharmaceuticals of Belgium

(a subsidiary of Johnson & Johnson International Ltd. ) : 1975

Technical Collaboration Agreement with

F. Hoffman-La Roche & Co. Ltd. : 1984

Converted into Public Limited Company : 1991

Initially Public Offering (IPO) : 1994

Stock Exchange Listings : 1995

Agreement with M/s. Bovis Tanvec Ltd. of UK for

implementation of Dhaka Plant : 1996

Awarded ISO-9001 Certificate : 1998

Awarded UK-MHRA Certificate : 2007

Business Lines : Manufacturing and Marketing of

Pharmaceutical Finished

Products, Basic Chemicals,

AgroVet Products and Pesticide

Products

Authorized Capital : Tk. 5,000 million

Paid-up Capital : Tk. 1,207.22 million

Number of Employees : 3,811

Subsidiary Company

Square Spinnings Ltd.

Square Cephalosporins Ltd.

Square Biotechs Ltd.

Square Multi Fabrics Ltd.

Associate Company

Square Textiles Ltd.

Square Knit Fabrics Ltd.

Square Fashions Ltd.

Square Hospitals Ltd.

Problem Identification

Pharmaceutical company is very important for every country. In our country, pharmaceutical

sector is booming. This pharmaceutical sector involves with various medicine production,

distribution and other works. One country’s health and nutrition sectors development almost

depends on the pharmaceutical sector because they provide the medicine which refers by the

doctor. If they don’t produce quality or standard medicine the patient will not recover from

illness. The nation will net get healthy human resource.

There are many pharmaceutical companies in Bangladesh now. Square pharmaceutical

company is one of them. In the report we will see how they perform in Bangladesh with their

financial statement analysis.

Objective of the Study

In Bangladesh, pharmaceutical sector is one of the boost sectors. This sector develops their

products and service rapidly. They create fantastic opportunities to export medicine from

Bangladesh to other country. As a result they earn huge amount of profit. They not only export

the medicine but also meet the local demand of medicine. To address the followings

components in this paper:

To know the liquidity ration

To know financial ration

To know coverage ratio

To know activity ratio

To know profitability ratio

And also trend analysis and common size analysis

Limitation of the Study

Limitation of the study is about:

a) Based on only secondary source of data

b) Time bound restrict me for further research on the topic

c) There is not possible to analyze every ratio of the financial statement

Finding

Square Pharmaceuticals Ltd.

Balance Sheet

As on 31.03.2009 As on 31.03.2008 As on 31.03.2007

Non-Current assets 9,407,730,001 8,291,290,984 6,804,429,292

Property, Plant and

Equipment-Carrying

Value

4,899,679,832 4,088,432,171 3,531,003,509

Capital Work-in-

Progress

- 591,114,649 481,239,419

Investment – Long

Term (at Cost)

4,508,050,169 3,611,744,164 2,792,186,364

Current Assets 3,843,512,855 4,411,836,436 3,682,510,712

Inventories 2,098,755,231 2,026,736,322 1,544,191,798

Trade Debtors 477,562,002 360,245,646 322,864,637

Advances, Deposits

and Prepayments

260,330,162 288,806,440 236,455,395

Investment in

Marketable Securities

(at Cost)

