Ratio Analysis

Ratio Analysis is done to measure the financial performance of the company and to understand that in
which track the company is going in the future. So, it is basically one technique of assessing the
companys financial performance.
Here we chose Glaxo Smith Kline Bangladesh (GSK BD) to evaluate their financial position by
analyzing ratio analysis.

1. Liquidity Ratio:
Liquidity ratio can be categorized in two ways:
1. Current Ratio
2. Quick / Acid Test Ratio
1.1 Current Ratio:
It is tool to analyze whether a firm is capable enough to meet its short terms debt or not. It is a assessment
of firms liquidity. If a firm is liquid enough the assessment is that this firm will to pay its short term loans
with in next 12 months.
Formula: Current ratio (2013) = Current Asset / Current Liabilities
Year

2011

2012

2013

2014

Current Ratio

2.05

1.79

1.689

1.729

Compare to year 2011, 2012, 2013 and 2014, the firm was liquid more at the at the year end of 2011. So
liquidity position of the year end respectively 2012, 2013 and 2014 compare to year end of 2011 are
somewhat weak. As current assets are scheduled to be converted to cash in near future, it is highly
probable that they can be liquidated at close to their value.

Current Ratio
2.5
2

2.05

1.79

1.69

1.72

2013

2014

1.5

Current Ratio

1
0.5
0
2011

2012

1.2 Quick / Acid Test Ratio: Quick Ratio assesses the firms capacity to recover its current liabilities by
using organizations quick assets. Quick ratio is calculated by subtracting the inventory from the current
assets, then dividing by the current liabilities.
Formula: (Current Asset Inventory) / Current Liabilities
Year

2011

2012

2013

2014

Quick / Acid Test

0.96

1.05

1.08

1.39

Quick Ratio
1.39

1.5
1

0.96

1.05

1.08

2011

2012

2013

Quick Ratio

0.5
0
2014

In terms of short term debt paying, in 2011 the firm was in very weak position and it is gradually tackled
in respectively 2012, 2013 and 2014. Here we can say that if the account receivable can be collected, the
company can pay its short term debt without having to liquidate its inventory.

2. Asset Management Ratio:

Firms invest in assets to generate revenue both in current period and future periods. So, asset management
ratio is calculated to analyze how efficiently the firm is managing its assets. Asset management can be
categorized by four category:
1.
2.
3.
4.
2.1

Inventory Turnover Ratio

Days sales outstanding
Fixed assets turnover Ratio
Total Asset Turnover Ratio
Inventory Turnover Ratio: This ratio shows that how many times the inventories are sold and
renovated in a business over a certain period. Generally, a company with high inventory turnover
ratio is assumed as strong one. When the inventory level is very high then the ratio will be low
which means the inventories are kept idle in the warehouse so definitely it is bad for future
growth. Huge amount of inventories also symbolize that the rate of return on the inventory
investment is near to zero.

The turnover ratios of the unpreserved goods are normally very high as these are sold out quickly.
Although high inventory turnover ratio is always desired but sometimes high ratio may also indicate
ineffective buying as lower inventory purchasing will cause the ratio to be high.
Formula: Inventory Turnover Ratio= Cost of Goods Sold Inventory
Year
COGS /

2011
3,386,670/

2012
3,964,900/

2013
1,224,492/

2014
868,079/

Inventory

1,138,844

1,059,544

4,516,705

4,476,255

Result

2.97 Times

3.74 Times

0.27 Times

1.19 Times

Inventory Turnover Ratio

4
3.5
3

3.47
2.97

2.5
2
1.5
1
0.5
0

2011

2012

0.27

0.29

2013

2014

Inventory Turnover Ratio

From 2011 to 2012 GSK has maintained moderate inventory turnover which means that GSK had
reasonable sales over these two years. But in 2013 and 2014 there were big drop in inventory turnover
which means inventories were not utilized properly.

2.2 Days Sales Outstanding: This ratio is also called Average Collection period (ACP); which evaluates
the firms ability to collect its credit sales in a timely manner. The lower the DSO days are, the better it is
for any firm.
Formula: Inventory Turnover Ratio= Accounts Receivables Average daily sales
= Accounts Receivables/ (Annual Sales/360)

Year
Accounts

2011
401,297/

2012
487,398/

2013
506,060/

2014

Receivables/

(4,735,121/360)

(5,553,812/360)

(6,774,872/360)

(7,187,225/360)

