Financial Analysis of Square Pharma

Financial Statement Analysis Of Square Pharmaceuticals Ltd.

2011, 2012 & 2013

SAMEEHA ASLAMSAHEDI AKHTER KHAN

8/10/2014

Table of Contents

Principle Activities of Square Pharmaceuticals Ltd (Square).........................................................3

Report on Financial Performance from 2011-2013.........................................................................4

Vertical Analysis of Financial Statements from 2011-2013............................................................8

Horizontal Analysis of Financial Statements from 2011- 2013....................................................10

Analysis of Liquidity and Profitability from 2011-2013...............................................................12

Square Pharmaceuticals Ltd......................................................................................................12

Company X................................................................................................................................17

Assessment of viability for short term credit.................................................................................22

Assessment of viability for long term credit..................................................................................23

REFERENCES..............................................................................................................................25

Principle Activities of Square Pharmaceuticals Ltd (Square).

Square Pharmaceuticals Ltd. (Square) is a leading pharmaceutical public limited company in

Bangladesh. Square is focused on being a socially aware business with a strong sense of

corporate social responsibility and this is seen in their motto which is ‘Being Good by Doing

Well’ and so the company stays away from any immoral, corrupt activities or malpractices and

endeavors to be impeccable in all their dealings (Square 2014). According to the Annual Report

of 2012-2013, Square strives for producing the best products at the lowest possible cost so that

the underprivileged people in the nation can have access to their products. Square knows that

their human capital is the ‘back-bone of the management and operational strength of the

company,’ and so they make sure that they provide them with a well rounded pay- package

(Square 2013, p 10a). Not only do they work towards providing a good work environment for

their own workers, but they also try to works towards the betterment of the whole human

civilizations through ‘achievement of millennium development goals’ (Square 2013, p 10b).

As mentioned above, Square is very conscious about its duties towards its stakeholders be they

customers, debtors, creditors, and financial institutions who help them. Square believes in

collaboration between its stakeholders. The company is a law- abiding entity and makes sure that

it pays all its dues like taxes to the government on time. Square is also very aware of its

responsibilities towards its other stakeholders like the shareholders of the company and ‘strives

for protection of their capital as well as ensure highest return and growth of their assets’ (Square

2013, p 10c). According to their Annual Report 2012 – 2013, ‘Square strives for practicing good-

governance in every sphere of activities covering inter alia not being limited to, disclosure &

reporting to shareholders, holding AGM in time, distribution of dividends and other benefits to

shareholders, reporting/dissemination of price sensitive information, acquisition of shares by

insiders, recruitment & promotion of staff, procurement &supplies, sale of assets etc. all that

directly and indirectly affect the interest of concerned groups -the shareholders, the creditors,

suppliers, employees, government and the public in general’ ( Square 2013, p 10d). Not only is

Square environment- conscious but it’s against any sort of discrimination may they be based on

caste, race, religion, gender etc (Square 2013).

Report on Financial Performance from 2011-2013

Profitability Ratios

2013 2012 2011Return on common stockholder's equity

(ROE)

(3341424783/ 17555815219.50)*100

=19.03

(2897710641/ 15042296622.50)*100

=19.26

(2532054550/ 12769520420.50)*100

=19.83

Return on Assets (ROA)(3341424783/

22450715134)*100=14.88

(2897710641/ 20449097208)*100=

14.17

(2532054550/ 17320430979)*100=

14.62

Gross Profit margin(7736011423/

17959489496)*100=43.07

(6887171623/ 16054425243)*100=

42.90

(5767763459/ 13471424469)*100=

42.81

Net Profit margin(3341424783/

17959489496)*100=18.61

(2897710641/ 16054425243)*100=

18.05

(2532054550/ 13471424469)*100=

18.80

Profitability is the indicator of success or failure of a company’s operating policy. Profitability

trend is good for the company in the year 2013. The total profitability of SPL was quite good

from 2011 to 2013 and almost similar. ROE is net income by average common shareholder’s

equity. ROE tells us how many taka of net profit owners earned for each taka invested by the

owners. ROE has fallen because share capital has increased drastically in 2013. Return on Assets

or ROA is net income by average total assets and Square’s ROA is pretty good. Gross profit

margin is calculated by dividing gross profit by sales. Gross profit margin in 2013 tells us that

for every 100 taka sales revenue, 43 taka gross profit was earned. The Net profit margin goes a

step further and removes expenses and hence for every 100 taka sales, 18 taka net income was

earned (Weygandt, Kimmel & Kieso 838-840).