20,250,000 20,250,000 20,250,000

Short Term Loan 693,157,720 1,510,502,334 1,418,893,703

Cash and Cash

Equivalents

293,457,740 205,295,694 139,855,179

TOTAL ASSETS 13,251,242,856 12,703,127,420 10,486,940,004

Shareholders’ Equity 9,949,397,634 8,417,040,705 7,333,257,612

Share Capital 1,207,224,000 894,240,000 596,160,000

Share Premium 2,035,465,000 2,035,465,000 2,035,465,000

General Reserve 105,878,200 105,878,200 105,878,200

Tax Holiday Reserve 1,101,935,237 1,101,935,237 1,101,935,237

Retained Earnings 5,498,895,197 4,279,522,268 3,493,819,175

Non-Current

Liabilities

660,976,668 785,241,612 598,116,106

Long Term Loans –

Secured

449,757,608 602,584,615 492,569,379

Deferred Tax Liability 211,219,060 182,656,997 105,546,727

Current Liabilities 2,640,868,554 3,500,845,103 2,555,566,286

Short Term Bank

Loans

1,534,345,782 2,669,693,184 1,818,777,878

Long Term Loans –

Current Portion

295,590,601 297,002,646 225,176,449

Trade Creditors 124,222,699 100,953,258 60,601,743

Liabilities for

Expenses

69,573,702 32,290,235 24,565,248

Liabilities for Other

Finance

617,135,770 400,905,780 426,444,968

TOTAL EQUITY

AND LIABILITIES

13,251,242,856 12,703,127,420 10,486,940,004

Square Pharmaceutical Ltd

Income Statement For the year ended 31-03-

09For the year ended 31-03-08

For the year ended 31-03-07

NET TURNOVER9,820,796,568 8,257,843,739 7,500,811,349

Less: COST OF GOODS SOLD5,672,565,973 4,856,061,933 4,268,447,662

GROSS PROFIT4,148,230,595 3,401,781,806 3,232,363,687

Less: Operating Expenses1,779,793,368 1,692,475,988 1,406,611,448

PROFIT FROM OPERATIONS2,368,437,227 1,709,305,818 1,825,752,239

Other Income665,520,915 604,628,504 220,144,368

Less: Financial Expenses397,135,963 351,868,423 236,845,084

NET PROFIT BEFORE WPPF2,636,822,179 1,962,065,899 1,809,051,523

Less: Allocation for WPPF125,562,961 93,431,709 86,145,311

NET PROFIT BEFORE TAX2,511,259,218 1,868,634,190 1,722,906,212

Less: Provision for Income Tax592,644,226 409,660,827 347,984,083

Less: Provision for Deferred Income Tax 28,562,063 77,110,270 71,679,289

NET PROFIT AFTER TAX1,890,052,929 1,381,863,093 1,303,242,840

Earnings Per Share (EPS)156.56 114.47 145.74

Financial Ratio: Financial ratios are useful indicators of a firm’s performance and financial

situation. Financial ratios can be used to analyze trends and to compare the firm’s financials to

those of other firms.

Uses of Ratio Analysis: Ratios are used both internal and external analyst:

1. Internal Uses

Planning

Evaluation of management

Focus on investment for various assets and assets efficiency

Understanding how suppliers of funds analyze the firm

1. External Uses

Credit granting by the financial institution of individual

Performance monitoring

Investment decisions

Policy making decision

Focus on the profitability and long term health of the firm

Focus on the long term cash flow of the firm

Focus on the liquidity of the firm

Categories of Financial Ratio

Financial ratios can be classified according to the information they provide. The following types

of ratios frequently are used:

1. Liquidity Ratio

2. Financial Leverage Ratio

3. Coverage Ratio

4. Activity Ratio

5. Profitability Ratio

Trend Analysis

Trend Analysis is important for the company. The value of the variable tends to increase or

decrease over long period of time. In this aspect financial health of the firm either improves or

not can be seen in the trend analysis.

Common Size Analysis: It is an analysis of percentage of financial statements where all

balance sheet items are divided by total assets and all income statement items are divided by

net sales or revenue.

Liquidity Ratio

Liquidity ratios are the first ones to come in the picture. These ratios actually show the

relationship of a firm’s cash and other current assets to its current liabilities. Two ratios are

discussed under Liquidity ratios. They are:

1. Current ratio

2. Quick/ Acid Test ratio.

1. Current ratio: This ratio indicates the extent to which current liabilities are covered by those

assets expected to be converted to cash in the near future. Current assets normally include cash,

marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts

payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other

accrued expenses (principally wages).

2. Quick/ Acid Test ratio: This ratio indicates the firm’s liquidity position as well. It actually refers

to the extent to which current liabilities are covered by those assets except inventories. Companies

with less than 1 cannot pay their current liabilities and should be looked at with extreme care.

Current Assets (2008-2009): Cash and Cash Equivalence + Inventories + Trade Debtor +

Advance, Deposits and Payment + Investment at Marketable Securities (at cost) + Short Term

Loan

= 293,457,740 +2,098,755,231 + 477,562,002 + 260,330,162 + 20,250,000 + 693,157,720

= 3,843,512,855



Loan

= 205,295,694 + 2,026,736,322 + 360,245,646 + 288,806,440 + 20,250,000 + 1,510,502,334

= 4,411,836,436



Loan

= 139,855,179 + 1,544,191,798 + 322,864,637 + 236,455,395 + 20,250,000 + 1,418,893,703

