Download - 35705488 Company Analysis
-
8/3/2019 35705488 Company Analysis
1/48
Company Analysis Square Pharmaceuticals Ltd.
1
This report is prepared to achieve some objectives. This are-
Calculate ratios of Square Pharmaceutical Ltd. and analyze their financial situation.
Take in Square Pharmaceutical Ltd consideration and analyze that companies three years ratioanalysis and analyze them.
To have a look at investment portfolio, analysis of financial statements, riskanalysis, SWOT analysis, valuation ofSQUARE PHARMACEUTICALS LTD.
Developing & analyzing Common Size Income Statement
Determine ROA and ROE using DuPont system and analyze them.
Determine the financial weakness and strength of the company.
Determine whether investment in this company is profitable or not. If yes then Why.
The study mainly focuses on company analysis based on SQUAREPHARMACEUTICALS LTD.
Types of Data:
The report is mainly based on two types of data-
Primary dataSecondary data
Collection of Data:
Primary Sources of Data:
Interview and discussion with the officials and clients
Secondary Sources of Data:
Published documents and reports
Different books and journals
Annual Reports of the company (2007, 2008, 2009)
Printed record of the company
Objectives :
Methodology :
-
8/3/2019 35705488 Company Analysis
2/48
Company Analysis Square Pharmaceuticals Ltd.
2
This study may provide substantial benefits to the managers of any organization,
economists of any country, academician, business students, regulatory bodies, decision
makers, financial analysts and much other person having concern on insurance and
financial markets and institutions.
Every organization has their own secrecy that is not revealed to others. While collecting data
interviewing the employees, they did not disclose much information for the sake of the
confidentiality of the organization.
Another problem is that creates a lot of confusions regarding verification of data. The clients were
too busy to provide me much time for interview.
Benefits of The Study :
Limitation :
-
8/3/2019 35705488 Company Analysis
3/48
Company Analysis Square Pharmaceuticals Ltd.
3
Report Body
-
8/3/2019 35705488 Company Analysis
4/48
Company Analysis Square Pharmaceuticals Ltd.
4
Industry Analysis
With a USD 600mn industry and an average annual growth rate of 12%, the Bangladeshi
Pharmaceutical industry is the biggest (in volume) amongst all the LDCs. Primarily a generics industry
producing about 8,000 different brands which meet 97% of the domestic demand. Local companies
enjoy 86% market share. Of the 245 registered pharmaceuticals, the top ten players account for 65%
market share.
According to the WTO TRIPS agreement, LDCs are exempted from Patent Protection until 2016
allowing legal reverse engineering and sale of patented products. This provides a unique opportunity
for Bangladesh over India and China, who are under the patent regime.
Bangladesh has made significant progress in the export market. Between 2003 and 2006
pharmaceutical exports increased to about 61 countries from 51 and quadrupled in value from USD
7.9mn to USD 36.5mn. Since many companies have acquired international certifications like USFDA,
UKMHRA and TGA, Bangladesh can penetrate into regulated and unregulated markets.
Background of Square Pharmaceuticals Ltd.
In the Bangladeshi pharmaceutical industrywe have focused on SquarePharmaceuticals in our report.Square pharmaceuticals ltd. maintains a vastarray of partnerships with virtually every major company chain and mostindependent properties both domestically and internationally.
The company was founded in 1958 by Samson H. Chowdhury along with
three ofhis friends as a private firm. It went public in 1991 and is currently listed
on the Dhaka Stock Exchange. Square Pharmaceuticals Ltd., the flagshipcompany, is holding the strong leadership position in the pharmaceutical
industry of Bangladesh since 1985 and it has been continuously in the 1st
position among all national and multinational companies since 1985. Square
Pharmaceuticals Ltd. is now on its way to becoming a high performance global
player.
-
8/3/2019 35705488 Company Analysis
5/48
Company Analysis Square Pharmaceuticals Ltd.
5
Square
Pharmaceuticals
Limited is an
organizationwith equal
emphasis on
Leadership, Technology, Quality and Passion. Square Pharmaceuticals Ltd. is the
leading branded generic pharmaceutical manufacturer in Bangladesh producing
quality essential and other ethical drugs and medicines. It was established in
1958 and has been continuously in the 1st position among all national and
multinational companies since 1985. And now SQUARE Pharmaceuticals is set on
becoming a high performance global player in the field.
SQUARE Pharmaceuticals Limited 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 7.5 Billion (US$ 107.91 million) with about 16.92% market
share (April 2006 March 2007) having a growth rate of about 23.17%.
-
8/3/2019 35705488 Company Analysis
6/48
Company Analysis Square Pharmaceuticals Ltd.
6
Corporate History:
-
8/3/2019 35705488 Company Analysis
7/48
Company Analysis Square Pharmaceuticals Ltd.
7
MILESTONES/Chronology since Inception:
1958: Debut of Square Pharma as a Partnership Firm.
1964: Converted into a Private Limited Company.1974: Technical Collaboration with Janssen Pharmaceutica, Belgium, a
subsidiary of Johnson and Johnson International, USA.
1982: Licensing Agreement signed with F. Hoffmann-La Roche Ltd., Switzerland.
1985: Achieved first position in the Pharmaceutical Market of Bangladesh
among all national and multinational companies.
1987: Pioneer in pharmaceutical export from Bangladesh.
1991: Converted in to a Public Limited Company.
1994: Initial Public Offering of Square Pharmaceutical Shares.
1995: Chemical Division of Square Pharmaceuticals Ltd. starts production ofpharmaceutical bulk products (API).
1997: Won the National Export trophy for exporting pharmaceuticals.
1998: Agro-chemicals & Veterinary Products Division of Square Pharma starts
its operation.
2001: US FDA/UK MCA standard new Pharmaceutical factory goes into
operation built under the supervision of Bovis Lend Lease, UK.