Market Performance Ratios

2013 2012 2011

Earnings per Share(EPS)

(3341424783/ 370768664)=

9.01

(2897710641/ 264834760)=

10.94

(2532054550/ 19617390)=

129.07

Price earnings ratio (PER)

(178.6/9.01)=19.82

(237.3/10.94)=21.69

(3272/129.07)=25.35

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51 ; 2012 p 50-51; 2011 p 44-45 . The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Dividend payout ratio ((0.3+0.25)*10)/9.01=0.61

((0.4+0.25)*10)/10.94=0.59

((0.35+0.3)*100)/129.07= 0.50

EPS or earnings per share measure how much net profit each common stock or ordinary share

earns. Hence the higher the EPS the better it is for the company but the EPS has been decreasing

for Square. PER for Square has been calculated by using the DSE share price. The PER reflects

the ‘investor’s assessment of a company’s future earnings’ (p 841). The PER in 2013 tells us that

for every taka each share earned, Squares shares sold for 19.82 times that amount. Finally the

dividend payout ratio measures how much of the earnings a company distributes to the

shareholders as dividend. Usually it is calculated by using cash dividend paid but in accordance

with Bangladesh GAAP rules, we have used both the proposed cash and stock dividends. We can

see that Square in 2013 Square distributed 61% of its net income as dividend to its shareholders.

This is a very high value and Square should reinvest more into the business but again this value

also includes stock dividend so we cannot be sure (Weygandt, Kimmel & Kieso p 841-842).

Asset Efficiency Ratios

2013 2012 2011

Asset Turnover ratio(17959489496/22450715134)=

0.80

(16054425243/20449097208)=

0.79

(13471424469/17320430979)=

0.78

Inventory Turnover(10223478073/2595750856)=

3.94

(9167253620/2614753400.5)=

3.51

(7703661010/2374383205.5)=

3.24Accounts Receivable

Turnover(17959489496/804643313)=

22.32

(16054425243/790366529.5)=

20.31

(13471424469/640335259.5)=

21.04Accounts Payable

Turnover(10223478073/980764718)=

10.42

(9167253620/804400386.5)=

11.40

(7703661010/564042566.5)=

13.66Days Inventory (365/3.938)=

92.67(365/3.505)=

104.11(365/3.244)=

112.50Average Collection

Period(365/22.3198)=

16.35(365/20.3126)=

17.97(365/21.03808)=

17.35Average Payment Period (365/10.4239)= (365/11.396)= (365/13.6579)=

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 20, 50-51 ; 2012 p 20, 50-51; 2011 p17, 44-45 . The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

35.02 32.03 26.72

Cash Conversion Cycle(92.673848926442+16.3531824949931-35.0153949090395)

=74.01

(104.108060139226+17.9691131199657-

32.0277100692346)=90.05

(112.498443127562+17.3494919008256-

26.7243764367689)=103.12

Efficiency ratios are impressive in case of Square Pharmaceuticals Ltd. Analysis indicates that

the credit management policy of SPL is satisfactory and inventory turnover indicates the increase

of net income of the firm. Specifically the asset turnover measures ‘how efficiently a company is

using its assets to generate sales’ (p 839). Asset turnover is net sales by average total assets. In

2013, Square generated sales of taka 0.8 for each taka it invested in its assets. Inventory turnover

measures how quickly a firm is able to sell its inventory. Inventory turnover is measured by

dividing cost of goods sold by average inventory. We can look at days inventory which is 365 by

inventory turnover to see that in 2013, Square took about 93 days on average to sell its inventory.

Accounts receivables turnover measures how quickly Square turns its receivables into cash. It is

calculated by dividing credit sales by average accounts receivables. The average collection

period tells us that it takes Square about 16-17 days to collect its receivables. On the other hand

from the average payment period, we see that Square takes about 35 days on average to pay its

creditors. Finally the cash conversion cycle gives an overall picture of Square’s asset efficiency

because in 2013 it took Square about 74 days on average to get cash (Weygandt, Kimmel &

Kieso p 837-839).

Liquidity Ratios

2013 2012 2011Current Ratio (5996697544/

3792438255)=1.58

(6745507008/4252934845)=

1.59

(7022213840/4668189426)=

1.50Acid Test Ratio ((5996697544-

2503683240)/3792438255)=

0.92

((6745507008-2687818472)/4252934845)=

0.95

((7022213840-2541688329)

/4668189426)=0.96

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p50-51; 2012 p 50-51; 2011 p44-45. The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45. The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Liquidity ratios tell us whether a company is capable of meeting its short-term debt obligations.

The liquidity position of the company is satisfactory. Current ratio is calculated by dividing

current assets by current liabilities. Acid test ratio tells us a bit more about how liquid a firm

really is because it doesn’t count inventory hence it is a measure of a firm’s immediate liquidity.

Ideally a current ratio should be around 1.5 and an acid-test ratio should be around 0.8. Square’s

liquidity ratios are close to the ideal figures even though the acid test ratio is a bit high. The

company’s current ratio and quick ratio are in a fluctuating trend over the three years, but the

difference is only marginal. Overall Square is in a good liquidity position (Weygandt, Kimmel &

Kieso p 835-836).

