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Dear Madam,
With our respect, We would like to thank you for assigning us this subject to prepare
the report. Please find enclosed with this letter the report of “Square Pharmaceuticals
Ltd” that you wanted as partial requirement for the course of “Intermediate
Accounting-305”. The name of my project is " Ratio Analysis of a company."
We collected all the relevant information and the annual report 2004 to 2006, I go
through from “Square Pharmaceuticals, Ltd.” We thing that is the report contains the
information that you need to get an idea about the “Ratio Analysis”. If you need any
clarification or any further information I would be happy to provide it to you.
Finally we would like to thank you for valuable guidance & supportive in preparing
this report. We will be grateful for any clarification when required. We will be highly
obliged if you are kind enough to approve this report and provide your valuable
judgment on it.
Yours sincerely,
Name ID Signature
Tamjida Akhter 138
Choyti
Ryhanul Islam khan 139
Anjuara Akhter Sonia 125
Fakrul Islam 151
Amil Mahmud 152
Executive Summary
situation.
• Determine ROA and ROE using DuPont system and analyze them.
Types of Data:
The report is mainly based on two types of data-
Primary data
Secondary data
Collection of Data:
Primary Sources of Data:
• Interview and discussion with the officials and clients
did not disclose much information for the sake of the confidentiality
of the organization.
verification of data.
• The clients were too busy to provide me much time for interview.
Inroduction
SQUARE today symbolizes a name - a state of mind. But its journey to the growth
and prosperity has been no bed of roses. From the inception in 1958, it has today
burgeoned into one of the top line conglomerates in Bangladesh. Square
Pharmaceuticals Ltd., the flagship company, is holding the strong leadership position
in the pharmaceutical industry of Bangladesh since 1985 and is now on its way to
becoming a high performance global player.
About Square pharmaceutical LTD.
SQUARE today symbolizes a name – a state of mind. But its journey to the growth
and prosperity has been no bed of roses. From the inception in 1958, it has today
burgeoned into one of the top line conglomerates in Bangladesh. Square
Pharmaceuticals Ltd., the flagship company, is holding the strong leadership position
in the pharmaceutical industry of Bangladesh since 1985 and is now on its way to
becoming a high performance global player.
VISION
We view business as a means to the material and social wellbeing of the investors,
employees and the society at large, leading to accretion of wealth through financial
and moral gains as a part of the process of the human civilization.
MISSION
Our Mission is to produce and provide quality & innovative healthcare relief for
people, maintain stringently ethical standard in business operation also ensuring
benefit to the shareholders, stakeholders and the society at large.
OBJECTIVE
Our objectives are to conduct transparent business operation based on market
mechanism within the legal & social frame work with aims to attain the mission
reflected by our vision.
RATIO ANALYSIS
Financial ratios are useful indicators of a firm's performance and financial situation.
Financial ratios can be used to analyze trends and to compare the firm's financials to
those of other firms.
Combined Analysis:
A combined view makes it possible to assess the trend in the behavior of the ratio in
relation to the trend for the industry.
Financial ratios can be classified according to the information they provide. The
following types of ratios frequently are used:
A) Liquidity ratio
B) Activity ratio
C) Profitability ratio
D) Debt-coverage ratio
LIQUIDITY RATIOS
Liquidity ratios are the first ones to come in the picture. These ratios actually show
the relationship of a firm’s cash and other current assets to its current liabilities. Two
ratios are discussed under Liquidity ratios. They are:
1. Current ratio
2. Quick/ Acid Test ratio.
1. Current ratio: This ratio indicates the extent to which current liabilities are covered
by those assets expected to be converted to cash in the near future. Current assets
normally include cash, marketable securities, accounts receivables, and inventories.
Current liabilities consist of accounts payable, short-term notes payable, current
maturities of long-term debt, accrued taxes, and other accrued expenses (principally
wages).
Following table shows the Current ratios of Square Pharmaceuticals in different years:
Analysis
In the table we see that the change of Current ratios over different periods:
From the analysis, we can see that in 2003-04 the current assets were 1.62 times than
the current liabilities that has not fluctuated much through out these three years. A
minimal increase is seen in 2004-05 and it went up to 1.66 times which kept slightly
increasing and resulted at 1.78 times in 2005-06. The reason for such stability can be
there not investing remarkably on assets and not making any huge loan or financing
from outside..
2. Quick/ Acid Test ratio: This ratio indicates the firm’s liquidity position as
well. It actually refers to the extent to which current liabilities are covered by
those assets except inventories.
Quick Ratio=(Current Assets-Inventories)/Current Liabilities
Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in
different years:
Year 2005-06 2004-05 2003-04
Quick
1.19 times 1.08 times .98 times
ratio
Analysis-
Following graph shows the change of Current ratios over different periods:. In 2003-
04, the quick ratio was .98 times which increased veryrapidly just like current ratio
and resulted as 1.19 times in 2005-06. 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 token it can be said that they have not been able to improve them-selves.
Activity ratios are used to evaluate the competence, which the company manages and
utilizes on its asset. This ratio also calls the turnover ratios because they indicate the
speed with which the assets are transformed or turnover into sales. A proper balance
between assets and sales generally reflects on that the assets..
1. Inventory turnover ratio
2. Average payment period
3. Fixed asset turnover ratio
4. Total asset turnover ratio
1. Inventory turnover ratio: The liquidity of the company’s register can be considered
by this ratio. Its ratio indicates how many periods it is needed to twist inventory of
sales on a standard. This event on the efficiency of the company's inventory
organization.
