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Description
Page
Letter of transmittal
4-15
Du-pont Analysis
15-20
Overall Comparison
21
22-23
24-25
26
27
Conclusion
28
Reference
28
Letter of Transmittal
May 4, 2015
Mr. Kamrul Huda Talukdar
Here is the group project report on Financial Statement Analysis of GlaxoSmithKline that you
have asked us to prepare as a part of requirement for our Corporate Finance course.
In presenting this report, we have contributed our level best to include all information and
explanation to make the report informative and comprehensive.
It was a very enriching and enthralling experience for us to prepare this report. Our excel
working and report writing skills have improved a lot while doing it. If further any report is
required, we will be available by any means.
Thank you Sir for believing in us and giving us this opportunity.
Sincerely,
______________
______________
______________
F.M.SafiulAlam
__________________
Salma Akter
______________
Ismat Zerin Sachi
plc-
one
of
the
worlds
leading
research
based
of
the
pioneering
pharmaceutical
companies
in
Bangladesh,
comprises
of
price-controlled
essential
products.
So,
GSK
Part I
Ratio analysis of GSK:
1. Liquidity Ratio Analysis:
1.1 Current Ratio:
Current ratio is a financial ratio that measures whether or not a company
has enough resources to pay its debt over the next business.
Year
2010
2011
2012
2013
2014
Current
2.59
1.89
1.74
1.69
1.73
Ratio
2014
2013
2012
2011
2010
Quick
1.4
1.1
1.05
.96
1.60
Ratio
4
Interpretation: The table shows that GSK Bangladesh Ltd had highest quick
ratio in 2010 but was dropped in 2011 and then again rose in 2012 and in
2013 it rose very little. Over these four years GSK has maintained very
efficient quick ratios these were quite high than 1 but in 2011 there was
huge fall and the ratio was below 1 which is very disappointing. This means
in 2011 GSK was not enough able to pay back its short term debt but if we
analyze he trend then we will find that GSK is capable to tackle liquidity crisis
and to recover from bad situations. Another important point is, the current
ratio in 2011 was quite high than 1 which means it had enough current
assets but yes there were lacings in quick assets. It actually means that
when the current assets will generate cash then GSK will gain a high quick
ratio. This impact we really can see in 2012, as in this year the ratio is 1.05
so it means GSK has recovered from the lacings in quick assets
1.3 Cash ratio: The cash ratio is effective and quick way to determine if a
company could have potential short-term liquidity issues.
Year
2014
2013
2012
2011
2010
Cash
.83
.71
.63
.97
Ratio
Interpretation: Here, we can see that in first two years the cash ratio was
very poor which signals that GSK faced much liquidity crisis and had not
sufficient cash in hand to pay back the short term liabilities. On the other
hand, from 2012 to 2014 the cash ratio took huge increase and it was above
0.5 then. Highest cash ratio was achieved in 2014 which was 1 which
indicates that there were enough cash assets in this year. Although there
was a fall in cash ratio in 2011 but still that was a satisfying figure.
companys ability to cover its short term financial obligations total current
liabilities by comparing its total current assets to its total assets.
Year
NWC
2014
to .16
2013
2012
2011
2010
.14
.10
.10
.216
TA
Interpretation: Here we can see that GSK Bangladesh Ltd has maintained
positive net working capital which indicates their operational efficiency. In
2010 the working capital ratio was too high and these were above 2 which is
a sign that GSK is slow at payment collections and operating cycle is not
enough efficient.
2014
0.578
2013
0.592
2012
0.573
2011
0.529
2010
0.385
Interpretation: A debt ratio less than .50 is considered as good, In2010 the
debt ratio of GSK was impressive as the debt ratio was less than .50 at those
years. In 2011 the ratio was very near to .5 and in 2012 it was more than .5
which is not fruitful for the business and it signals towards higher
dependency on debt. It rose higher and higher now which is not good for the
company.
2.2. Debt-equity ratio:
2014
1.1706
2013
1.159
2012
1.061
2011
0.962
2010
0.603
2014
2.17
2013
2.16
2012
2.06
2011
1.96
2010
1.60
2014
0.056
2013
0.063
2012
0.088
2011
0.092
2010
0.085
2014
382.374
2013
169.792
2012
79.498
2011
123.790
2010
674.097
Interpretation: In 2011 and 2012, the interest coverage ratio was relatively
very low and it indicates that then GSK was not much efficient to pay back its
interests from the earnings but there is a conflicting point and that is, the
ratio is greater than 1 which means the firm can meet up the obligation, yes
of course more high the ratio then the firm is more capable but by the two
figures of 2011 and 2012 we cannot say that GSK failed, GSK then definitely
had enough capacity. So, we can say that it could have been better. In 2010
the ratio was abnormally high which is also not good for business and
indicates that the money is being spent much on repaying debts rather than
reinvesting. It means that the firm has now fewer debts so they can
concentrate on more business growth but they are not doing so. In 2011 and
2012 the ratio decreased rapidly, which signals that the firm has less debts
and at the same time now they have realized the importance of business
extension. In 2014 it went up at 382.374 tk.