Solvency/ Leverage Ratios

2013 2012 2011

Debt to Equity(4602899322/

18844746184)=0.24

(5186900507/16266884255)=

0.32

(5626700664/13817708990)=

0.41

Debt Ratio (4602899322/23447645506)=

0.20

(5186900507/21453784762)=

0.24

(5626700664/19444409654)=

0.29Equity Ratio (18844746184/

23447645506)=0.80

(16266884255/21453784762)=

0.76

(13817708990/19444409654)=

0.71Interest Coverage Ratio ((4481047443+

325281016-181743100)/ 325281016)=

14.22

((3978939088-252604901+433581036)/ 433581036)=

9.59

((3414752310-171776894+268849071)/ 268849071)=

13.06

Solvency ratios measure a business’s ability to survive in the long run. EBIT has been calculated

by adding back interest expense and subtracting interest income from profit after tax. Ideally the

debt and equity ratios should be around 50% and debt to equity ratio should be around 100%.

Square seems to be a very safe company because its equity ratio is too high at around 80% and

the debt ratio is too low at 20%. In 2013 the debt to equity is also very low at 24%. These ratios

were marginally better in 2011. The interest coverage ratio is high at 14 times which is good

because Square can cover its interest expense very well but even this shows that Square has the

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p50-51, 72; 2012 p 50-51, 72; 2011 p 44-45, 67 . The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

ability to be able to pay more interest. It seems that Square might prefer expansion through

internal resources. Either way, a higher debt ratio would help Square expand its business and

Square can do this by issuing debentures, issuing preference share and buying back ordinary

shares. If Square doesn’t want to take on more long term liabilities, it can simply issue

preference shares (Weygandt, Kimmel & Kieso p842-843).

Vertical Analysis of Financial Statements from 2011-2013

Square Pharmaceuticals Ltd.Common-size Income Statements

for the years ended 2011, 2012 & 2013

2011 2012 2013GROSS TURNOVER 115.63% 115.81% 115.50%Less: Value Added Tax -15.63% -15.81% -15.50%

NET TURNOVER 100.00% 100.00% 100.00%COST OF GOODS SOLD -57.19% -57.10% -56.93%

GROSS PROFIT 42.81% 42.90% 43.07%

Operating Expenses: -22.39% -22.21% -21.62%

Selling and Distribution Expenses -15.75% -15.14% -15.71%

Administrative Expenses -4.65% -4.37% -4.11%

Financial Expenses -2.00% -2.70% -1.81%

PROFIT FROM OPERATIONS 20.43% 20.69% 21.45%

Other Income 6.19% 5.34% 4.75%

PROFIT BEFORE WPPF 26.62% 26.02% 26.20%

Allocation for WPPF -1.27% -1.24% -1.25%

PROFIT BEFORE TAX 25.35% 24.78% 24.95%

Provision for Income Tax -5.98% -5.97% -5.95%

Provision for Deferred Income Tax -0.57% -0.76% -0.40%

PROFIT AFTER TAX FOR THE YEAR 18.80% 18.05% 18.61%

Other Comprehensive Income

Gain/(Loss) on Marketable Securities (Unrealized) 0.69% 0.87% -0.57%

Total Comprehensive Income for the Year 19.48% 18.92% 18.04%

Note. The data is from Square Pharmaceuticals 2013, p 50- 51; 2012 p 50-51; 2011 p 44-45.

Financial expenses have fallen which means profit from operation went up in 2013. There was also a loss on marketable securities. Mostly the income statement amounts improved in 2013 compared to 2012.

Square Pharmaceuticals Ltd.Common-size Balance Sheets

as at 2011, 2012 & 2013

2011 2012 2013ASSETS:Non-Current Assets: 63.89% 68.56% 74.43%

Property, Plant and Equipment-Carrying Value 35.91% 40.87% 39.76%Capital Work-in-Progress 4.56% 5.94% 15.86%

Investment - Long Term (at Cost) 20.73% 18.51% 16.30%

Investment in Marketable Securities (Fair Value) 2.68% 3.24% 2.51%

Current Assets: 36.11% 31.44% 25.57%

Inventories 13.07% 12.53% 10.68%

Trade Debtors 3.97% 3.77% 3.42%

Advances, Deposits and Prepayments 2.69% 2.69% 2.77%

Short Term Loan 14.47% 9.72% 4.73%

Cash and Cash Equivalents 1.90% 2.74% 3.98%

TOTAL ASSETS 100.00% 100.00% 100.00%

SHAREHOLDERS' EQUITY AND LIABILITIES:

Shareholders' Equity: 71.06% 75.82% 80.37%

Share Capital 10.09% 12.34% 15.81%

Share Premium 10.47% 9.49% 8.68%

General Reserve 0.54% 0.49% 0.45%

Tax Holiday Reserve 5.67% 0.00% 0.00%

Gain on Marketable Securities (Unrealized) 1.33% 1.86% 1.27%

Retained Earnings 42.96% 51.64% 54.15%

Non-Current Liabilities: 4.93% 4.35% 3.46%

Long Term Loans - Secured 3.37% 2.37% 1.34%

Deferred Tax Liability 1.56% 1.98% 2.12%

Current Liabilities: 24.01% 19.82% 16.17%

Short Term Bank Loans 13.51% 9.40% 4.75%

Long Term Loans - Current Portion 2.46% 2.22% 2.18%

Trade Creditors 3.77% 4.08% 4.63%

Liabilities for Expenses 0.41% 0.44% 0.47%

Liabilities for Other Finance 3.86% 3.68% 4.15%

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 100.00% 100.00% 100.00%

Capital work in progress has increased sharply because Square is working on a unit in Gazipur (Square 2013 p 60). Non-current assets have gone up but non- current liabilities have gone down. Current assets have decreased and retained earnings have increased. This reinforces what was said earlier in the solvency evaluation that Square prefers to finance growth through internal resources.