= 3,682,510,712

Current Liability (2008-2009): Short Term Bank Loans + Long Term Loans – Current Portion +

Trade Creditors + Liabilities for Expenses + Liabilities for Other Finance

= 1,534,345,782 + 295,590,601 + 124,222,699 + 69,573,702 + 617,135,770

= 2,640,868,554

Current Liability (2007-2008): Short Term Bank Loans + Long Term Loans – Current Portion +


= 2,669,693,184 + 297,002,646 + 100,953,258 + 32,290,235 + 400,905,780

= 3,500,845,103

Current Liability (2006-2007): Short Term Bank Loans + Long Term Loans (Current Portion) +


= 1,818,777,878 + 225,176,449 + 60,601,743 + 24,565,248 + 426,444,968

Inventories:

2008-2009: Raw Materials + Packing Materials + Work-in-Process + Finished Goods + Spares

& Accessories + Goods in Transit

= 712,447,113 + 203,170,462 + 146,340,693 + 568,607,732 + 99,673,071 + 368,516,160

= 2,098,755,231



= 688,846,968 + 186,341,475 + 141,106,414 + 581,543,862 + 87,243,576 + 341,654,027

= 2,026,736,322



= 562,131,687 + 166,890,495 + 119,969,662 + 458,007,065 + 90,596,538 + 146,596,351

= 1,544,191,798

Table 1: Calculation of Current Ratio and Quick Ratio

Year Current

Assets (I)

Current

Liability (II)

Inventories

(III)

Current

Ratio IV=

I ÷ II

Quick Ratio

V = (I – III) ÷

II

2009 3,843,512,855 2640868554 20987552311.46 0.66

2008 4,411,836436 3500845103 20267363221.26 0.68

2007 3682510712 2555566286 15441917981.44 0.84

Comment:

Current ratio of Square Pharmaceuticals Ltd. shows that the ability of the company to meet the

current liabilities with available current assets was decreased in the year 2008 and again

increased n 2009. If we take a closer look on the balance sheet, this assumption gets a more

realistic touch. Year by year assets have gone slightly up and the liabilities as well, but

proportionately assets were a littler higher than the liabilities which actually reflected as a

marginal increase in the ratio. As the current ratio is not consistent the management should

keep keen eyes in this regard.

The Quick ratio shows the decreasing trend. It indicates that the company is so much depends

on the inventories to meet the current liability. Their ratio is so much weak to cover an

unexpected draw down of liabilities.

Financial Leverage Ratio

Financial leverage ratio shows the extent that debt is used in a company’s capital structure. It

may be defined as the use of fixed financial charges in the firm’s capital structure t magnifies

the Earning Per Share.

1. Debt to Equity Ratio

2. Debt to Asset Ratio

A. Debt to Equity Ratio: It indicates what proportion of the equity and debt using the company

to finance it assets. Sometimes investors uses only long term debt instead of total liabilities for a

more stringent test.

A ratio greater than one means assets are mainly financed with debt, less than one means

equity provides a majority of the financing.

If the ratio is high (financed more with debt) then the company is in a risky position. Especially

if the rate of interest are on the rise.

Total Debt (2008-2009): Short Term Bank Loans + Long Term Loans – Current Portion + Trade

Creditors + Liabilities for Expenses + Liabilities for Other Finance + Loan Term Loan (secured)

+ Deferred Tax Liability

= 1,534,345,782 + 295,590,601 + 124,222,699 + 69,573,702 + 617,135,770 + 449,757,608 +

211,219,060

= 3301845222




= 2,669,693,184 + 297,002,646 + 100,953,258 + 32,290,235 + 400,905,780 + 602,584,615 +

182,656,997

= 428,60,86715




= 1,818,777,878 + 225,176,449 + 60,601,743 + 24,565,248 + 426,444,968 + 492,569,379 +

105,546,727

= 315,36,82392

Shareholder’s Equity (2008-2009): Share Capital + Share Premium + General Reserve + Tax

Holiday Reserve + Retain Earnings

= 1,207,224,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 5,498,895,197

= 9,949,397,634



= 894,240,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 4,279,522,268

= 8,417,040,705



= 596,160,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 3,493,819,175

= 7,333,257,612

Table 2: Debt to Equity Ratio

Year Debt (I) Equity (II) Debt to Equity Ratio

III = I ÷ II

20093301845222 9949397634 0.33

20084286086715 8417040705 0.51

20073153682392 7333257612 0.43

Debt to Asset Ratio: It indicates what proportion of the company’s assets is being financed

through debt. It is so much similar to the debt equity ratio. A ratio under 1 means a major

portion of assets are financed with equity and above 1 means they are financing more by debt.

