Square Pharmaceuticals ltd.Submitted byGroup Name: Peace Messengers Islam Mohammad Samiul (09-14649-3) Hamid Faisal (09- 15037 -3)Course Name: Financial ManagementSection: HAIUBLetter of Transmittal01/03/2011Mrs. Farzana IslamHonorable FacultyA.I.U.B.Dear Madam,It gives us immense pleasure to submit a report on Financial Ratio Analysis. This report is submitted as a partial fulfillment/ as a part of our course Financial Management . We have choose two renowned pharmaceuticals companies of the country who are Beximco Pharmaceuticals Ltd. and Square Pharmaceuticals Ltd.The preparation of the report has given us in-depth knowledge on Financial Ratio Analysis. We have given our best effort to make it a worthy one and each aspect of the problem is considered and studied as required.If any confusion arises or further explanation is needed, we shall be available to explain the matter to you as and when required despite having limitations. Your compassionate and authoritative advice will encourage us to conduct further flawless research in future.Yours sincerely,Islam Mohammad Samiul (09-14649-3)Hamid Faisal (09-15037 -3)Course Name: Financial ManagementSection: HAIUBFinancial RatiosFinancial 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.Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:1. Liquidity ratios2. Activity ratios3. Debt management ratios 4. Profitability ratios5. Market value ratios1. LIQUIDITY RATIOSLiquidity ratios are the first ones to come in the picture. These ratios actually show the relationship of a firms cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are:i. Net Working Capitalii. Current ratioiii. Quick/ Acid Test ratio.i. Net Working Capital: Ameasure ofboth acompany's efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities.Negativeworking capital means that a company currently is unable tomeetits short-term liabilities withits current assets (cash, accounts receivable andinventory).The working capital ratio is calculated as:Net Working Capital = Current Assets Current Liabilities|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |2,861,891,654 - 2,602,032,267 |4,411,836,436 - 3,500,845,103 || |=Tk. 259,859,387 |=Tk. 910,991,333 ||2009 |6,916,737,893 2,321,451,642 | 3,843,512,855 - 2,640,868,554 || |=Tk. 4,595,286,251 |=Tk. 1,202,644,301 |ii. 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).Current Ratio=Current Assets/Current Liabilities|Year |Beximco Pharmaceutical |Square Pharmaceutical ||2008 | 2,861,891,654 / 2,602,032,267 | 4,411,836,436 / 3,500,845,103 || |=1.09 Times |=1.26 Times ||2009 | 6,916,737,893 / 2,321,451,642 | 3,843,512,855 / 2,640,868,554 || |= 2.98 Times |=1.45 Time |iii. Quick/ Acid Test ratio: This ratio indicates the firms liquidity position as well. It actually refers to the extent to which current liabilities are covered by those assets except inventories.Quick Ratio=(Current Assets-Inventories)/Current Liabilities|Year |Beximco Pharmaceutical |Square Pharmaceutical ||2008 | (2,861,891,654 - 1,505,288,093) / 2,602,032,267 | (4,411,836,436 - 2,026,736,322) / 3,500,845,103 || |=0.53 Times |=0.69 Times ||2009 | (6,916,737,893 1,722,953,284) / 2,321,451,642 | (3,843,512,855 - 2,098,755,231) / 2,640,868,554 || |=2.23 Times |=0.67 Times |Summary: In the liquidity ratio we can see that NWC of Beximco Pharma. Ltd. is higher than Square pharma. Ltd. both current ratio and quick ratios are also improved over time marginally. Both companies situations are stable.2. ACTIVITY RATIOSAn indicator of how rapidly a firm converts various accounts into cash or sales. In general, the sooner management can convert assets into sales or cash, the more effectively the firm is being run. Activity ratios measure the efficiency of the company in using its resources.The ratios are:i. Inventory Turnover Ratioii. Average Collection period Ratioiii. Fixed Asset Turnover Ratioiv. Total Asset Turnover Ratiov. Accounts Receivable Turnover Ratioi. Inventory Turnover Ratio: This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. The formula is:Inventory Turnover Ratio = Cost of goods sold / Inventory|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |2,002,871,181 / 1,505,288,093 |4,856,061,933 / 2,026,736,322 || |=1.33 Times |=2.39 Times ||2009 |4,868,254,915 / 1,722,953,284 |5,672,565,973 / 2,098,755,231 || |= 2.83 Times |=2.71 Times |ii. Average Collection period Ratio: The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. Following formula is used to calculate ;Average collection period = Accounts Receivable / Annual Sales|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |503,916,401 / 4,010,167,059 |1,510,502,334 / 9,565,715,902 || |=0.12 Times |=0.15 Times ||2009 |694,111,730 / 4,868,254,915 |693,157,720 / 11,366,597,928 || |=0.14 Times |=0.06 Times |iii. Fixed Asset Turnover Ratio: Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. The