Horizontal Analysis of Financial Statements from 2011- 2013

Square Pharmaceuticals Ltd.Trend Analysis of Income Statementsfor the years ended 2011, 2012 & 2013

2011 2012 2013GROSS TURNOVER 100.00 119.36 133.17 Less: Value Added Tax 100.00 120.59 132.22

NET TURNOVER 100.00 119.17 133.32 COST OF GOODS SOLD 100.00 119.00 132.71

GROSS PROFIT 100.00 119.41 134.12

Operating Expenses: 100.00 118.23 128.75

Selling and Distribution Expenses 100.00 114.58 132.97

Administrative Expenses 100.00 112.11 117.76

Financial Expenses 100.00 161.27 120.99

PROFIT FROM OPERATIONS 100.00 120.70 140.02

Other Income 100.00 102.74 102.21

PROFIT BEFORE WPPF 100.00 116.52 131.23

Allocation for WPPF 100.00 116.52 131.23

PROFIT BEFORE TAX 100.00 116.52 131.23

Provision for Income Tax 100.00 119.03 132.55

Provision for Deferred Income Tax 100.00 158.61 93.17

Note. The data is from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.

PROFIT AFTER TAX FOR THE YEAR 100.00 114.44 131.96

Other Comprehensive Income

Gain/(Loss) on Marketable Securities (Unrealized) 100.00 151.36 (109.72)

Total Comprehensive Income for the Year 100.00 115.74 123.45

Revenue and expenses have both increased on average.

Square Pharmaceuticals Ltd.Trend Analysis of Balance Sheets

as at 2011, 2012 & 2013

2011 2012 2013ASSETS:Non-Current Assets: 100.00 118.40 140.48

Property, Plant and Equipment-Carrying Value 100.00 125.59 133.53Capital Work-in-Progress 100.00 143.58 418.93

Investment - Long Term (at Cost) 100.00 98.49 94.78

Investment in Marketable Securities (Fair Value) 100.00 133.33 113.05

Current Assets: 100.00 96.06 85.40

Inventories 100.00 105.75 98.50

Trade Debtors 100.00 104.65 103.70

Advances, Deposits and Prepayments 100.00 110.15 124.12

Short Term Loan 100.00 74.11 39.42

Cash and Cash Equivalents 100.00 158.50 251.80

TOTAL ASSETS 100.00 110.33 120.59

SHAREHOLDERS' EQUITY AND LIABILITIES:

Shareholders' Equity: 100.00 117.72 136.38

Share Capital 100.00 135.00 189.00

Share Premium 100.00 100.00 100.00

General Reserve 100.00 100.00 100.00

Tax Holiday Reserve 100.00 0.00 0.00

Gain on Marketable Securities (Unrealized) 100.00 153.96 114.84

Retained Earnings 100.00 132.62 152.01

Non-Current Liabilities: 100.00 97.44 84.55


Long Term Loans - Secured 100.00 77.60 47.80

Deferred Tax Liability 100.00 140.39 164.11

Current Liabilities: 100.00 91.10 81.24

Short Term Bank Loans 100.00 76.75 42.35

Long Term Loans - Current Portion 100.00 99.78 106.96

Trade Creditors 100.00 119.37 148.10

Liabilities for Expenses 100.00 119.95 137.87

Liabilities for Other Finance 100.00 105.18 129.73TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES

100.00 110.33 120.59

Share capital and retained earnings have increased drastically and so has capital work in progress. Current and non-current liabilities and current assets have gone down. Square may be using internal resources instead of long term liabilities to finance expansion.

Analysis of Liquidity and Profitability from 2011-2013

Square Pharmaceuticals Ltd.

Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its

short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

The higher the current ratio, the more capable the company is of paying its obligations. A ratio

under 1 suggests that the company would be unable to pay off its obligations if they came due at

that point. While this shows the company is not in good financial health, it does not necessarily

mean that it will go bankrupt - as there are many ways to access financing - but it is definitely

not a good sign (Investopedia 2014).

Current Ratio=Current Assets/Current Liabilities (Weygandt, Kimmel & Kieso p 843-44).

Following table shows the Current ratios of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Current Ratio 1.58 1.59 1.50


From the analysis, we can see that in 2011 the current assets were 1.50 times than the current

liabilities that has not fluctuated much throughout these three years. A minimal increase is seen

in 2012 and it went up to 1.59 times which kept slightly decreasing and resulted at 1.58 times in

2013. So Square’s current ratio is close to the ideal of 1.5: 1.The reason for such stability can be

there not investing remarkably on assets and not making any huge loan or financing from

outside. 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 little higher than the liabilities which actually reflected as a marginal increase in the ratio.