2004: Signing of agreement with ROVIPHARM, Vietnam to manufacture and
market Square products under license in Vietnam.
2004: Secured the top position for the best published accounts and report for
2003 in the manufacturing category for transparency and excellence in corporate
reporting.
2005: New State-of- the-Art Square Cephlosporins Ltd. goes into operation; built
under the supervision of TELSTAR S.A. of Spain as per US FDA/ UK MHRA
requirements.
2007: Square Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA approval.
2008: New SVPO (Small Volume Parenteral and Ophthalmic) plant starts
operation in Dhaka Unit.
-
8/3/2019 35705488 Company Analysis
8/48
Company Analysis Square Pharmaceuticals Ltd.
8
Organogram:The Board has approved an Organogram with modern features ensuring
clear lines of delegation of authority and reporting for accountability for effective
decision making evaluation of performance on merit for both rewarding anddisciplinary action. The Organogram of Square Pharmaceuticals Ltd. is as follows:
-
8/3/2019 35705488 Company Analysis
9/48
Company Analysis Square Pharmaceuticals Ltd.
9
Company analysis
Porters 5-Forces Model:
The 5 forces approach can be used in initial diagnosis and as an aid to
strategy development. Its main value is as a thought provoking aid to help arrive
at a shared understanding of the threats and opportunities facing the firm. Whilst
it is a powerful and simple tool for analysis, it doesn't look in great detail about
the choices or the ease or difficulty in following a particular course of action.
Over the past few decades, the pharmaceutical industry has been struck by
many challenges. There have also been opportunities such as: revolutionary
developments in information technology and the emergence of market
institutions. The pharmaceutical industry includes all companies that develop
drugs to consumers.
Now we will analyze how Michael Porters five external environmental
forces affect the profitability of a pharmaceutical industry as a whole.
Figure:Porters Five Forces Model for Industry Analysis.
-
8/3/2019 35705488 Company Analysis
10/48
Company Analysis Square Pharmaceuticals Ltd.
10
Threat of New Entrants:
Threat of new entrants in the pharmaceuticals industry is very low
because of the high cost of R&D and patent limitations required to enter the
industry. Even though, the economies of scale for production may not be verysignificant, other barriers to entry are high. To develop new drugs is a very costly
and timely process that requires a lot of research and development. Along with
high R&D costs, the heavy regulation of the pharmaceutical industry is another
barrier to entry. All drugs and chemicals used need to be approved and when the
drugs are not approved, the time and money used to develop them is lost by the
firm. The standards are very strict. The established firms have large budgets to
spend on marketing to uphold their brand, just another cost necessary for a new
entrant.
Industry Rivalry:
The pharmaceuticals industry is a highly competitive and aggressive
market. With strict govt. regulations, high costs with research and highly
competitive products in the market place, companies are left frantically trying to
release the next best miracle product to stay ahead. Advantages are gained by
first mover advantage (patents).
Bargaining Power of Suppliers:
It is essential to identify the suppliers for the pharmaceuticals industry.
The suppliers could be wide variety of the providers such as the raw materials
and intermediates, the manufacturing and production plants, the overseas head
offices who supply finished products, the local co-marketing partners who supply
products or third party suppliers anywhere along the supply chain. Also labor
can be considered as a supplier to industry. All suppliers provide different levels
of threat. It is not easy for the pharmaceuticals industry to change suppliers even
when they threaten to withhold supply. Labor can also be the significant supplier
because labor holds immense power when enquiring for more compensation or
reducing quality by working fewer hours. In the pharmaceuticals industry, each
supplier holds a certain level of power to be a threat, but it is not too high. The
threat from suppliers in the pharmaceuticals industry is not considered
significantly bigger than that in other industries as long as there is no
-
8/3/2019 35705488 Company Analysis
11/48
Company Analysis Square Pharmaceuticals Ltd.
11
considerable threat from the raw material suppliers. Thus, supplier power is low
in the pharmaceuticals industry.
Bargaining Power of Buyers:
Major consumers in pharmaceuticals industry include doctors, patients,
hospitals, drug stores and pharmacists. There are several significant indicators of
the threat of buyers in the pharmaceutical industry; they include the number of
buyers, product differentiation, and product significance of a buyers final cost.
Buyers do not pose a big threat to pharmaceuticals industry, because firms spend
most of their research and development on new patent drugs.
Since the industry has many buyers, and given that competition normally
occurs among consumers, (e.g. competition among hospitals and drug stores);
the power of the buyers in terms of the number of buyers in the industry is
relatively small. Although big retail stores possess some bargaining power in the
industry, they do not pose a big threat in the pharmaceuticals industry as they do
to the other industries.
Threat of Substitutes:
Threat of substitutes is low (with patents) and medium (after patent
expiry).
Overall, the pharmaceutical industry shows an upward trend in its core
markets. The industry remains highly valued has a favorable market position
with strong financial make-up and strong earnings growth. Its future potential
demand trend is positive and despite increased competition the industry still
shows a continuing upward growth momentum.
-
8/3/2019 35705488 Company Analysis
12/48
Company Analysis Square Pharmaceuticals Ltd.
12
SWOT analysis:
The following SWOT analysis captures the main strengths and weaknesses
within the company, and describes the opportunities and threats of the company.
Strengths:Highly experienced Senior Executives some of whom has local andInternational significant pharmaceutical literature.Good reputation with high image.Efficient, skilled, experienced and dedicated staff members
Large customer Base and product development capabilities and outstandingProfessional services.
Resources are available in BangladeshSquare pharmaceutical Ltd is able to make benchmarking medicinesIncreasing presence in the marketRegulatory performance is strong and positiveEmployee mobility is lower than that of its rival .
Weakness:Non-availability of high technologyEverything is not organized.Time consuming decision making processIncorrect method for collecting resources and inventory managementLack of asset management and debt.Minimum profit in comparison with others.