ratio is calculated by using following formula:Fixed Assets Turnover Ratio = Sales / Net Fixed Assets|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |4,010,167,059 / 11,921,072,697 |9,565,715,902/ 4,088,432,171 || |= 0.33 Times |=2.33 Times ||2009 |4,868,254,915 / 12,966,587,178 |11,366,597,928 / 4,899,679,832 || |=0.37 Times |=2.31 Times |iv. Total Asset Turnover Ratio: Asset turnovermeasuresa firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, whilethose with high profit margins have low asset turnover.The formula is :Total Asset Turnover Ratio = Sales / Total Assets|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |4,010,167,059 / 14,819,665,441 |9,565,715,902 / 12,703,127,420 || |=0.27 Times |=0.76 Times ||2009 |4,868,254,915 / 14,819,665,441 |11,366,597,928 / 13,251,242,856 || |=0.32 Times |=0.86 Times |v. Accounts Receivable Turnover Ratio: An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.The receivables turnoverratio is an activity ratio,measuring how efficiently a firm uses its assets. The formula is:Accounts Receivable Turnover Ratio = Sales / Accounts Receivable|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |4,010,167,059 / 503,916,401 |9,565,715,902 / 1,510,502,334 || |=7.96 Times |=6.33 Times ||2009 |4,868,254,915 / 694,111,730 |11,366,597,928 / 693,157,720 || |=7.01 Times |=16.39 Times |Summary: Both the companies changes are normal. Beximco is in better position.3. DEBT MANAGEMENT RATIOSA ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.The ratios are:i. Debt Ratioii. Debt Equity Ratioiii. Times-Interest-Earned (TIE) Ratioi. Debt Ratio: Thedebt ratio compares a company's totaldebt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage. The formula is:Debt Ratio = Total Liability / Total Assets|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |4369463296 / 14,819,665,441 |4286086715 / 12,703,127,420 || |= 29% |=33.75% ||2009 |9006226808 / 19,891,933,422 |3301845222/ 13,251,242,856 || |=45% |=24.92% |ii. Debt Equity Ratio: Thedebt-equity ratio is anotherleverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. The formula is:Debt Equity Ratio = Total Debt / Total Share Holders Equity|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |4369463296 / 10,450,202,145 |5551255643 / 8,417,040,705 || |= 41% |=65.96% ||2009 |9006226808 / 10,885,706,614 |3978587430 / 9,949,397,634 || |=82% |=39.99% |iii. Times-Interest-Earned (TIE) Ratio: A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. The formula is:TIE ratio = EBIT / Interest Expense|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |998,794,848 / 249,654,298) |1,709,305,818 / 351,868,423) || |=4 Times |=4.86 Time ||2009 |1,001,282,411 / 910,840,798 |2,368,437,227 / 397,135,963 || |=1.09 Times |=5.97 Times |Summary:4. PROFITABILITY RATIOSProfitability 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.There are four important profitability ratios that we are going to analyze:i. Gross Profit Marginii. Operating Profit Marginiii. Net Profit Marginiv. Return on Total Assetsi. Gross Profit Margin: Gross Profit Margin gives us the amount of Gross profit a firm is earning per dollar of its sales. The equation is as follows:Gross Profit Margin (GPM) = Gross profit / Sales|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |2,007,295,878 / 4,010,167,059 |3,401,781,806 / 9,565,715,902 || |=50.05% |=35.56% ||2009 |2,302,048,289 / 4,868,254,915 |4,148,230,595 / 11,366,597,928 || |=47.28% |=36.50% |ii. Operating Profit Margin: The operating profit margin is a type of profitability ratio known as a margin ratio. The information with which to calculate the operating profit margin comes from a company's income statement. The formula is :Operating Profit Margin = Operating Income / Sales|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |998,794,848 / 4,010,167,059 |1,709,305,818 / 9,565,715,902 || |=24.91% |=17.87% ||2009 |1,001,282,411 / 4,868,254,915 |2,368,437,227 / 11,366,597,928 || |=20.57% |=20.84% |iii. Net Profit Margin: Net Profit Margin gives us the net profit that the business is earning per dollar of sales. The equation is as follows:Net Profit Margin = Net Profit After Taxes / Sales|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |545,341,273 / 4,010,167,059 |1,381,863,093 / 9,565,715,902 || |=13.60% |=14.44 % ||2009 |624,740,307 / 4,868,254,915 |1,890,052,929 / 11,366,597,928 || |=12.84% |=16.63% |iv. Return on Total Assets: Return of total asset measures the amount of Net Income earned by utilizing each dollar of Total Assets. The equation is:Return on Total Assets (ROA) = Net Profit After Tax / Total assets|Year |Beximco Pharmaceuticals ltd. |Square Pharmaceuticals ltd. ||2008 |545,341,273 / 14,819,665,441 |1,381,863,093 / 12,703,127,420 || |= 3.68% |=10.88% ||2009 |624,740,307 / 19,891,933,422 |1,890,052,929 / 13,251,242,856 || |=3.14% |=14.26% |