.Inventory turnover ratio = Gross Turnover / Inventories
Analysis-
Analysis shows a gradual declination of Inventory Turnover Ratio over the last three
yeas. In 2003-04, the ratio was 6.89 times, then it rapidly declined to 5.41 times in
following year and dropped further to 5.27 times in the year 2005-06.
2. Average payment period: The accounts payable turnover ratio includes all
outstanding obligations that a company owes its creditors.
Following table shows the Fixed assets turnover ratio ratios of Square
Pharmaceuticals in different years:
Analysis shows that the fixed asset turnover ratio was as high as 1.42 times among
three years. However, it declined to 1.33 times in the following year. In 2005-06 the
turnover somewhat increased to 1.35 times.
4. Total asset turnover ratio: The Total Asset Turnover is similar to fixed asset
turnover since both measures a company's effectiveness in generating sales revenue
from investments back into the company. Total Asset Turnover evaluates the
efficiency of managing all of the company's assets.
Analysis shows a gradual fall of company’s total asset turnover. In 2003-04, it was
0.93 times, declined to 0.78 times in the following year and then again declined
slightly to 0.76% in 2005-06.
Debt Ratios-
The debt ratio measures the proportion of total assets provided by the firm’s creditors.
1. Debt ratio
2. Times-Interest-Earned (TIE) ratio
1. Debt ratio: The ratio of total debt to total assets, generally called the debt ratio,
measures the percentage of funds provided by the creditors.
Calculating the debt ratio, we came to see that this company is not that highly
leveraged one. In 2003-04, it was 37%, in 2004-05, it suddenly went up to 46%, and
than again in 2005-06, it climbed down to 31%. A little bit of fluctuation is seen here
in debt management, which is actually nothing but their strategic move. The reason
behind such fluctuation is better understandable form the balance sheet. In 2004-05,
the company has issued long-term loan, which happens to be BTD 389,193,080 that is
way too high than the previous year’s loan, which is BDT 36,544,158 that actually
increased the total debt thus resulting in a high debt ratio.
2. Times-Interest-Earned (TIE) ratio: The time interest earned ratio measures the
ability to meet Contractual interest payments.
We can see from this ratio analysis that, this company has covered their interest
expenses 11 times in 2003-04, 15 times in 2004-05 and 11 times in 2005-06. It means
they have performed pretty much same in 2003-04 and 2005-06 but has taken a
different look in 2004-05. As in 2004-05 they issued a little high number of long-
term loans and does not have good liquidity position, their EBIT became high thus
making TIE a little high as well.
PROFITIBILITY RATIO:
Profitability is the net result of a number of policies and decisions. Profitability ratios
show the combined effects of liquidity, asset management and debt on operating
results.
There are four important profitability ratios that we are going to analyze:
1. Net Profit Margin: Net profit margin measures the percentage of each sales dollar
remaining after all costs and expense, including interest, taxes, and preferred stock
dividends have been deducted.
Net Profit margin = Net income available to the stockholders / gross turnover
Following shows the Net Profit Margin of Square Pharmaceuticals in different years:
The Net Profit Margin was 17.69% in 2003-04, increase to 20.26% in 2004-05 and
then again decreased to 16.45% in 2005-06.
The main reason that the profit margin declined is high cost. High cost, in turn,
generally occurs due to inefficient operations. Profit margin also declined because in
2005-06 Square Pharmaceuticals used a lot of long-term debt. This invariably resulted
in more interest cost, which brought the Net income down.
2. Gross Profit Margin: The gross profit margin measures the percentage of each sales
dollar remaining after the firm has paid for its goods.
Return on Total Assets (ROA): Return of total asset measures the amount of Net
Income earned by utilizing each dollar of Total Assets. The equation is:
Return on Total Assets (ROA) = Net income available to total common shareholders /
Total assets
Following shows the Return on Total Assets of Square Pharmaceuticals in different
years:
So, return on total assets decreased gradually throughout the years. This may have
occurred because Square used more debt financing in 2005-06 and 2004-05 compared
to 2003-04 which resulted in more interest cost and brought the Net income down.
4. Return on Equity (ROE): Return on Equity measures the amount of Net Income
earned by utilizing each dollar of Total common equity. It is the most important of the
“Bottom line” ratio. By this, we can find out how much the shareholders are going to
get for their shares. The equation is:
Therefore, the Return on Equity increased in 2004-05 but decreased a little in 2005-
06. This again may have happened due to the issue of more long-term debt in 2005---
06.
The following SWOT analysis captures the main strengths and weaknesses within the
company, and describes the opportunities and threats of the company.
Strengths:
Weakness:
Opportunities
Government Support
Credit line with well known foreign bank can gear up its foreign
exchange business.
Threats:
Hiking price of raw materials: More and more factories, especially small ones, are
facing 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.
After analyzing all the ratios, we have found out the following information:
1. Liquidity Ratios: In the liquidity ratio we can see that both current ratio and quick
ratio improved over time marginally. The situation was almost stable.
2. Activity Ratios: 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 actually pretty much normal for big companies.
3. Debt Ratios: Here Debt ratio has improved over time and TIE has remained pretty
much stable.
4. Profitability Ratios: 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.
From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been
doing pretty good through out 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.
Recommendation:
Following troubles found in analysis:
period and average payment period. It wills results liquidity of the company.
Management should try to boost up its quick and current rations & the earnings per
share.
Management can increase their profit before tax if they if they can cut the financial
Conclusion
This report has two identical parts. In the first part we have calculated five years ratio