Opportunities:Government SupportBanking and information technologyCredit line with well known foreign bank can gear up its foreign exchangebusiness.Entering in new arena product helps to grow customers' confidence.Opportunity to take market share away from rivals by offering newInnovative product or services.Opportunity to enter into the global market.
-
8/3/2019 35705488 Company Analysis
13/48
Company Analysis Square Pharmaceuticals Ltd.
13
Threats:Hiking price of raw materials: More and more factories, especially small ones, areFacing closure due to price hike of raw materials. As we are just entered in the
market it will be a great threat for us.
Inadequate Power supply: The industry sources also blamed lack of adequate power
Supply for making the industry more vulnerable. We have to face the same problem
Here and for this many industries are shutting down now days.
Mergers and Acquisition
Frequent Currency Devaluation
Competitors are much in pharmaceutical industries.
Competitors are offering innovative new product and services regularly.
Matching them is really hard.
Compliance with Accounting Principles:
The financial statement, prepared in accordance with the International
Accounting Standards (IAS) as adopted by The Institute of Chartered
Accountants of Bangladesh (ICAB) as Bangladesh Accounting Standards (BAS),
give a true and fair view of the state of affairs of the company and its subsidiaries
and of the results of its operations and its cash flow and comply with the
Companies Act 1994, the Securities and Exchange Rules 1987 and other
applicable laws and regulations.
The elements of financial statements have been measured on "Historical
Cost" convention in a going concern concept and on accrual basis in accordance
with generally accepted accounting principle (GAAP) and practice in Bangladesh
in compliance with the Companies Act 1994, the Securities and Exchange Rules
1987, listing regulations of Dhaka Stock Exchange Ltd. (DSE) & Chittagong Stock
Exchange Ltd. (CSE) and International Accounting Standards (IAS) as adopted by
The Institute of Chartered Accountants of Bangladesh (ICAB), as Bangladesh
Accounting Standard (BAS).
-
8/3/2019 35705488 Company Analysis
14/48
Company Analysis Square Pharmaceuticals Ltd.
14
Specific accounting policies were selected and applied by the company's
management for significant transactions and events that have a material effect
within the framework of BAS-1 ''Presentation of Financial Statements'' in
preparation and presentation financial statements. The previous years' figures
were presented according to the same accounting principles. Compared to theprevious year, there were no significant changes in the accounting and valuation
principles affecting the financial position and performance of the company.
However, changes made to the presentation are explained in the note for each
respective item. Accounting and valuation methods are disclosed for reasons of
clarity. The company classified the expenses using the function of expenses
method as per BAS-1.
Application of Bangladesh Accounting Standards (BAS):
The following BASs are applicable for the financial statements for the year
under review:
BAS - 1 Presentation of Financial Statements
BAS - 2 Inventories
BAS - 7 Cash Flow Statements
BAS - 8 Accounting Policies, Changes in Accounting Estimates and ErrorsBAS - 10 Events after the Balance Sheet Date
BAS - 12 Income Taxes
BAS - 14 Segment Reporting
BAS - 16 Properties, Plant and Equipment
BAS - 17 Leases
BAS - 18 Revenue
BAS - 19 Employee Benefits
BAS - 21 the effects of Changes in Foreign Exchange Rates
BAS - 23 Borrowing Costs
BAS - 24 Related Party Disclosures
BAS - 26 Accounting and Reporting by Retirement Benefit Plans
BAS - 27 Consolidated Financial Statements and Accounting for
Investment in Subsidiary
BAS - 28 Accounting for Investment in Associates
BAS - 33 Earnings per Share
BAS - 37 Provisions, Contingent Liabilities and Contingent Assets
BAS - 38 Intangible Assets
-
8/3/2019 35705488 Company Analysis
15/48
Company Analysis Square Pharmaceuticals Ltd.
15
What DoesDiscounted Cash Flow - DCF Mean
A valuation method used to estimate the attractiveness of an investment opportunity.
Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts
them (most often using the weighted average cost of capital) to arrive at a present value,
which is used to evaluate the potential for investment. If the value arrived at through DCF
analysis is higher than the current cost of the investment, the opportunity may be a good
one.
Calculated as:
Essentially, it's about how to create shareholder value, which is what makes companies
thrive. It shows executives and corporate finance practitioners how to value companies using
the discounted cash flow (DCF) approach and apply that information to make wiser business
and investment decisions, such as corporate portfolio strategy, acquisitions, or performance
management.
-
8/3/2019 35705488 Company Analysis
16/48
Company Analysis Square Pharmaceuticals Ltd.
16
-
8/3/2019 35705488 Company Analysis
17/48
Company Analysis Square Pharmaceuticals Ltd.
17
-
8/3/2019 35705488 Company Analysis
18/48
Company Analysis Square Pharmaceuticals Ltd.
18
Computation of Financial Ratios:
We divided the financial ratios into five the major categories that will help us
understand the important economic characteristics of SQUARE
PHARMACEUTICALS LTD. We focus on describing the various ratios and
computing them using the financial data of that company. The five categories are:
1. Common size statement
2. Internal liquidity (solvency)
3. Operating performance
a) Operating efficiencyb) Operating profitability
4. Risk Analysis
a) Business risk
b) Financial risk
1.Common size statement:
Common size statements normalize balance sheet and income statement
items to allow easier comparison of different size firms. A common size balance
sheet accounts as a percentage of total assets. A common size income statement
expresses all income statement items as a percentage of sales. Common size
ratios are useful to quickly compare two different size firms and to examine
trends over time within a single firm. Common size statements also give an
analyst insight into the structure of a firms financial statement that is, the
proportion of assets that are liquid, the proportion of liabilities that are short-term obligations, or the percentage of sales consumed by production costs.
-
8/3/2019 35705488 Company Analysis
19/48
Company Analysis Square Pharmaceuticals Ltd.