30.51 Days

31.59 Days

26.91 Days

52.33 Days

1,044,908/

(Annual
Sales/360)
Result

Days Sales Outstanding

60

52.33

50
40
30

30.51

31.59

2011

2012

26.91

20
10
0

2013

2014

Days Sales Outstanding

From 2011 to 2012 GSK has maintained moderate Days Sales Outstanding and in 2013, it was even less.
This means, GSK collected the accounts receivable generated from credit sales in a timely manner for
these three years, whereas, in 2014 it failed to do so. It took more than 52 days on an average for GSK to
collect the account receivables generated due to credit sales.
2.3 Fixed Asset Turnover Ratio: It is the ratio where sales are compared with the fixed assets of the
firm. The ratio actually clarifies that the firm is capable enough to use its fixed assets to earn revenues or
not. In fixed asset turn over, normally investments on property, plant and equipment are counted and the
depreciations of these are subtracted. A high fixed asset turnover is always appreciable as it signals
towards the firms high productivity. Higher fixed asset turnover means the firm is utilizing its fixed
assets and generating revenues from these. On the other hand, low fixed asset is the signal that the firm is
not productive and the firm fails to generate sales revenue by utilizing the fixed assets.
There is neither standard guideline nor a best level for fixed asset turnover, so the evaluation and
comparison can be done by calculating fixed asset turnovers of past years of a particular organization. As
there is no average figure, so progress of the firm can also be assessed through comparing fixed asset
turnovers of different firms of the same industry. High fixed asset turnover means that less money is
allocated to the fixed asset portion, where as too low fixed asset turnover means that additional fixed asset
investment has been made which is unnecessary. So, the investment in fixed assets should be in the right
amount, neither more nor less and most importantly it should be monitored that the assets are being
utilizing properly thus they can contribute to high revenues.
Formula: Fixed Asset Turnover = Sales Net Fixed Assets

Year
Sales Net Fixed

2011
401,297/ 480,662

2012
487,398/ 497,830

2013
506,060/ 586,374

Assets

2014
1,044,908/

578,303

Result

0.84 Times

0.98 Times

0.86 Times

1.81 Times

Fixed Asset Turnover

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

1.81

0.84

2011

0.98

2012

0.86

2013

2014

Fixed Asset Turnover

From 2011 to 2013 GSK has maintained low fixed asset turnover; which means, GSK highly utilized its
fixed assets to generate sales for these three years. Whereas, in 2014 this ratio was higher with slightly
lower utilization of fixed assets to generate sales than that of the past three years.
2.4 Total Asset Turnover Ratio: Total Asset Turnover ratio refers to how much sales revenue is gathered
in against of each dollar/taka of assets. Through this ratio, the effectiveness of asset management of the
firm is measured. Higher the ratio, higher the efficacy of the firm and the vice versa.
From the asset turnover, we can also guess that pricing strategy as the high asset turnover signals towards
the low profit margin which means costs have increased and need to cut down.
Formula: Total Asset Turnover = Sales Total Assets

Year

2011

2012

2013

2014

Sales Total

401,297/

487,398/

506,060/

1,044,908/

Assets

2,791,387

3,064,206

3,997,625

5,028,322

Result

0.14 Times

0.16 Times

0.13 Times

0.21 Times

Total Asset Turnover

0.25
0.21
0.2
0.15

0.14

0.16
0.13

0.1
0.05
0

2011

2012

2013

2014

Total Asset Turnover

Total Asset Turnover Ratio of GSK has been quite low fro, 2011 to 2014. This is not a good sign for the
company since lower Total Asset Turnover Ratio means inefficacy in using the companys fixed asset.
However, this ratio was a bit higher in the year of 2014 compared to than that of the previous three years.

3. Debt Management Ratios:

4. Profitability Ratios:
A profitability ratio is a measure of profitability, which is a way to measure a firms performance.
Profitability is just the ability to make profit and a profit is what is left over from income earned after
deducting all costs and expenses related to earning the income. Profitability can be categorized by
following ratios:
1.

Net Profit Margin

2.

Return on Total Asset (ROA)

3.

Return on Equity (ROE)

4.1 Net Profit Margin: This is the ratio of Net Income to Sales or Revenues. Through the net profit
margin, we asses that out of each dollar/taka of sales, how much is kept as earning. This is also known as
profit margin. Higher the profit margin, better the condition of the firm. Higher profit margin means that
from the sales, higher portion is remaining as profit so it also indicates towards efficient expense
controlling ability.
Formula: Net Profit Margin= Net Profit/Sales
Year
Net Profit/Sales

2011
282,068 /401,297

2012
243,967 /487,398

2013
546,249 /506,060

2014
826,778/1,044,9
08

Result

70 %

50 %

108 %

79 %

Net Profit Margin

120

108

100
80

79

70

60

50

40
20
0

2011

2012

2013

2014

Net Profit Margin

Net Profit Margin Ratio of GSK has been high from 2011 to 2014. This is a good sign for the company
since the higher this ratio is, the better it is for a firm. This high Net Profit Margin refers to efficiency in
GSKs profit management ability.

