Institute of Business AdministrationUniversity of Rajshahi

Group G• Group Member ID• Kazi Tanvirul Islam B040006• S.M. Zayed Siraj B040016• Jannatul Ferdows B040017• Md. Tajmilur Rahman B040036• Umma Kulsum B020050

Topics Capital Structure Decisions and

Profitabilityof

Square Pharmaceuticals LTD.

Capital structure

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells tk20 billion in equity and tk80 billion in debts is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

Capital structure

Equity Capital: This refers to money put up and owned by the shareholders (owners). Typically, equity capital consists of two types:

1.) Contributed capital

2.) Retained earnings.

Debt Capital: The debt capital in a company's capital structure refers to borrowed money that is at work in the business.

The Forms of Fund Mobilization for Capital

• Owner’s funds:

Equity Capital

Retain Earning• Borrowed funds:

Conventional sources

Financial instate

Bank

Cash credit

Debenture

Fixed Deposits• Nonconventional sources

Supplier’s credit

Short term

Bank Borrowings

Hire Purchase

Determinations of Capital Structure Decisions

Determinants

Financial Leverage Operating Leverage

EBIT/EPS Analysis Cost of Capital

Growth & Stability of Sales

Nature & Size of a Firm

Flexibility Cash Flow Analysis

Control Marketability

Floatation Cost Legal Constraints

Capital Market Conditions

Asset Structure

Purpose of financing Period of Finance

Company Profile of Square Pharmaceuticals Limited Bangladesh

Square Pharmaceuticals Limited Bangladesh 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%

Capital Structure of Square Pharmaceuticals Limited Bangladesh

Fiscal Year Weight of Debt

Weight of Equity

Cost of Debt

Cost of Equity

WACC

2006 17.12% 82.88% 7.21% 13.21% 11.90%

2007 15.75% 84.25% 7.21% 13.21% 12.00%

2008 14.02% 85.98% 7.21% 13.21% 12.12%

2009 4.39% 35.61% 7.21% 13.21% 12.87%

2010 4.80% 95.20% 7.21% 13.21% 12.84%

100% Equity Financed

- 100% - 13.21% 13.21%

50% Debt and 50% Equity Financed

50% 50% 7.21% 13.21% 9.31%

Total Debt Ratio• During the fiscal years 2006-2010, on average Square Pharmaceuticals

Limited Bangladesh had a debt ratio of 0.29 and total debt was worth of 3,422,741,464BDT. The Total Debt Ratio expresses the fraction of its total debt relative to its total assets. In addition, the total debt of the firm had increased by19.96%between fiscal 2006 and 2010.This was caused by significant increased in short term bank loans, loan term secured loans and trade credits. Besides throughout the FY 2006-2010, total assets of the firm had yearly changed at 12.91% on average but total debt of the firm had changed yearly at22.69%on average. In contrary, the company had more debt in FY 2008, 47.95%more than FY 2006. And in 2008FY the short-term bank loans was 54.84%more than 2006 FY. But the debt had decreased by22.96% and18.92%in FY 2009 and FY 2010 respectively comparing to FY 2008. The firm’s debt ratio had decreased in past 5 (five) fiscal year and in near future it is expected to have a sound financial performance based on the current situation of its debt ratio. The company had worst debt ratio in 2008 FY though it gradually recovers itself and established a strong financial foundation to overcome its debt

Debt Equity Ratio 

• Debt equity ratio refers to a firm’s investment dependency on its debt and equity. If a firm’s debt equity ratio is 1 then it shows that the firm relies more on debt for investment rather than its own equity. Square Pharmaceuticals Limited Bangladesh had a strong financial backbone since its debt equity ratio is far below1and we can say that they do not rely a lot on debt for their investment. The company’s equity had increased by staggering80.48%between FY 2006 and 2010 though the total debt of the firm had increased by19.96%at the same time. Debt equity ratio also shows that a firm’s riskiness. In case of Square Pharmaceuticals, it is quite unlikely to be risky since it had debt equity ratio of 0.40on average during the FY 2006-2010. Investors would be happy to invest in such firm having a good debt equity ratio. Though this firm experienced worst debt equity condition in FY 2008, it progressively had reduced the ratio in its following FY. As we have observed before in 2008 FY, the short term bank loans was at peak in last 5 (five) FY. It caused the ratio to increase from 2007 FY.