19
For SQUARE PHARMACEUTICALS LTD, the common size statement shows
2.Evaluating Internal Liquidity:
Internal liquidity (solvency) ratios indicate the ability of the firm to meet
future short-term financial obligation. They compare near- term financial
obligation, such as accounts payable or notes payable, to current assets or cash
flows that will be available to meet these obligations.
-
8/3/2019 35705488 Company Analysis
20/48
Company Analysis Square Pharmaceuticals Ltd.
20
Current ratio:
Clearly the best-known liquidity measure is the current assets, whichexamines the relationship between current assets and current liability as follows:
Interpretation:
These current ratios experienced a decline of 2007-08 and consistent with
the 2008-09 and 2006-07 .As always it is important to compare these values with
similar figures for the firms industry and the aggregate market. If the ratios
differ from the industry results, it is necessary to determine what might explain
it.
Quick ratio:
Some observers believe that current asset not gauges the ability of the firm to
meet current obligation because inventories and some other assets included in
current assets might not be very liquid. As an alternative, they prefer the quick
ratio, which relates current liabilities to only relatively liquid current assets as
follows:
Year Calculations CR
2008-2009 3843513/2640869 1.45
2007-2008 4411836/3500845 1.26
2006-2007 368251/2555566 1.44
Current Ratio = Current Assets / Current Liabilities
-
8/3/2019 35705488 Company Analysis
21/48
Company Analysis Square Pharmaceuticals Ltd.
21
Interpretation:
These quick ratios for square pharmaceuticals Ltd. were small, but were
fairly constant except 2008-2009. This indicates that now the company has an
ability to meet up the quick debt and liquid cash in hand.
Cash ratio:
The most conservative liquidity ratio is the cash ratio, which
relates the firms cash and short term marketable securities to its
current liabilities as follows:
Quick Ratio = {Cash and Cash Equivalents +Marketable Securities +
Account Receivables}/Current Liabilities
Years Calculations Quick Ratio
2008-2009 791,269,742/2,640,868,554 0.302007-2008 585,791,340/3,500,845,103 0.17
2006-2007 482,969,816/2,555,566,286 0.19
Cash Ratio = (Cash + Marketable Securities)/Current
Liabilities
-
8/3/2019 35705488 Company Analysis
22/48
Company Analysis Square Pharmaceuticals Ltd.
22
Interpretation:
The cash ratios of 2008-09 was better than the previous two years butquite low and it would be cause for concern except that such cash ratios are
typical for a fast-growing firm with larger inventories being financed by accounts
payable to its suppliers. In addition, The Company has strong lines of credit
available on short notice at various banks. Still, as an investor, it would to
conform how the company can justify such a low ratio and how it is able to
accomplish this.
Receivables Turnover:
In addition to examining total liquid assets relative to near-term liabilities,
it is useful to analyze the quality (liquidity) of the accounts receivables. One way
to do this is to calculate how often the companys turnover, which implies an
average collection period. The faster these accounts are paid, the sooner the
company gets the funds that can be used to pay off its own current liabilities.
Receivables turnover is computed as follows:
Years Calculations Cash Ratio
2008-2009 313,707,740/2,640,868,554 0.12
2007-2008 225,545,694/3,500,845,103 0.06
2006-2007 160,105,179/2,555,566,286 0.06
Receivable Turnover = Net Annual Sales/Average
Receivables
-
8/3/2019 35705488 Company Analysis
23/48
Company Analysis Square Pharmaceuticals Ltd.
23
We compute the average receivables figure form the beginning receivables
figure plus the ending value divided by two.
For 2008-2009 = 11,366,597,928/ {(477,562,002+360,245,646)/2}
= 11,366,597,928/418,903,824
= 27.13 times
For 2007-2008 = 9,565,715,902/ {(360,245,646+322,864,637)/2}
= 9,565,715,902/ 341,5551,41.5
= 28.00 times
For 2006-2007 = 8,711,034,758/ {(322,864,637+288,732,137)/2}
= 8,711,034,758/305,798,387
= 28.47 times
Given these annual receivables turnover figures, an average collection
period is as follows:
For 2008-2009 = 365/27.13 = 13.45 days
For 2007-2008 = 365/28.00 = 13.04 days
Average Receivable Collection Period = 365/Average
Receivable Turnover
-
8/3/2019 35705488 Company Analysis
24/48
Company Analysis Square Pharmaceuticals Ltd.
24
For 2006-2007 = 365/28.47 = 12.82 days
Interpretation:
These results indicate that square pharmaceutical was collected its accounts
receivables in about 13 days on average and collection period has increased
slightly over the recent years. To determine whether these receivables collection
numbers are good or bad, it is essential that they be related to the companys
credit policy and to comparable collection figures for other companies in the
industry.
Inventory Turnover:
Other current assets that should be examined in terms of its liquidity are
inventory based upon the companys inventory turnover and implied processing
time. Inventory turnover can be calculated relative to sales or cost of goods sold.
The preferred turnover ratio is relative to cost of goods sold because it does not
include the profit implied in sales.
For square pharmaceutical Ltd. The inventory turnover ratios as follows:
For 2008-2009 = 5,672,565,973/ {(2,098,755,231+2,026,736,322)/2}
= 5,672,565,973/2,062,745,777
= 2.75 times
For 2007-2008 = 4,856,061,933/ {(2,026,736,322+1,544,191,798)/2}
= 4,856,061,933/1,785,464,060
Inventory Turnover = Cost of Goods Sold/ Average Inventory
-
8/3/2019 35705488 Company Analysis
25/48
Company Analysis Square Pharmaceuticals Ltd.