Quick/ Acid Test ratio: The acid-test ratio is a more conservative version of another well-

known liquidity metric -- the current ratio. Although the two are similar, the Acid-Test ratio

provides a more rigorous assessment of a company's ability to pay its current liabilities. It does

this by eliminating all but the most liquid of current assets from consideration. Inventory is the

most notable exclusion, because it is not as rapidly convertible to cash and is often sold on credit.

Some analysts include inventory in the ratio, though, if it is more liquid than certain receivables

(Investing Answers 2014).

Quick Ratio= (Current Assets-Inventories)/Current Liabilities (Weygandt, Kimmel & Kieso p

843)

Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Acid Test Ratio 0.92 0.95 0.96

Analysis of this ratio speaks in a same language as current ratio. In 2011, the acid test ratio

was .96 times which decreased very silently and resulted as 0.92 times in 2013. Both of these

ratios portray the idea that square has so far an almost constant liquidity position which is good



at some point, but at the same time it can be said that they have not been able to improve them-

selves. Standing at this point, we can make an assumption that may be their profit margin was

not so high that they can make some investments paying off the liabilities that could result in an

increase in assets and decrease in liabilities to make the liquidity position far better. Or since the

ideal quick test ratio is 0.8: 1, Square may be a little too liquid but at the same time the ideal for

depends on the type of industry as well. From both the current and acid test ratio we can assume

that Square’s liquidity position is sound.

Average Inventory Turnover (Days):

The formula to calculate days in inventory is the number of days in the period divided by the

inventory turnover ratio. This formula is used to determine how quickly a company is converting

their inventory into sales. A slower turnaround on sales may be a warning sign that there are

problems internally, such as brand image or the product, or externally, such as an industry

downturn or the overall economy (Days in Inventory 2014).

Calculated as:

Inventory turnover in days = 365 / Inventory Turnover (Weygandt, Kimmel & Kieso p 843-44).

Following shows the Earnings per Shares of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Inventory turnover in

days

92.67 104.11 112.50

In 2011, the firm’s inventory turnover was 112.50 days, which decreases over the period of time.

In 2012, it decreases to 104.11 days, which ultimately reached 92.67 days in 2013. Square’s days

inventory has decreased which may indicate that their inventory management system is in a good

shape or that. In essence a reduction in Days inventory is good for Square.

Return on total asset: Return on 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 income available to total common shareholders / Total

assets (Weygandt, Kimmel & Kieso p 843-44).

Following shows the Return on Total Assets of Square Pharmaceuticals in different years:

Year 2013 2012 2011

ROA% 14.88 14.17 14.62

In 2013 it had the highest return on assets of 14.88%. In 2011 it was 14.62% of total assets; in

2012 it was 14.17% of total assets. Return on assets shows the overall earning power of total

assets irrespective of capital structure. The higher the return on total assets is better. But the trend

of SPL’s return on assets shows fluctuations since 2011. The reason of the decline in 2012 was

due to the more investment in total assets, but ROA increased to 14.88 on year 2013.

Gross Profit Margin: GP Margin gives us the amount of Gross profit a firm is earning per taka

of its sales. The equation is as follows:

Gross Profit Margin (GPM) = Gross profit / Gross turnover (Weygandt, Kimmel & Kieso p 943-

44).

Year 2013 2012 2011

GP Margin% 43.07 42.90 42.81

Gross profit margin indicates the efficiency of management in turning over the company’s goods

at a profit. The gross profit margin measures the percentage of each sales remaining after the

company has accounted for the costs of goods sold. The higher the gross profit margin indicates

that the company is in good position/ which can be viewed in the year 2013. In 2013 the

company converted its gross profit to Taka 43.07 of per 100 Taka sales. It’s increasing from the

year 2011 through 2012. So the gross profit margin of Square is in an upward trend from 2011-

2013.



Net Profit Margin:

Net Profit Margin gives us the net profit that the business is earning per taka of sales. The

equation is as follows:

Net Profit margin = Net income available to the stockholders / gross turnover (Weygandt,

Kimmel & Kieso p 843-44).

Following shows the Net Profit Margin of Square Pharmaceuticals in different years:

Year 2013 2012 2011

NP Margin% 18.61 18.05 18.80

Therefore, the Net Profit Margin was 18.80% in 2011; it decreased to 18.05% in 2012 and then

again increased to 18.61% in 2013. The net profit margin ratio indicates the efficiency of

management in turning over the company’s goods at a profit. A high profit margin ratio is a sign

of a good management and a relatively low profit margin is definitely a danger signal warranting

a careful and detailed analysis of the factors responsible for it like operating, administration,

distribution expenses etc. From the above figure it can be observed that the net profit margin was

comparably high in 2011, but due to increase of the cost of goods sold, net profit margin was low

in the next two years.

Debt to Equity Ratio: The debt to equity ratio is a financial liquidity ratio that compares a

company's total debt to total equity. The debt to equity ratio shows the percentage of company

financing that comes from creditors and investors. A higher debt to equity ratio indicates that

more creditor financing (bank loans) is used than investor financing (shareholders).