Furthermore we can interpret a high ratio as a highly debt leverage firm. When a company with

high ratio then the company is also on high risk, especially in an increasing rate of interest

market.




= 1,534,345,782 + 295,590,601 + 124,222,699 + 69,573,702 + 617,135,770 + 449,757,608 +

211,219,060

= 3301845222




= 2,669,693,184 + 297,002,646 + 100,953,258 + 32,290,235 + 400,905,780 + 602,584,615 +

182,656,997

= 428,60,86715




= 1,818,777,878 + 225,176,449 + 60,601,743 + 24,565,248 + 426,444,968 + 492,569,379 +

105,546,727

= 315, 36, 82392

Total Assets:

2008-2009: Property Plant and Equipment Carrying Value + Investment Long term (at cost) +

Current Assets

= 4,899,679,832 + 4,508,050,169 + 3843,512,855

2007-2008: Property Plant and Equipment Carrying Value + Capital Work In progress +

Investment Long term (at cost) + Current Assets

= 4,088,432,171 + 591,114,649 + 3,611,744,164 + 4,411,836,436



= 3,531,003,509 + 481,239,419 + 2,792,186,364 + 3,682,510,712

From the financial statement of the Square Pharmaceutical we get the following results:

Table 3: Debt to Asset Ratio

Year Debt (I) Assets (II) Debt to Asset Ratio

III = I ÷ II

20093301845222 13251242856 0.25

20084286086715 12703127420 0.34

20073153682392 10486940004 0.30

Comment:

Debt to equity ratio has increased in the year 2008 and then decreased in the year 2009.

Square Pharmaceuticals Ltd. has increased their debt financing from 2007 to 2008 and then

again decreased in the year 2009. The management should keep the debt to equity ratio in a

balance position.

Debt to total asset ratio also increased in 2008 and then decreased in 2009. The assets of

Square Pharmaceuticals Ltd. for 2007 are supported by debt financing more than 2008. But it

decreased in 2009. as we know that the ratio the greater the financing risk higher. So, the

company should keep a moderate debt to asset ratio.

Coverage Ratio

Coverage ratio relates the financial charges of a firm to its ability to service of cover them.

Interest Coverage Ratio: It indicates the firm’s ability to cover interest charges. It is also called

times interest earned. The higher the ratio the greater the likelihood that the company could

cover its interest payments without difficulty. The value of the ratio indicates the firm’s ability to

cover annual interest by same times with operating income. The ratio also sheds some light on

the firms’ capacity to take on new debt.

EBIT (2008-2009): Gross Turn Over – Cost of goods sold – selling and distribution expense –

administrative expense

= 11,366,597,928 – 1,545,801,360 – 5,672,565,973 – 1,319,362,317 – 460,431,051

= 2,368,437,227



= 9,565,715,902 – 1,307,872,163 – 4,856,061,933 – 1,220,979,268 – 471,496,720

= 1,709,305,818



= 8,711,034,758 – 1,210,223,409 – 4,268,447,662 – 1,000,132,914 – 406,478,534

Interest Charges (2008-2009): Interest on cash credit + Interest on Overdraft + Interest on

LATR + Interest on Short term loan + Interest on Lease + Interest on long term loan

= 21,820,760 + 37,764,410 + 135,144,391 + 93,716,961 + 43,122,332 + 65,567,109

= 397,135,963



= 32,462,066 + 37,863,050 + 121,482,002 + 86,151,797 + 39,519,065 + 34,390,443



= 38,825,395 + 36,488,368 + 85,890,159 + 47,026,386 + 14,684,279 + 13,930,497

= 236,845,084

From the financial data of the Square Pharmaceutical we get the following results:

Table 4: Interest Coverage Ratio

Year EBIT (I) Interest Expense (II) Interest Coverage

Ratio III= I ÷ II

2009 2368437227 397135963 5.96

2008 1709305818 351868423 4.86

2007 1825752239 236845084 7.71

Comment

The value of the interest coverage ratio decreased in 2008 and then again increased in 2009.

The management should try to increase its earning to cover its interest expense with relatively

easy.