25
= 2.72 times
For 2006-2007 = 4,268,447,662/ {(154,191,798+1,342,364,478)/2}
= 4,268,447,662/1,443,278,138
= 2.96 times
Given the turnover values, we compute the average processing time as
follows:
For 2008-2009 = 365/ 2.75 = 133 days
For 2007-2008 = 365/2.72 = 134 days
For 2006-2007 = 365/2.96 = 123 days
Interpretation:
Inventory turnover of square pharmaceuticals in 2008-09 and 2007-2008
was almost same. This seems like a good turnover figure but it is essential to
examine this figure relative to an industry norm and/or the companys prime
competition. An abnormally high inventory turnover that could mean inadequate
inventory that could lead to outages, backorders, and slow delivery to customers
.On the other hand low inventory turnover value and processing time indicate
that capital is being tied up in inventory and could signal obsolete inventory.
Average Inventory Processing Period = 365/ Average Annual Turnover
-
8/3/2019 35705488 Company Analysis
26/48
Company Analysis Square Pharmaceuticals Ltd.
26
Cash Conversion Cycle:
A very useful measure of overall internal liquidity is the cash conversion
cycle, which combines information from receivables turnover, the inventory
turnover, and accounts payable turnover.
For 2008-2009 = 5,672,565,973/ {(124,222,699+100,953,258)/2}
= 5,672,565,973/112,587,978.5
= 50.38 times
For 2007-2008 = 4,856,061,933/ {(100,953,258+60,601,743)/2}
= 4,856,061,933/80,777,500.5
= 60.12 times
For 2006-2007 = 4,268,447,662/ {(60,601,743+79,390,166)/2}
= 4,268,447,662/69,995,954.5
= 60.98 times
Payable Turnover Ratio = Cost of Goods Sold/ Average Trade Payable
Payable Payment Period= 365/ Payable Turnover
-
8/3/2019 35705488 Company Analysis
27/48
Company Analysis Square Pharmaceuticals Ltd.
27
For 2008-2009 = 365/50.38 = 7 days
For 2007-2008 = 365/60.12 = 6 days
For 2006-2007 = 365/60.98 = 6 days
Therefore, the cash conversion cycle for Square Pharmaceuticals equals:
Interpretation:
Square Pharmaceuticals Ltd. has experienced stable receivables days in
2008-09 and 2007-08 but in 2006-07 it differs (32-13)=19 days. Inventoryprocessing days were almost same in 2008-09 and 2007-08 but in 2006-07 it
differs (134-123) =21 days and the payable payment period were almost same in
three fiscal years. Overall the result has been a small decrease in 2008-2009
compared to 2007-08 in its cash conversion cycle but it differs quietly in 2006-07
fiscal as (139-129) =10 days.
Year Receivable
Days
Inventory
Processing
days
Payable
Payment
Period (days)
Cash
Conversion
Cycle (days)
2008-2009 13 133 7 139
2007-2008 13 134 6 141
2006-2007 32 123 6 129
Cash Conversion Cycle = Receivable Days + Inventory Processing Days - Payable
Payment Period
-
8/3/2019 35705488 Company Analysis
28/48
Company Analysis Square Pharmaceuticals Ltd.
28
Evaluating operating Performance:
The ratios that indicate how well the management is operating the business
can be divided into two subcategories:
1) Operating efficiency ratios
2) Operating profitability ratios.
1)Operating Efficiency Ratios:
Operating efficiency ratios examine how the management uses its assets
and capital, measured in terms of the tk. of sales generated by various
assets or capital categories. These are
Total Asset Turnover:
The total assets turnover ratios indicate the effectiveness of the firms use
of its total assets base (net assets equal gross assets minus depreciation on fixed
assets). It is compute as follows:
For 2008-2009 = 9,820,796,568/ {(13,251,242,856+2,703,127,420)/2}
= 9,820,796,568/7,977,185,135 = 1.23 times
For 2007-2008 = 8,257,843,739/ {(12,703,127,420+10,486,940,004)/2}
= 8,257,843,739/11,595,033,710 = 0.71 times
For 2006-2007 = 7,500,811,349/ {(10,486,940,004+9,298,987,312)/2}
= 7,500,811,349/9,892,963,656 = 0.75 times
Total Asset Turnover = Net Sales/Average Total Assets
-
8/3/2019 35705488 Company Analysis
29/48
Company Analysis Square Pharmaceuticals Ltd.
29
Interpretation:
Square Pharmaceuticals Ltd. has experienced a quite good total assets
turnover in 2008-09 which is 1.23 times compared to other two fiscal years. So
we can say that the effectiveness the firms uses the total assets increase (1.23-0.71) =0.52 times than the previous fiscal year.
Net Fixed Asset Turnover:
The net fixed assets turnover ratio reflects the firms utilization of fixed
assets. It is computed as follows:
Calculation of fixed assets- 2008-2009:
For 2008-2009 = 9,820,796,568/ {(4,088,432,171+4,899,679,832)/2}
= 2.19 times
Net Fixed Asset Turnover = Net Sales/Average Net Fixed Assets
-
8/3/2019 35705488 Company Analysis
30/48
Company Analysis Square Pharmaceuticals Ltd.
30
Calculation of fixed assets- 2007-2008:
For 2007-2008 = 8, 257, 843, 739/ {(4,088,432,171+3,531,003,509)/2}
= 2.17 times
Calculation of fixed assets- 2006-2007:
For 2006-2007 = 7,500,811,349/ {(2,273,761,161+3,531,003,509)/2}
= 2.58 times
Interpretation:
Square Pharmaceuticals Ltd. Net fixed assets turnover ratios, which
indicate a decline trend in 2007-2008 and in 2008-2009 compared to the 2006-2007 fiscal. An abnormally low turnover implies capital tied up in excessive fixed
-
8/3/2019 35705488 Company Analysis
31/48
Company Analysis Square Pharmaceuticals Ltd.
31
assets, which an abnormally high turnover ratio can indicate a lack of productive
capacity to meet sales demand or it might imply the use of old, fully depreciated
equipment that may be obsolete.