4.2 Return on Asset (ROA): ROA is the measurement tool by which we can know that a firm is how
much profitable in comparison with its total assets. So, it measures that the firm how efficiently uses its
assets to generate profits. This is also known as Return on Investment (ROI) as it tells that a firm how
effectively transforms its investments on profits. It is often expressed in percentage. Higher ROA is
always desired as it indicates that higher profit has been made through fewer investments.
Formula: ROA = Net Income/Total Assets
Year
Net Income/Total

2011
282,068 /

2012
243,967 /

2013
546,249 /

2014

Assets

2,791,387

3,064,206

3,997,625

5,028,322

Result

10 %

08 %

14 %

16 %

826,778/

Return on Asset
18
16
14
12
10
8
6
4
2
0

16
14
10
8

2011

2012

2013

2014

Return on Asset

Return on Asset Ratio of GSK has been quite high from 2011 to 2014. This is a good sign for the
company since the higher this ratio is, the better it is for a firm. This high ROA refers to efficiency in
GSKs profit management ability.
4.3 Return on Common Equity (ROE): Return on Equity or ROE is the ratio of net income to total
shareholders equity. It measures that the firm how much earns from the shareholders equity. It also
shows the firms efficiency at generating profits from every dollar/taka of equity capital. Increasing ROE
indicates improved performance. In accounting sense, ROE is the true bottom line of performance
measurement.

Formula: ROE= Net Income Available to Common Stockholders/Common Equity

Year
Net Income Available

2011
282,068 /

2012
243,967 /

2013
546,249 /

2014

to Common

1,422,290

1,485,560

1,851,112

2,316,497

20 %

16 %

29 %

36 %

826,778/

Stockholders/Commo
n Equity
Result

Return on Equity
40

36

35

29

30
25
20

20
16

15
10
5
0

2011

2012

2013

2014

Return on Equity

Return on Equity Ratio of GSK has been quite high from 2011 to 2014. This high ROE refers to the
efficiency of earning from the shareholders equity along with GSKs efficiency at generations profit from
every taka of equity capital. Since the ROE has been increasing in recent years, it indicated improved
performance of GSK.

5. Market Value Ratios:

Market Value Ratios relate an observable market value, the stock price, to book values obtained from the
firm's financial statements
Market value ratios are categorized as below:

1. Price/Earnings Ratio
2. Market/Book Ratio
5.1 Price Earnings Ratio or P/E: This is the ratio of market value to EPS. Through this ratio, the recent
trading price of the firm is compared with its EPS.
The P/E ratio actually represents the expectation of investors about the firm. Higher P/E means that
investors have high expectations about the firms future growth and thats why they are interested to
invest.
The P/E ratio has also another meaning, sometimes it also indicates that how much the investors are
willing to pay for per dollar of earnings. So, in this case it is referred as multiple. The average P/E ratio is
20-25 times. Comparing P/E ratio within firms of same industry gives the idea that which firm is
performing well.
Formula: P/E ratio= Market Price per share/Earning per share
Year
Market Price/EPS

2011
664.50 / 23.42

2012
570.00 / 20.25

2013
955.70 / 45.35

2014
1512.30 / 68.63

Result

28.37

28.15

21.08

22.04

Price/Earning(PE) Ratio
30

28.37

28.15

25

21.08

22.04

2013

2014

20
15
10
5
0

2011

2012

Price/Earning(PE) Ratio

Over the last four years, the P/E ratio of GSK was stable which means that investors have interest on
GSK, this is because GSK is a well reputed multinational firm and has a unique brand image. In 2013
there was a little downfall compare to 2012. So, from 2011 to 2014 it is quite stable which indicates that
people have positive opinion about the stocks of GSK.
5.2 Market/Book Ratio:
A ratio used to find the value of a company by comparing the book value of a firm to its market value.
Book value is calculated by looking at the firm's historical cost, or accounting value. Market value is
determined in the stock market through its market capitalization
Formula: Market/Book Ratio = Market Price per share/Book Value per share
Year
Market Price /

2011
664.50 / 118.07

2012
570.00 / 123.32

2013
955.70 / 153.66

2014
1512.30 / 192.3

BVPS
Result

5.63

4.62

6.22

7.86

Market/Book Ratio
9
8
7
6
5
4
3
2
1
0

7.86
6.22

5.63
4.62

2011

2012

2013

Market/Book Ratio

2014

Investors are willing to pay more for GSK.Rason is they have generated more returns compare to total
Asset & common equity. From 2011 to 2014 the market book value has increased in a gradual manner
which indicates the good performance & investors acceptance

http://www.gsk.com.bd/userfiles/reports/reports-AnnualReportURL-29.pdf
https://www.gsk.com/media/603031/annual-report-2014.pdfs