Activity Ratio

Activity ratio indicates the quality of receivables and how successful the firm is in its collections.

Mainly activity ratios are the indication of financial activities of a firm’s collection / marketing

department. Activity ratios can be categorized in the following types:

1. Receivable Turn Over

2. Average Collection / Receivable Turnover in Days

3. Inventory Turnover

4. Total Asset Turnover

Receivable Turn Over: This ratio shows the efficiency of the collection team of the company.

How efficient the collection team is to collect the receivables. The mathematical formula to

compute the ratio is:

Annual Net Credit Sales: Assuming that all sales are on credit.

2008-2009: Gross Turnover – Value Added Tax

= 11,366,597,928 – 1,545,801,360

= 9820796568


= 9,565,715,902 – 1,307,872,163

= 8,257,843,739


= 8,711,034,758 – 1,210,223,409

= 7,500,811,349

The practical data of the Square Pharmaceuticals Ltd. show the following results:

Table 5: Receivable Turnover Ratio

Year Net Sales (I) Receivable (II) Receivables Turnover Ratio

III = I ÷ II

2009 9820796568 477562002 20.56

2008 8257843739 360245646 22.92

2007 7500811349 322864637 23.23

Average Collection / Receivable Turnover in Days: This indicates the average number of

days it takes a company to collect unpaid invoices. A ratio indicates that the company is having

problems getting paid for service or products. The ratio is sometimes seasonally affected, rising

during busy seasons, and falling during the off season. To account for this seasonality, the

average accounts receivables (beginning + ending account receivables / 2) could be used

instead. Average collection period can be determined by the following formula:

Table 6: Average Collection Period

Year Receivable Turnover (I) Average Collection Period

II = 365 ÷ I

2009 20.56 18

2008 22.92 16

2007 23.23 16

Comment

Receivable turnover ratio indicates the quality of receivables and how successful the Square

Pharmaceuticals Ltd. Is in collection. The higher the turnover he shorter the time between sale

and cash collection. The receivable collection shows the decreasing trend. So the management

should try to turn the trend to an increasing trend.

For the year 2007 and 2008 time series analysis is stable. But at the year 2009 in comparison

with last two years average collection period has increased. Therefore the company has to take

utmost care to bring down the collection period of receivable.

Inventory Turnover: It is an important ratio for the company. it indicates that how much time

need to produce the product and sale it. a low turnover is usually a bad sign because products

tend to deteriorate as they sit in a warehouse. Companies selling perishable items have very

high turnover. For more accurate inventory figures, the average inventory figure (the opening

inventory + ending inventory / 2) is used when computing inventory turnover. Average inventory

accounts for any seasonality effects on the ratio. Inventory turnover ratio indicates the

effectiveness of the inventory management of the company. It can be calculated by the

following equation:

Cost of Goods Sold:

2008-2009:Raw material consumed+ Packing Material Consumed+ Work in Process (opening)

– Work in Process (ending) + Factory Overhead + Purchased of Finished Goods+ Finished

Goods (Opening) – Finished Goods (ending)

= 3,004,618,146 + 1,318,695,068 + 141,106,414 – 146,340,693+ 1,123,414,629 +

218,136,279+ 581,543,862 – 568,607,732

= 5,672,565,973

2007-2008: Raw material consumed+ Packing Material Consumed+ Work in Process (opening)



= 2,770,478,855 + 1,144,141,207 + 119,969,662 – 141,106,414 + 874,353,806+ 211,761,614+

458,007,065 – 581,543,862

= 4,856,061,933

2006-2007: Raw material consumed+ Packing Material Consumed+ Work in Process (opening)



= 2,401,727,164 + 927,381,432 + 108,390,739- 119,969,662 + 748,199,160 + 247,748,512 +

412,977,382 – 458,007,065)

= 4,268,447,662

Inventory:



= 712,447,113 + 203,170,462 + 146,340,693 + 568,607,732 + 99,673,071 + 368,516,160

= 2,098,755,231



= 688,846,968 + 186,341,475 + 141,106,414 + 581,543,862 + 87,243,576 + 341,654,027

= 2,026,736,322



= 562,131,687 + 166,890,495 + 119,969,662 + 458,007,065 + 90,596,538 + 146,596,351