Equity Turnover:
In addition to specific assets turnover ratios, it is useful to examine the
turnover for alternative capital components. An important one, equity turnover,
is computed as follows:
For 2008-2009 = 9,820,796,568/ {(9,949,397,634+8,417,040,705)/2}
= 9,820,796,568/9,183,219,170 = 1.06 times
For 2007-2008 = 8,257,843,739/ {(8,417,040,705+7,333,257,612)/2}
= 8,257,843,739 / 7,875,149,159 = 1.04 times
For 2006-2007 = 7,500,811,349/ {(7,333,257,612+6,402,014,772)/2}
= 7,500,811,349 / 3,986,736,192 = 1.88 times
Interpretation:
Square Pharmaceuticals Ltd has experienced a small decline in this ratio
during the past several years. In our later analysis of sustainable growth, we
Equity Turnover = Net Sales/Average Equity
-
8/3/2019 35705488 Company Analysis
32/48
Company Analysis Square Pharmaceuticals Ltd.
32
examine the variables that affect the equity turnover ratio to understand what
caused any changes.
Following an analysis of companys record of operating efficiency based upon
its ability to generate sales from its assets and capital, the next step is to examineits profitability in relation to sales and capital.
2)Operating profitability ratios:
The ratios in this category indicate two facets of profitability:
The rate of profit on sales (profit margin)
The percentage return on capital employed.
Gross Profit Margin:
Gross profit equals net sales minus the cost of goods sold. The gross profit
margin is computed as:
For 2008-2009 = 4,148,230,595/9,820,796,568
= 42.23%
For 2007-2008 = 3,401,781,806/8,257,843,739
= 41.19%
For 2006-2007 = 3,232,363,687/ 7,500,811,349
= 43.09%
Gross Profit Margin = Gross Profit/Net Sales
-
8/3/2019 35705488 Company Analysis
33/48
Company Analysis Square Pharmaceuticals Ltd.
33
Interpretation:
This ratio indicates the basic cost structure of the firm. An analysis of this
ratio over time relative a comparable industry figure shows the companys cost
price position. Square Pharmaceuticals Ltd has experienced quite stability in thismargin during the last several years. As always, it is important to compare these
margin and any change with the industry and strong competitor. Notably, this
margin can be impacted by a change in the companys product mix toward higher
or lower profit margin items.
Operating Profit Margin:
Operating profit is gross profit minus sales, general, and administrative
(SG&A) expenses. The operating profit margin is computed as:
For 2008-2009 = 2,368,437,227/9,820,796,568
= 24.11%
For 2007-2008 = 1,709,305,818/8,257,843,739
= 20.70%
For 2006-2007 = 1,825,752,239/7,500,811,349
= 24.34%
Operating Profit Margin = Operating Profit/Net Sales
-
8/3/2019 35705488 Company Analysis
34/48
Company Analysis Square Pharmaceuticals Ltd.
34
Interpretation:
The variability of the operating profit margin over time is a prime indicator
of the business risk. Square Pharmaceuticals Ltd has experienced a constant
operating profit
Margin in 2008-09 and 2006-07 but in 2007-08 it has decreased about 4.00%. It
is clearly shows that the companys ability to control its SG&S expense as it has
experienced strong sales growth.
Net Profit Margin:
This margin relates net income to sales. In the case of SquarePharmaceuticals Ltd, this is the same as operating income after taxes because the
company does not have any significant non operating adjustments. The net
income used is earnings after taxes but before dividends on preferred and
common stock. This margin is computed as follows:
For 2008-2009 = 1,890,052,929/9,820,796,568
= 19.25%
For 2007-2008 = 1,381,863,093/8,257,843,739
= 16.73%
For 2006-2007 =1,303,242,840/7,500,811,349
= 17.37%
Net Profit Margin = Net Income /Net Sales
-
8/3/2019 35705488 Company Analysis
35/48
Company Analysis Square Pharmaceuticals Ltd.
35
Interpretation:
Square Pharmaceuticals Ltd has experienced an increasing trend in net
profit margin. In 2008-09 fiscal year net profit margin is very high than the
previous fiscal year. This analysis has computed based on sales and earningsfrom continuing operation because our analysis seeks to derive insights about
future expectation.
Return on Owners Equity:
The return on owners equity (ROE) ratio extremely important to owner of
the enterprise( the common stockholder) because it indicates the rate of return
that management has on the capital provided by the owner after accounting for
payments to all other capital suppliers.
For 2008-2009 = 1,890,052,929/ {(8,417,040,705+ 9,949,397,634)/2}
= 20.58%
For 2007-2008 = 1,381,863,093/ {(7,333,257,612+8,417,040,705)/2}
= 17.55%
For 2006-2007 =1,303,242,840/ {(6,402,014,772+7,333,257,612)/2}
= 18.98%
Return on Owners Equity = Net income/Average Total Equity
-
8/3/2019 35705488 Company Analysis
36/48
Company Analysis Square Pharmaceuticals Ltd.
36
Interpretation:
From the calculation we can see that Square Pharmaceuticals Ltd has
experienced an increase of 3.03% in 2008-09 compared to the 2007-08 fiscal
year. And decrease 1.43% in 2007-08 compared to 2006-07 fiscal year.
Risk analysis:
Risk analysis examines the uncertainty of income flows for the total firm and for the
individual sources of capital (that is debt, preferred stock, and common stock). This involves
examining the major factors that cause a firms income flow to vary. More volatile income
flows mean greater risk (uncertainty) facing the investor. The total risk of the firm has twointernal components:
a) Business risk
b) Financial risk
a)Business risk:
Business risk is the uncertainty of income caused by the firms industry. In turn, thisuncertainty is due to the firms variability of sales caused by its products, customers, and
the way it produces its product. Specifically, a firms operating earnings vary over time
because its sales and production costs vary.