Debt to Equity Ratio = Total Liabilities / Total Equity (Weygandt, Kimmel & Kieso p 843-44).

Year 2013 2012 2011

Debt to Equity Ratio 0.24 0.32 0.41



Debt to equity ratio for the company was 0.24 in 2011. The ratio decreased to 0.32 in 2012. In

2013, it was 0.24. Debt to Equity ratio shows the relationship between debt financing and equity

financing. A high ratio shows a large share of financing by the creditors. By using debt capital or

trading on equity, company can magnify the shareholders profit. In 2011, the company’s

liabilities were Taka 0.41 compare to the Shareholder’s equity of Taka 1. This decreased to Taka

0.24 in 2013. Generally a debt to equity ratio should be 1:1 or 100%. Square is too risk free at

present and seeing the trend it seems as if like Square prefers equity financing over debt

financing. However Square could still benefit from having a higher debt to equity ratio because

investors like debenture holders face the lowest risk in a company so it is easier to issue more

debentures than it is to issue ordinary shares. More debentures would mean that Square would

have access to more funds and thus could expand faster.

Company X

Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its

short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

The higher the current ratio, the more capable the company is of paying its obligations. A ratio

under 1 suggests that the company would be unable to pay off its obligations if they came due at

that point. While this shows the company is not in good financial health, it does not necessarily

mean that it will go bankrupt - as there are many ways to access financing - but it is definitely

not a good sign (Investopedia 2014).

Current Ratio=Current Assets/Current Liabilities (Weygandt, Kimmel & Kieso p 843-44).

Following table shows the Current ratios of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Current Ratio 4.3 4.1 4.0

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

From the analysis, we can see that in 2011 the current assets were 4.0 times than the current

liabilities that has not fluctuated much throughout these three years. A minimal increase is seen

in 2012 and it went up to 4.1times which kept slightly increasing and resulted at 4.3 times in

2013. The reason for such stability can be there not investing remarkably on assets and not

making any huge loan or financing from outside. Year by year assets have gone slightly up and

the liabilities as well, but proportionately assets were a little higher than the liabilities which

actually reflected as a marginal increase in the ratio. Over all Company X is in a bad liquidity

position it has too many funds sitting idle which could otherwise be invested in non- current

assets. The ideal current ratio is 1.5:1. Company X’s ratio is too high which is not good because

being too liquid means that they are too conservative and they should invest more.

Quick/ Acid Test ratio: The acid-test ratio is a more conservative version of another well-

known liquidity metric -- the current ratio. Although the two are similar, the Acid-Test ratio

provides a more rigorous assessment of a company's ability to pay its current liabilities. It does

this by eliminating all but the most liquid of current assets from consideration. Inventory is the

most notable exclusion, because it is not as rapidly convertible to cash and is often sold on credit.

Some analysts include inventory in the ratio, though, if it is more liquid than certain receivables

(Investing Answers 2014).

Quick Ratio= (Current Assets-Inventories)/Current Liabilities (Weygandt, Kimmel & Kieso p

843-44).

Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Acid Test Ratio 2.6 3.3 3.1

Analysis of this ratio speaks in a same language as current ratio. In 2011, the acid test ratio was

3.1 times which decreased very silently and resulted as 2.6 times in 2013. Both of these ratios

portray the idea that Company X has too many assets sitting idle. They have slightly improved

their position in 2013 but this needs more work because the ideal quick ratio is 0.8:1. After


looking at both the liquidity ratios of Company X, we can assume that they have a lot of assets

tied up in inventories and that they are too conservative. Hence Company X’s inventory may be

too expensive or they generally prefer producing and stocking up a lot instead of using a more

efficient system like just in time. Either way they need to manage their current assets and

liabilities better.

Average Inventory Turnover (Days):

The formula to calculate days in inventory is the number of days in the period divided by the

inventory turnover ratio. This formula is used to determine how quickly a company is converting

their inventory into sales. A slower turnaround on sales may be a warning sign that there are

problems internally, such as brand image or the product, or externally, such as an industry

downturn or the overall economy (Days in Inventory 2014).

Calculated as:

Inventory turnover in days = 365 / Inventory Turnover (Weygandt, Kimmel & Kieso p 843-44).

Following shows the Earnings per Shares of Square Pharmaceuticals in different years:

Year 2013 2012 2011

Inventory turnover in

days

43 36 34

In 2011, the firm’s inventory turnover was 34 days. In 2012, it increased to 36 days, which

ultimately reached 43 days in 2013. Average inventory shows the number of days to convert

inventory into sales. For Company X, it indicates inventory management system is not in a good

shape because Days inventory should not be increasing continuously over the years. It means

that they have a lot of inventory lying around for a longer period of time.

Return on total asset: Return on 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 income available to total common shareholders / Total

assets (Weygandt, Kimmel & Kieso p 843-44).