= 1,544,191,798

Table 7: Inventory Turnover Ratio

Year Cost of Goods Inventory (II) Inventory Turnover ratio

Sold (I) III = I ÷ II

2009 5672565973 2098755231 2.70

2008 4856061933 2026736322 2.40

2007 4268447662 1544191798 2.76

Total Asset Turnover: It indicates the relationship between assets and revenues. Companies

with low profit margin tend to have high asset turnover, those with high profit margin have low

asset turnover. It indicates pricing strategy. This ratio is more useful for growing company to

check if it n fact they are growing revenues in proportion to sales. This ratio is useful to

determine the amount of sales that are generated from each dollar of asset. The formula for

total asset turnover is as follows:

Net Sales:


= 11,366,597,928 – 1,545,801,360

= 9820796568


= 9,565,715,902 – 1,307,872,163

= 8,257,843,739


= 8,711,034,758 – 1,210,223,409

= 7,500,811,349

Assets:


Current Assets

= 4,899,679,832 + 4,508,050,169 + 3843,512,855



= 4,088,432,171 + 591,114,649 + 3,611,744,164 + 4,411,836,436



= 3,531,003,509 + 481,239,419 + 2,792,186,364 + 3,682,510,712

Financial data of Square Pharmaceuticals Ltd. show the following result:

Table 8: Total Asset Turnover Ratio

Year Net Sales Total Asset Total Asset Turnover Ratio

III = I ÷ II

2009 9820796568 13251242856 0.74

2008 8257843739 12703127420 0.65

2007 7500811349 1048940004 0.72

Comment

The changes in Inventory Turnover Ratio decreased in 2008 comparing to previous year but

increased again in 2009. Though last year trend is an increasing one, still the company should

improve its inventory management to achieve organizations goals.

Firm’s Total Asset Turnover Ratio is weak. The company should go for more sales to get a

higher asset turnover.

Profitability Ratio

Profitability is the net result of a number of policies and decisions. Profitability ratios show the

combined effects of liquidity, asset management and debt on operating results.

Profitability Ratio can be divided into the following parts:

Gross Profit Margin

Net Profit Margin

Return on Investment Ratio

Return on Equity

Gross Profit Margin: It indicates what the company pricing policy is and what the true mark-up

margin are. The results may skew if the company has very large range of products. This is very

useful when comparing against the margins of previous year. A 33% gross margins means

products are marked up 50% and so on.

The gross profit margin ratio tells us the profit a business makes on its cost of goods sold. We

can compute it from the following formula:

Net Sales:


= 11,366,597,928 – 1,545,801,360

= 9820796568


= 9,565,715,902 – 1,307,872,163

= 8,257,843,739


= 8,711,034,758 – 1,210,223,409

= 7,500,811,349

Gross Profit:

2008-2009: Net Sales – Cost of Goods Sold

= 9820796568 – 5,672,565,973

= 4148230595


=8257843739 – 4856061933

= 3401781806


7,500,811,349 - 4,856,061,933

= 3232363687

From the profit and loss account of the Square Pharmaceutical Company we get the following

result:

Table 9: Gross Profit Margin Ratio

Year Gross Profit (I) Net Sales (II) Gross Profit Margin

III = I ÷ II

20094148230595 9820796568

0.42

20083401781806 8257843739

0.41

20073232363687 7500811349

0.43

Net Profit Margin: The main reason that the profit margin declined is high cost. High cost, in

turn, generally occurs due to inefficient operations. It indicates what proportion of sales

contributes to the income of the company. This ratio is not useful for companies losing money,

since they have no profit. A low profit margin can indicate pricing strategy and or the impact

competition has on margins. The net profit margins ratio tells us the amount of net profit per Tk.

of turnover a business has earned. It is only after taking consideration of cost of sales, the

administrative, and selling and distribution cost, pay interest and tax and so on. The formula to

calculate it as follows:

Net Profit After Tax:

2008-2009: Gross Profit – Operating Expense + Other Income – Financial Expenses –

Allocation for WPPF – Provision for income tax – Provision for deferred income tax

= 4,148,230,595 – 1,779,793,368 + 665,520,915 – 397,135,963 – 125,562,961 – 592,644,226

– 28,562,063

= 1,890,052,929



= 3,401,781,806 – 1,692,475,988 + 604,628,504 – 351,868,423 – 93,431,709 – 409,660,827 –

77,110,270

= 1,381,863,093



= 3,232,363,687 – 1,406,611,448 + 220,144,368 – 236,845,084 – 86,145,311 – 347,984,083 –