Business risk generally measured by the variability of the firms operating income over
time. In turn, the earnings variability measures by the standard deviation of the historical
operating earnings series. The standard deviation of operating earnings divided by the
average operating earnings is the coefficient of variation (CV) of operating earnings:
Business Risk = f (Coefficient of variation of operating earnings)
Standard deviation of operating earnings (OE)
= --------------------------------------------------------------------------------------
Mean operating leverage
-
8/3/2019 35705488 Company Analysis
37/48
Company Analysis Square Pharmaceuticals Ltd.
37
Square Pharmaceuticals: Risk Analysis
Business Risk Analysis:
Business risk related to the inability of the firm to hold its competitive position and maintain
stability and growth in earnings. Here earning variability is low that is less risky but sales
variability is high that is highly risk.
Standard deviation ofEBIT/ sales
CV = ------------------------------------------------------
Mean of EBIT/ sales
Earning variability Sales Variability
SD of EBIT 460.47 SD of Sales 633.23
Mean of EBIT 2046.18 Mean of Sales 4706.48
CV 0.23 CV 0.13
Financial Risk:
The uncertainty of future incomes due to the companys financing.
Debt to total capital ratio:
2007 2008 2009
Long term debt 492,569,379 602,584,615 449,757,608
Total capital 7,333,257,612 8,417,040,705 9,949,397,634
6.72% 7.16% 4.52%
Debt to total Capital: Debt to total capital ratio decrease up to year 2008 after that it
decreases.
-
8/3/2019 35705488 Company Analysis
38/48
Company Analysis Square Pharmaceuticals Ltd.
38
Time interest earned ratio:
A coverage ratio computed by dividing earnings before interest and tax (EBIT) by interest
charges; measures the ability of the firm to meet its annual interest payment. From year
2006 to 2008 the ratio decreases.
Financial Leverage 2007 2008 2009
% change in EPS .117866639 .060312885 .367694592
% change in EBIT .155389823 .068124977 .385613505
The Decomposition of ROE (DuPont System):
DuPont analysis (also known as the DuPont identity, DuPont Model or the DuPont
method) is an expression which breaks ROE (Return on Equity) into five parts. The name
comes from the DuPont Corporation that started using this formula in the 1920s.
One of the more useful measures of the financial performance of a company is the
DuPont Equation. To understand the factors affecting a firms ROE including its
trend and its performance relative to competitors, analysts often decompose
ROE into a product of a series of ratios. This model allows the stock analyst, as
well as the investor, to examine the profitability of a company using information
from both the income statement as well as the balance sheet.
Calculation of DuPont system in 2008-2009:
ROE = Net Income / Common Equity
= (Net profit pretax profits) (Pretax profits EBIT) (EBIT Sales) (Sales Assets) (Assets Equity)
= Tax burden Interest burden Margin on sales Asset Turnover Equity Multiplier or Financial Leverage
http://en.wikipedia.org/wiki/Return_On_Equityhttp://en.wikipedia.org/wiki/Return_On_Equity -
8/3/2019 35705488 Company Analysis
39/48
Company Analysis Square Pharmaceuticals Ltd.
39
Tax burden:
The ratio of net income after tax to pretax profit is the tax burden ratio. Its
value reflects both the government tax and the policies pursued by the firm in
trying to minimize its tax burden. It is calculated as follows:
Tax burden = Net profit pretax profits
For 2008-09 = 1,890,052,929/2,511,259,217
= 0.75
Interest burden:
The ratio of pretax profits to EBIT is the interest burden. The companys pretax
profits will be greatest when there is no interest payment to be made to debt holders. It
is calculated as follows:
Interest burden = Pretax profits EBIT
For 2008-09 = 2,511,259,218/2,368,437,227
=1.06
Margin on sales:
This margin means the firms operating margin or return on sales. Profit
margin shows operating per tk. of sales. It is calculated as follows:
Margin= EBIT SalesFor 2008-09 =2,368,437,227/9,820,796,568
= 0.24
Assets Turnover:
The ratios of sales to total assets, is known as total asset turnover (ATO). It
indicates the efficiency of firms use of assets in the sense that it measures the
annual sales generated by each tk. of assets. It is calculated as follows:
-
8/3/2019 35705488 Company Analysis
40/48
Company Analysis Square Pharmaceuticals Ltd.
40
Assets Turnover =Sales Assets
For 2008-09 =9,820,796,568/13,251,242,856
= 0.74 times
Equity Multiplier or Financial Leverage:
The ratio of assets to equity is a measure of firms degree of financial
leverage. This financial leverage is also referred to as the equity multiplier
whereby the two ratios margin on sales and total assets turnover equal return on
total assets (ROTA) and ROTA times the financial leverage multiplier equals ROE.
It is calculated as follows:
Equity Multiplier or Financial Leverage =Assets Equity
For 2008-09 =13,251,242,856/9,949,397,634
=1.33
The operating financial results of the Company for the year 2008-2009 as
compared to previous year are summarized here under:
It may be observed that the Gross Turnover increased by 18.51% during the
year as against 9.81% in the previous year. The growth in gross profit had
positive impact on net profit. The Earning per Share of Tk. 156.56 is based onincreased outstanding 12,072,240 shares of Tk. 100 each. However, if the original
-
8/3/2019 35705488 Company Analysis
41/48
Company Analysis Square Pharmaceuticals Ltd.
41
issued capital at the time of IPO is considered, the EPS would stand at Tk. 945.03
in 2008-2009 as against Tk. 690.93 in 2007-2008.
Calculation of DuPont system in 2007-2008:
Tax burden:
Tax burden = Net profit pretax profits
For 2007-08 = 1,381,863,093/1,868,634,190
= 0.74
Interest burden:
Interest burden = Pretax profits EBIT
For 2007-08 =1,868,634,190/1,709,305,818
=1.09
Margin on sales:
Margin= EBIT Sales
For 2007-08 =1,709,305,818/ 8,257,843,739
= 0.21
Assets Turnover:
Assets Turnover =Sales Assets
For 2007-08 =8,257,843,739/12,703,127,420
= 0.65 times
Equity Multiplier or Financial Leverage:
-
8/3/2019 35705488 Company Analysis
42/48
Company Analysis Square Pharmaceuticals Ltd.