Following shows the Return on Total Assets of Square Pharmaceuticals in different years:

Year 2013 2012 2011

ROA% 20.1 33.0 32.2

In 2013 it had the lowest return on assets of 20.1%. In 2011 it was 32.2% of total assets; in 2012

it was 33.0% of total assets. Return on assets shows the overall earning power of total assets

irrespective of capital structure. The higher the return on total assets the better it is for the

company. But Company X’s return on assets shows a downward trend since 2011. The reason of

the decline on 2013 could be due to more investment in non-current assets, excess assets tied up

in current assets etc.

Gross Profit Margin: GP 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 / Gross turnover (Weygandt, Kimmel & Kieso p843-

44).

Year 2013 2012 2011

GP Margin% 78.1 83.3 81.2

Gross profit margin indicates the efficiency of management in turning over the company’s goods

at a profit. The gross profit margin measures the percentage of each sales remaining after the

company has paid for its goods. In 2013 the company converted its gross profit to Taka 78.1 per

100 Taka sales. This might have happened because net sales have decreased so inventory is not

being sold or because the costs of goods sold has increased. Either way even though the gross

profit margin is very high, it still needs to be investigated as to why it has gone down in 2013.



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 income available to the stockholders / gross turnover (Weygandt,

Kimmel & Kieso p 843-44).

Following shows the Net Profit Margin of Company X in different years:

Year 2013 2012 2011

NP Margin% 28.8 29.5 25

Therefore, the Net Profit Margin was 25% in 2011, increased to 29.5% in 2012 and then again

decreased to 28.8 in 2013. The net profit margin ratio indicates the efficiency of management in

turning over the company’s goods at a profit. A high profit margin ratio is a high sign of a good

management and a relatively low profit margin is definitely a danger signal warranting a careful

and detailed analysis of the factors responsible for it. Company X’s net profit margin has gone

up over from the low in 2011. But it is till alarming that even though gross profit margin is so

high at about 78%, net profit margin is just about 28% in 2013. The trend is also similar in 2012

and 2011. This basically means that Company X needs to take a look at its operating, financial,

selling and administration expenses.

Debt to Equity Ratio: The debt to equity ratio is a financial liquidity ratio that compares a

company's total debt to total equity. The debt to equity ratio shows the percentage of company

financing that comes from creditors and investors. A higher debt to equity ratio indicates that

more creditor financing (bank loans) is used than investor financing (shareholders).

Debt to Equity Ratio = Total Liabilities / Total Equity (Weygandt, Kimmel & Kieso p 843-44).

Year 2013 2012 2011


Debt to Equity Ratio

%

89 95 90

Debt to equity ratio for the company was 90% in 2011. The ratio increased to 95% in 2012. In

2013, it was fell to 89%. Debt to Equity ratio shows the relationship between debt financing and

equity financing. A high ratio shows a large share of financing by the creditors. By using debt

capital or trading on equity, company can magnify the shareholders profit. In 2011, the

company’s liabilities were Taka .90 compared to the Shareholder’s equity of Taka 1. This fell in

2013. Company X’s debt to equity ratio is close to the ideal of 100%. This means that the

company is availing all the opportunities it has to expand. At the same time it can be said that

they maybe a little risky but if their interest coverage ratio is high than they should be fine. Also

it depends on whether Company X is effectively using its total assets or total equity and

liabilities but as we have seen return on assets has fallen so Company X needs to be a careful if it

wants to stay solvent and profitable in the long term.

Assessment of viability for short term credit

We would prefer Company X to provide credit. Short term liquidity ratios measure the ability of

a company to pay off short term debts due in the very near future and have enough money to

finance its day to day business operations i.e., the ability to survive in the short-run. The short

term creditor of the company like suppliers of goods on credit and commercial bank providing

short term loans are primarily interested in knowing the company ability to meets its current

obligation as and when they became due. The short term obligation can only be met when there

are sufficient liquid assets if the firm fail to meet such obligation its good will be effected in the

market and it will result in the loss of creditor confident. But a very high liquidity position is not

good because it means the firm has tied up excessive funds in the current assets so it is very

important to have a proper balance in regard to the liquidity of the firm. Square Pharmaceuticals

Ltd. is showing a declining current ratio. On the other hand Company X is showing an increasing

current ratio. A declining ratio might be a sign of a deteriorating financial condition, or it might


be the result of eliminating obsolete inventories or other stagnant current assets. An improving

ratio might be the result of stockpiling inventory, or it might indicate an improving financial

situation. In short, the current ratio is useful, but tricky to interpret. The general rule of thumb

calls for a current ratio of at least 2. SPL has a ratio less than 2 and Company X has a ratio of

greater than 2. This also makes Company X a more preferable choice. The acid-test ratio

measures how well a company can meet its obligations without having to liquidate or depend too

heavily on its inventory. Ideally, each dollar of liabilities should be backed by at least $1 of

quick assets. Square Pharmaceuticals Ltd. has a quick ratio of less than 1 in contrast to Company

X. Acid test ratio also suggest that we should consider becoming a short term creditor for

Company X rather than SPL. That’s why we would prefer to become a short term creditor for

Company X rather than Square Pharmaceuticals Ltd.