71,679,289

= 1,303,242,840

Net Sales:


= 11,366,597,928 – 1,545,801,360

= 9820796568


= 9,565,715,902 – 1,307,872,163

= 8,257,843,739


= 8,711,034,758 – 1,210,223,409

= 7,500,811,349

Table 10: Net Profit Margin Ratio

Year Profit After Tax (I) Net Sales (II) Net Profit Margin

III = I ÷ II

2009 1890052929 9820796568 0.19

2008 1381863093 8257843739 0.17

2007 1303242840 7500811349 0.17

Comment

Time series analysis shows that the gross profit margin is more or less stable. From the above

findings on Gross profit margin of Square Pharmaceuticals we can say that the management

should try to increase profit gradually.

Time series analysis is stable of 2008 and 2007 and increased in 2009. This is a good symbol

for the company and the management should try to maintain this tend.

Return on Investment (ROI): It indicates what return a company is generating on the firm’s

investment or assets. The ROA (Return On Asset) is often referred to as ROI. We add the

interest expense to ignore the cost of the cost associated with funding those assets. This is an

important ratio for the companies deciding whether or not initiates a new project. The basis of

this ratio is that if accompany is going to start a project they expect to earn a return on it, and

ROA is the return they would receive. This ratio indicates the profitability on the assets of the

firm’s after all expenses and taxes. The method for calculating this ratio is as follows:




= 4,148,230,595 – 1,779,793,368 + 665,520,915 – 397,135,963 – 125,562,961 – 592,644,226

– 28,562,063

= 1,890,052,929



= 3,401,781,806 – 1,692,475,988 + 604,628,504 – 351,868,423 – 93,431,709 – 409,660,827 –

77,110,270

= 1,381,863,093



= 3,232,363,687 – 1,406,611,448 + 220,144,368 – 236,845,084 – 86,145,311 – 347,984,083 –

71,679,289

= 1,303,242,840

Net Sales:


= 11,366,597,928 – 1,545,801,360

= 9820796568


= 9,565,715,902 – 1,307,872,163

= 8,257,843,739


= 8,711,034,758 – 1,210,223,409

= 7,500,811,349

Assets:


Current Assets

= 4,899,679,832 + 4,508,050,169 + 3843,512,855



= 4,088,432,171 + 591,114,649 + 3,611,744,164 + 4,411,836,436



= 3,531,003,509 + 481,239,419 + 2,792,186,364 + 3,682,510,712

Table 11: Return On Investment Ratio

Year Profit After Tax (I) Asset (II) ROI = I ÷ II

20091890052929

13251242856 0.14

20081381863093

12703127420 0.11

20071303242840

10486940004 0.12

Return On Equity (ROE): It indicates what return a company is generating on the owner’s

equity investment. For high growth the company should expect a higher ROE. Average ROE

over past few year can give a better idea of the historical growth. Sometimes ROE is referred to

as stockholders return on investment, it tells the rate that shareholders are earning on their

shares. The ROE ratio tells us how much profit they earn from the investment of the

shareholders have made in their company. The formula as follows:




= 4,148,230,595 – 1,779,793,368 + 665,520,915 – 397,135,963 – 125,562,961 – 592,644,226

– 28,562,063

= 1,890,052,929



= 3,401,781,806 – 1,692,475,988 + 604,628,504 – 351,868,423 – 93,431,709 – 409,660,827 –

77,110,270

= 1,381,863,093



= 3,232,363,687 – 1,406,611,448 + 220,144,368 – 236,845,084 – 86,145,311 – 347,984,083 –

71,679,289

= 1,303,242,840

Shareholder’s Equity:

2008-2009: Share Capital + Share Premium + General Reserve + Tax Holiday Reserve +

Retain Earnings

= 1,207,224,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 5,498,895,197

= 9,949,397,634


Retain Earnings

= 894,240,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 4,279,522,268

= 8,417,040,705


Retain Earnings

= 596,160,000 + 2,035,465,000 + 105,878,200 + 1,101,935,237 + 3,493,819,175

= 7,333,257,612

Table 12: Return On Equity Ratio

Year Profit After Tax (I) Shareholder Equity

(II)

ROE

III = I ÷ II

20091890052929

9949397634 0.19

20081381863093

8417040705 0.16

20071303242840

7333257612 0.18

Comment

Square Pharmaceuticals Tend analysis of ROI ratio shows that after 2007, it decreased but for

the next year it increased. Profit in 2007 is 12%, in 2008 is 11% and in 2009 is 14%. The

company should take necessary steps to maintain this trend.