42
Equity Multiplier or Financial Leverage =Assets Equity
For 2007-08 =12,703,127,420/8,417,040,705
=1.51
The operating financial results of the Company for the year 2007-2008 as
compared to previous year are summarized here under:
It may be observed that the Gross Turnover increased by 9.81% during
the year under review over the previous year of 22.94% and the Gross Profit
increased by 5.24% during the current year as against 26.04% in the previous
year. The slower growth in gross profit was due to higher rate of increase in cost
of raw materials, packing materials & factory overhead with negative impact on
gross profit.
Cost of power and laboratory consumables increased at over 30% which
increased overhead. Operating & financial expenses also increased. Net profit
margin slightly declined over previous year due to increase in interest and
administrative expenses, and provision for corporate taxes and deferred taxes.
The Earning per Share of Tk. 154.23 is based on increased outstanding 8,942,400
shares of Tk. 100 ach. However, if the original issued capital for cash at the time
-
8/3/2019 35705488 Company Analysis
43/48
Company Analysis Square Pharmaceuticals Ltd.
43
of IPO is considered, the EPS would stand at Tk. 690.93 in 2007-2008 as against
Tk. 651.62 in 2006-2007.
-
8/3/2019 35705488 Company Analysis
44/48
Company Analysis Square Pharmaceuticals Ltd.
44
Chapter 3Conclusion
-
8/3/2019 35705488 Company Analysis
45/48
Company Analysis Square Pharmaceuticals Ltd.
45
Findings:
Square Pharmaceuticals Limited (SPL) is leading the Pharmaceuticals sector from the very
beginning. DPL grow as pharmaceutical industry matured and yet today it is one of the
fastest growing sectors of the country with a growth rate close to 15%.
The positives that differentiate are the market leader; it controls approximately 20% of the
market share.
Second, the company is about to enter the European market by next year.
Third it has a large and diversified portfolio of investment and businesses that gives it very
sustainable earnings. Strong brand image, a large distribution network, large product
portfolio and creative marketing make us optimistic about the future potential of the
company.
The pharmaceuticals market is an Oligopoly in nature despite the presence of more than 250
companies. The top 15 players control around 73% of the market share.
Though the sector is reaching maturity as indicated by the stable sales growth for last few
years. However, new opportunities of export are opening up and 3 year CAGR of revenue
was 15%.
Their DDM model gives us a fair value of BDT4925 for December 2009 whereas their PE
based relative valuation technique gives us BDT3971 for the same period.
On the other hand when they value SPL by using the sum of the parts, we arrive at a value of
BDT6332 for December 2009. Considering the assumption and market perception they back
the DDM approach and their bet is that SPL stock will reach a price of 4 ,925 by December
2009.
-
8/3/2019 35705488 Company Analysis
46/48
Company Analysis Square Pharmaceuticals Ltd.
46
Conclusion
This report has two identical parts. In the first part we have calculated three years ratio
Of Square pharma annual report of financial year 2007-2009. We have calculated their
ratios and shown DuPont analysis. Analyzing companies performance compare to the
square pharmaceutical company also measured in this part of the report.
In the liquidity ratio we can see that both current ratio and quick ratio improved over time
marginally. The situation was almost stable.
Inventory turnover, Total Asset Turnover, Fixed Asset Turnover all had been relatively stable
throughout the three years. Average Collection period is also very good. The only problem
here is the Average collection period which is way high. However, such a situation is actuallypretty much normal for big companies.
Here Debt ratio has improved over time and TIE has remained pretty much stable.
Apart from Gross Profit Ratio, most of the Profitability ratios have actually decreased in
2005-06. Although the decrease rate is very minimal still it is a problem for Square and they
need to try to improve these ratios.
Both P/E ratio and M/B ratio declined in the year 2005-06. But this happened mostly not
because of the companys failure but for the fact that the whole market was not so friendly
for investment in that year.
From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been doing pretty
good throughout the years. It is true that last year there return did decline but it is still pretty much
satisfactory. Therefore, we can conclude that Square Pharmaceuticals Ltd. is a good enough
company to invest on.
-
8/3/2019 35705488 Company Analysis
47/48
Company Analysis Square Pharmaceuticals Ltd.
47
Recommendations
After completing our study, we found some problems that should be kept in
control. Recommendations are suggested on the basis of problems.
Following troubles found in analysis:
Management should emphasis to reduce the differences between Average
collection Period and average payment period. It will result liquidity of the
company.
Management should try to boost up its quick and current rations & the
earnings per share.
Company should reduce its dependency on debt because it is very risky.
Management can increase their profit before tax if they if they can cut the
financial cost and use less debt capital.
Continue to seek intellectual property rights protection in developing
nations. Protecting the pharmaceutical property rights will eliminate
copy-cat drugs and lost profits in those countries.
Given the increase in life expectancy, continue to pursue research in
pharmaceutical products, which enhance the quality of life for the aging
population.
Global awareness of pharmaceutical benefits will produce opportunities
for the pharmaceutical industry to expand.
-
8/3/2019 35705488 Company Analysis
48/48
Company Analysis Square Pharmaceuticals Ltd.
References
Dewan MostafizurRahman
Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka
Square Pharmaceuticals Limited
Square Centre,
48, Mohakhali C/A,
Dhaka1212
http://www.squarepharma.com.bd/
http://www.yahoo.com/
http://www.google.com/
http://en.wikipedia.org/wiki/
http://www.banglapedia.org/
http://www.yahoo.com/http://www.yahoo.com/http://www.google.com/http://www.google.com/http://en.wikipedia.org/wiki/http://en.wikipedia.org/wiki/http://www.google.com/http://www.yahoo.com/