Assessment of viability for long term credit

When deciding whether to give a company a long term loan like a bond, it is important to think

about whether that company will be able to pay interest on the loan as it falls due and whether it

will be solvent and profitable enough in the long run when it will be time to repay that loan. The

ratio is simply a company's total long-term debt divided by its total equity (Weygandt, Kimmel

& Kieso p 843-44). Both Square and Company X have strong liquidity ratios so it shouldn’t be

difficult for them to make interest payments. Therefore we need to look at how leveraged the

companies are. The debt-to-equity ratio is a quick way to figure out how heavily indebted a

company is. The bigger the debt-to-equity ratio, the more dependent a company is on borrowed

money. Generally, you like to see a company's debt-to-equity ratio be 100% or less. That means

the company's debt is equal to the amount of its shareholder equity .As with all financial ratios,

it's helpful to compare the number with other companies in the industry. For instance, you might

be comfortable with more debt in an industry like utilities, which have huge capital requirements

and stable cash flow. Square Pharmaceuticals Ltd. has a debt-to-equity ratio of 24% versus

Company X whose ratio is 89%. Company X already has a high debt to equity ratio so the issue

arises that if I give them a bond then even more of their assets will be tied to debt which will

make them a more risky investment. We even know that Square can cover its present interest

expenses at least 14 times but we don’t know what Company X’s interest coverage ratio is. If

Company X is already paying a big portion of its operating income for loan interest than that

would be a problem. This may be one of the reasons as to why despite having a high gross profit

margin of 78%, Company X’s net profit margin is only about 28% because it may have high

financial (interest) expenses (Square 2013; 2012; 2011 & Tareq 2014).

At present Company X’s gross profit margin and net profit margin are falling while Square’s

margins are rising. Company X’s ratios may have a higher absolute number but these are

percentages so we cannot really compare Square and Company X properly. Nevertheless

Company X’s higher proportion of external liabilities can cause long- term solvency issues if it’s

profit making capacity keeps on falling. It doesn’t matter if the fall is small because even then it

would have to pay its outside liabilities. Another profitability ratio we can look at is ROA or

return on assets. Square’s ROA increased from 14.62% in 2011 to 14.88% in 2013 while

Company X’s ROA fell from 32.2% in 2011 to 20.1% in 2013. This means that Square is using

its assets more effectively to generate income. Even the Days inventory shows that Square’s

average inventory turnover in days has continuously decreased while Company X’s has

continuously increased so Company X is not using its assets efficiently. Hence it doesn’t make

sense to give Company X a long term loan which would increase its total assets if it is not using

its assets efficiently at present. Therefore we cannot be certain of Company X’s profit- making

capacity in the long term. Due to these reasons I would prefer to buy bonds of Square

Pharmaceuticals Ltd (Square 2013; 2012; 2011 & Tareq 2014).

REFERENCES

Days in Inventory. 2014. Days in Inventory. [Online] Available at: http://www.financeformulas.net/Days-in-Inventory.html. [Accessed 5 August 2014]

http://www.financeformulas.net/Days-in-Inventory.html

Investing Answers. 2014. Acid-Test Ratio Definition & Example [Online] Available at: http://www.investinganswers.com/financial-dictionary/ratio-analysis/acid-test-ratio-1225 [Accessed 5 August 2014].

Investopedia 2014. Current Ratio Definition [Online] Available at: http://www.investopedia.com/terms/c/currentratio.asp. [Accessed 5 August 2014]

Square Pharmaceuticals Ltd.( 2011). The Annual Report 2010-11.[ Online] Available at http://www.squarepharma.com.bd/financial-reports/annual_report_2010-11.pdf [ Accessed 3 August 2014]

Square Pharmaceuticals Ltd.( 2012). The Annual Report 2011-12.[ Online] Available at http://www.squarepharma.com.bd/financial-reports/spl_annual-report_11-12.pdf [ Accessed 3 August 2014]

Square Pharmaceuticals Ltd.( 2013). The Annual Report 2012-13.[ Online] Available at http://www.squarepharma.com.bd/financial-reports/Annual%20Report%202012-2013.pdf

[Accessed 3 August 2014].

Square Pharmaceuticals Ltd ( 2014). Corporate Social Responsibility.[ Online]. Available at http://www.squarepharma.com.bd/corporate-social-responsibility.php [Accessed 8 August 2014]

Tareq, Dr Mohammed (2014). BUS -505: Principle of Accounting Assignment 1. North South University.

Weygandt, Jerry J., Kimmel, Paul D., & Kieso, Donald E. ( 2014, 2015). Accounting Principles. 10th Edition. USA. John Willy & Sons, inc. p 826- 844.

http://www.squarepharma.com.bd/corporate-social-responsibility.php

http://www.squarepharma.com.bd/financial-reports/Annual%20Report%202012-2013.pdf

http://www.squarepharma.com.bd/financial-reports/spl_annual-report_11-12.pdf

http://www.squarepharma.com.bd/financial-reports/annual_report_2010-11.pdf

http://www.investopedia.com/terms/c/currentratio.asp

http://www.investinganswers.com/financial-dictionary/ratio-analysis/acid-test-ratio-1225

Financial Analysis of Square Pharma

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