ROE indicates the profitability to the shareholders of Square Pharmaceuticals Ltd. after all

expenses and taxes. It is 18% in 2007, 16% I 2008 and 19% in 2009. The investors of the

company got more benefit than the previous year. The management should try to keep this

trend of the profit to satisfy the shareholder.

Square Pharmaceutical Ltd. Common Size Balance Sheets

As on 31.03.2009 (%) As on 31.03.2008 As on 31.03.2007

Non-Current assets 70.99 65.27 64.88

Property, Plant and

Equipment-Carrying

Value

36.97 32.18 33.67

Capital Work-in-

Progress

- 4.65 4.59

Investment – Long

Term (at Cost)

34.02 28.43 2.66

Current Assets 29.00 34.73 35.12

Inventories 15.84 15.95 14.72

Trade Debtors 3.6 2.83 3.08

Advances, Deposits

and Prepayments

1.96 2.27 2.25

Investment in

Marketable Securities

(at Cost)

0.15 0.159 0.19

Short Term Loan 5.2 11.89 13.53

Cash and Cash

Equivalents

2.2 1.6 1.33

TOTAL ASSETS 100% 100% 100%

Shareholders’

Equity

75.08 66.26 69.92

Share Capital 9.11 7.0 5.68

Share Premium 15.36 16.0 19.40

General Reserve 0.799 0.8 1.0

Tax Holiday Reserve 8.3 8.68 10.50

Retained Earnings 41.49 33.68 33.33

Non-Current

Liabilities

4.99 6.18 5.70

Long Term Loans –

Secured

3.39 4.74 4.69

Deferred Tax Liability 1.59 1.44 1.0

Current Liabilities 19.92 27.56 24.36

Short Term Bank

Loans

11.57 21.01 17.34

Long Term Loans –

Current Portion

2.2 2.34 2.148

Trade Creditors 0.93 0.79 0.578

Liabilities for

Expenses

0.52 0.254 0.23

Liabilities for Other

Finance

4.65 3.16 4.06

TOTAL EQUITY

AND LIABILITIES

100% 100% 100%

Square Pharmaceuticals Ltd. Common Size Income Statement For the year ended 31-03-

09 (%)For the year ended 31-03-08 (%)

For the year ended 31-03-07 (%)

NET TURNOVER100% 100% 100%

Less: Cost of goods sold57.76 58.80 56.90

GROSS PROFIT42.24 41.19 43.1

Less: Operating Expenses18.12 20.49 18.75

PROFIT FROM OPERATIONS24.11 20.67 24.34

Add: Other Income6.77 7.32 2.94

Less: Financial Expenses4.04 4.26 3.16

NET PROFIT BEFORE WPPF26.85 23.76 24.12

Less: Allocation for WPPF1.2 1.13 1.14

NET PROFIT BEFORE TAX25.57 22.63 22.97

Less: Provision for Income Tax6.0 4.96 4.64

Less: Provision for Deferred Income Tax.29 0.93 .955

NET PROFIT AFTER TAX19.24 16.74 17.37

Summary and Conclusion

Considering the entire financial ratio for the Square Pharmaceutical Ltd. we can say that at

present the overall condition of the company is good. It had a mixed period from the year 2007

to 2009. Though the ROI is increasing gradually and ROE is not stable, it has decreasing tend

in 2008 but then again went up in 2009. The company gross profit margin is stable at around

42% constant rate. Net profit margin was stable at 17% over 2007 – 2008 and showed an

increasing trend in 2009 to reach 19%. But the company had a weak asset turnover ratio over

this period.

But we find that heir financial management is as stronger as required to attract large number of

shareholders. At the end we can conclude that, the company has strong growth rate in recent

years with a strong market reputation. But still the company should keep keen eyes in

management operation to improve the financial condition.

References

Square Pharmaceuticals Ltd.

1. Annual Report 2008-2009

2. Annual Report 2007-2008

3. Annual Report 2006-2007- See more at: http://www.assignmentpoint.com/science/pharmacy/financial-statement-analysis-of-square-

pharmaceuticals-ltd.html#sthash.JNvuNxpq.dpuf

Documents

Financial Statement Analysis of Square Pharmaceuticals Ltd