Financial Performance Evolution

on
Square Pharmaceuticals Ltd

At first we want to express our great gratitude to our honorable Teacher to give us
such a good topic for making a assignment. He gave us his helpful hand to do this
assignment. His class lecture & advice help us to prepare our assignment very much
which was very fruitful to us. So we are grateful to him.

At the very beginning, a special note of acknowledgement is due to our course

teacher, Mr. X, for giving us the permission to prepare the report on this topic. He was
very generous and friendly toward us while conducting the course and was the person
who has guided us throughout preparing the report. His teaching method was really
effective and interesting.

We would like to thank all mighty Allah for keeping everything on right track.
Finally, we would like to thank our parents and friends without whose support it was
impossible for us to complete the project.

Executive Summary
As escalating pharmaceutical expenditures draw increased scrutiny from policy
makers, the media, and consumer advocacy groups, the debate over pharmaceutical
price controls is emerging as a key political issue. Notably absent is the consideration
and investigation of the impact of market-based pricing patterns in the Bangladesh on
bio-pharmaceutical innovation and related economic contributions.

The report is designed to bridge the gulf between the theoretical knowledge & real
life. It is designed to have a practical experience while passing through the theoretical
understanding.

As a matter of fact, In Bangladesh , now-a-days many pharmaceutical Company are

conducting their operations, but they differ from one another in many ways regarding
their services & product. Square pharmaceutical Ltd. is registered company in
Bangladesh. This report covers mainly Square pharmaceutical and his product
development to declination an analysis. In the age of modern civilization
pharmaceutical company is playing its spending role to keep the economic
development wheel moving.

Project Object
This project is undertaken to

Calculate ratios of Square Pharmaceutical Ltd. and analyze their financial

situation.

Take in Square Pharmaceutical Ltd consideration and analyze that companies

five years ratio analysis and analyze them.

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 with

explanation.

Methodology of the report

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

 Secondary Sources of Data:

Published documents and reports

Different books and journals

Annual Reports of the company (2003,2004,2005,2006)

Printed record of the company

Relevant websites.

Managerial Finance (Lawrence J. Gitman)

Limitation of the report

Due to time limitations many of the aspects could not be discussed in

the present report.

Every organization has their own secrecy that is not revealed to

others. While collecting data i.e. 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.

Inroduction
The Leader of Bangladesh Pharma Market Since 1985
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.
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%.

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.
There are three types of ratio comparison can be made:
1. Cross- Sectional analysis
2. Time- Series analysis
3. Combined analysis

Cross- Sectional Analysis:

It involves the comparison of different firms financial ratios at the same point in
time.

Time- Series Analysis:

It is applied when a financial analyst evaluation of the firms financial performance
over time using financial ratio analysis.

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 firms 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.

Current Ratio = Current Assets/Current Liabilities

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

2005-06

2004-05

2003-04

Current ratio

1.78 times

1.66 times

1.62 times

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 firms liquidity position as
well. It actually refers to the extent to which current liabilities are covered by
those assets except inventories.
Quick Ratio = (Current Assets-Inventories)/Current Liabilities
Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in
different years:

Year
Quick
ratio

2005-06

2004-05

2003-04

1.19 times

1.08 times

.98 times

Analysis:
Following graph shows the change of Current ratios over different periods:. In 200304, 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 of Square Pharmaceuticals
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 companys 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
Following table shows the Inventory Turnover ratio of Square Pharmaceuticals in
different years:
Year
Inventory Turnover
Ratio

2005-06

2004-05

2003-04

5.27 times

5.41 times

6.89 times

AnalysisAnalysis 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.

Average Payment Period (APP) = Payables / (Cost of goods sold/365)

Following table shows the APPs of Square Pharmaceuticals in different years:

Year

2005-06

2004-05

2003-04

APP

234.07 days

225.27 days

161.25 days

Analysis shows a gradual increase of companys average payment period. In 2003-04,

the average payment period was 161.25 days, and then it became 225.27 days and
234.07 days consecutively for the following two years.

3. Fixed asset turnover ratio: The Fixed Asset Turnover ratio measures the
effectiveness in generating Net Sales revenue from investments in Net Property,
Plant, and Equipment back into the company evaluates only the investments.

Fixed assets turnover ratio = Gross Turnover / Net fixed assets

Following table shows the Fixed assets turnover ratio ratios of Square
Pharmaceuticals in different years:
Year
Fixed assets
turnover ratio

2005-06

2004-05

2003-04

1.35 times

1.33 times

1.42 times

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.
Total assets turnover ratio = Gross Turnover/Total Assets
Following table shows the ratios of Total assets turnover ratio Square Pharmaceuticals
in different years:
Year

2005-06

2004-05

2003-04

TATO

0.76 times

0.78 times

0.93 times

Analysis shows a gradual fall of companys 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 of Square Pharmaceuticals

Debt RatiosThe debt ratio measures the proportion of total assets provided by the firms 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.

Debt ratio = Total Debt / Total Assets

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

2005-06

2004-05

2003-04

Debt ratio

31%

46%

37%

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 years 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.
Times-Interest-Earned ratio = EBIT / Interest Charges
Following table shows the times-interest-earned (TIE) ratios of Square
Pharmaceuticals in different years:
Year

2005-06

2004-05

2003-04

TIE ratio

11.30 times

14.92 times

11.12 times

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 longterm 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
2. Gross Profit Margin
3. Return on Asset
4. Return on Equity
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:

Year

2005-06

2004-05

2003-04

Net Profit Margin

16.45%

20.26%

17.69%

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.

Gross Profit Margin (GPM) = Gross profit / Gross turnover

Following shows the Gross Profit Margin of Square Pharmaceuticals in different

years:

Year

2005-06

2004-05

2003-04

Gross Profit Margin

36.19%

35.04%

34.78%

So, the Gross Profit Margin has remained pretty much stable throughout the whole
three years. It increased slowly each year. It indicates that Square Pharmaceutical is
managing its Sales and Cost of Goods Sold very well.

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:
Year

2005-06

2004-05

2003-04

ROA

12.54%

15.88%

16.52%

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:

Return on Equity (ROE) = Net income available to common shareholders / Total

common equity

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

Year

2005-06

2004-05

2003-04

Return on Equity

18.21%

22.55%

21.13%

Therefore, the Return on Equity increased in 2004-05 but decreased a little in 200506. This again may have happened due to the issue of more long-term debt in 2005--06.

Qualitative analysis (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 and

international significant pharmaceutical literature.

Good reputation with high image.

Efficient, skilled, experienced and dedicated staff members

Large customer Base and product development capabilities and outstanding

professional services.

Resources are available in Bangladesh

Square pharma is able to make benchmarking medicines

Increasing presence in the market

Regulatory performance is strong and positive

Employee mobility is lower than that of its rival.

Weakness:
Non-availability of high technology
Everything is not organized.
Time consuming decision making process
Incorrect method for collecting resources and inventory management
Lack of asset management and debt.
Minimum profit in comparison with others.

Opportunities

Government Support
Banking and information technology
Credit line with well known foreign bank can gear up its foreign
exchange business.
Entering in new arena product helps to grow customers' confidence.
Opportunity to take market share away from rivals by offering new
innovative product or services.
Opportunity to enter into the global market.

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.
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.

OVERALL FINANCIAL SUMMARY

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:

Management should emphasis to reduce the differences between Average collection

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.
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.

Conclusion
This report has two identical parts. In the first part we have calculated five years ratio
of Square pharma annual report of financial year 2003-2006.
We have calculated their ratios and Dupont analysis. Analyzing companies
performance compare to the square pharmaceutical company also measured in this
part of the report.