Equity Multiplier 

On average the equity multiplier of Square Pharmaceuticals Limited Bangladesh was 1.40duringFY 2006-2010. Since we have portrayed before that the company’s equity had increased by staggering 80.48% and total Asset had increased by61.63%between the FY 2006 and 2010, the company do not rely on debt for its investment.

Long Term Debt 

Long term debt ratio is concerned with firm’s long term debt. Long term debt do not changes frequently alike short term debt. Square Pharmaceuticals Limited Bangladesh had an average long term debt worth of 635,978,867 BDT. In addition, Company’s equity had increased at a rate of 15.92% annually at the same time. for FY 2006-2010.

• Value of Unlevered Firm: Square pharmaceuticals value of unlevered was19, 169,008,059BDT.

• Value of Levered Firm

The firm’s value as a levered firm was19, 723,453,100 BDT in FY 2010.

• Present Value of Tax Shield 

Value of Tax Shield was554, 445,041BDT

Profitability

• Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability measures are important to company managers and owners alike. If a small business has outside investors who have put their own money into the company, the primary owner certainly has to show profitability to those equity investors.

Gross Profit Margin

• The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. The larger the gross profit margin, the better for the company. The calculation is:

Gross Profit Margin= Gross Profit/Net Sales = ____%.

=4,901,289,925 / 11,462,578,410

=42.75%

Operating Profit Margin

Operating profit is also known as EBIT and is found on the company's income statement. EBIT is earnings before interest and taxes. The operating profit margin looks at EBIT as a percentage of sales. The operating profit margin ratio is a measure of overall operating efficiency, incorporating all of the expenses of ordinary, daily business activity. The calculation is:

Operating Profit Margin = EBIT/Net Sales = _____%.

 

=3,275,183,812 /11,462,578,410

 

=28.57 %

Net Profit Margin

• When doing a simple profitability ratio analysis, net profit margin is the most often margin ratio used. The net profit margin shows how much of each sales dollar shows up as net income after all expenses are paid. For example, if the net profit margin is 5%, that means that 5 cents of every dollar is profit. The calculation is :

 

Net Profit Margin = Net Income/Net Sales = _____%.

=2,087,871,791 / 11,462,578,410

 

=18.21%

Profitability ratios

• In case of Square Pharmaceuticals, it’s profit margin had been stable during FY 2006-2010.Theaverage profit margin was 0.18; In FY 2006, it was highest among last 5 (five) FY. Moreover, in following 2 (two) fiscal years the ratio had slightly fall. In FY 2007 and 2008 the net profit had increased by 11.78% and6.03%respectively, compared to their earlier year. Though, net profit of FY 2009 had increased by 36.78%but in subsequent year its growth had dropped to10.47%.However, net sales during FY 2007 and 2008 had increased by 23.17% and10.09% respectively, compared to their preceding year and net sales of FY 2009 had increased by18.93% but in subsequent year its growth had dropped to16.72%.So as we can observe that growth of net sales and net profit of FY 2008, 2009 and 2010 were less than their respective preceding year, causing the profit margin ratio to fall.

Return on Equity

• Return on equity ratio or ROE represents firm’s net profits against its total equity. The difference between ROA and ROE is that ROE shows the difference between net profit and total equity of a firm. For Square Pharmaceuticals Limited Bangladesh, the return on equity ratio on average was 0.18during FY 2006-2010. A like ROA, the ratio did not fluctuate a lot during this period. So we can approach to a conclusion that the firm did not feature any serious financial issue to maintain the balance among its net income and total equity. However, in FY 2008, the ROE was lowest among last 5 (five) FY. It was caused by a low growth (6.03%) of net profit compared to its preceding year. At the same time, total equity increased by14.78%. So the gap of growth between total asset and net profit caused ROE in 2008 to fall. Nevertheless, the company bounces back and had better ROE in FY 2009 than FY 2008. Since the growth of net profit (36.78%) was twice than the growth of total equity (18.21%) in FY 2009. Because growth of net profit (10.47%) and total equity were (16.13%) less than its preceding year, in FY 2010 the ratio was a bit low than FY 2009