2.6. Cash coverage ratio:The higher the coverage ratio, the better the
ability of the enterprise to fulfill its obligations to its lenders.
Year
Times
2014
631.933
2013
326.830
2012
192.851
2011
262.720
2010
1262.820
2014
5.1565064
2013
3.6886357
2012
3.7420814
2011
2.9737786
2010
3.4373352
93
77
99
74
17
Interpretation: In 2011 the ratio is very low, it may mean the company has
much more inventory than it really needs at any one time. Therefore it has
too much of its capital tied up in goods or raw materials that it will take a
long time to sell or make a profit on. A high inventory turnover ratio could
mean the company has had unexpectedly strong sales. It is very high in
2014 its a good sign. Or it could mean the firm is not managing its buying as
well as it might and is having difficulty in administering its inventory.
Year
Days
2014
70
2013
98
2012
97
2011
122
2010
107
2014
6.8783328
2013
13.387487
2012
13.177210
2011
11.799542
2010
7.8463245
29
65
29
48
08
2014
53.06518
2013
27.2642641
2012
27.699337
2011
30.933402
2010
46.518596
441
87
77
02
10
Interpretation In 2013 it is low so its a good sign for the company. A higher
ratio indicates a company with poor collection procedures and customers
who are unable or unwilling to pay for their purchases. In 2014 the ratio is
higher; its a bad sign for the company. Companies with high days sales
ratios are unable to convert sales into cash as quickly as firms with lower
ratios.
2014
8.693053
2013
12.4025343
2012
22.764603
2011
16.787161
2010
0.8854933
032
41
25
35
2014
12.42813
2013
11.5538410
2012
9.8687241
2011
9.8512489
2010
9.3105096
024
12
03
11
2014
12.813024
2013
11.5538410
2012
9.8687241
2011
9.8512489
2010
92.875827
.42
12
03
86
4. Profitability Ratios:
4.1 Profit margin:
The profit margin ratio is a profitability ratio that measures the amount of net
income earned with each dollar of sales generated by comparing the net
income and net sales of a company.
Year
2014
2013
2012
2011
2010
Profit
.11
.08
.043
.60
.11
Margin
12
Interpretation: Over the last years, the gross profit margin has increased
gradually by slight amount every year but in 2011 there was a downfall and
in 2012 it decreased by only one point. In 2011 the sales were higher than
previous four years but the costs associated with the sales were also too
high, for this reason the margin was low. From this result, GSK tried to control
the cost and as a result the situation was little better in 2013 than that of
2012. One positive thing we can notice that the performance of GSK was
quite stable in terms of gross profit margin which means throughout these
years the GSK Bangladesh Ltd faced less fluctuations.
5.4.4| Earnings per Share (EPS):
EPS represents the number of currency amount earned on behalf of each
outstanding share of common stock.
Year
2014
2013
2012
2011
2010
EPS
34.05
23.42
20.25
45.35
68.63
Interpretation: In the year 2010, the EPS was very high but 2011 it
decreased a lot which indicates that earnings against each share were low on
those years. In 2011 the EPS dropped by 45.35tk and in 2012 it again
dropped by 20.17 tk. So, GSK should take initiative to increase the EPS
otherwise it may create confusion about the financial condition to the
general public.
5.4.5| Return on Total Assets (ROA):
The higher the return, the more efficient management is in utilizing its asset
base. The ROA ratio is calculated by comparing Earnings Available for CS
Holders to Total Assets, and is expressed as a percentage.
Year
2014
2013
2012
2011
2010
13
ROA
.164
.134
.18
.10
.18
Interpretation: In 2010 the ROA was 18% and then it fell down to 10% in
2011 which indicates unsuccessful management policies of GSK. Then in
2012 the ROA was 18% which is very impressive but in 2013 it decreased
and became 13.4%. In 2014 the ROA was 16.4%, so there was again downfall
but this year the percentage of downfall was lower than that of 2013.
5.4.6| Return on Equity (ROE):
This ratio indicates how profitable a company is by comparing its Earnings
Available for CS Holders to its Stock holders Equity.
Year
2014
2013
2012
2011
2010
ROE
.35
.29
.16
.19
.29
Interpretation: The graph interprets that, from 2010 to 2014 there was a
huge improvement in ROE, over these 3 years it increased by almost 29%
but in 2011 it decreased by 19.83% which is not a good indication. In 2012
the downfall continued which indicates that GSKs management efficiency is
lower than previous years and it is earning less profit from the equity capital.
But the impressive part is that in 2014 it rose high and become 35%.
5.4.8 DPS (Dividend per Share):
The amount of dividend that a stockholder will receive for each share of
stock held. It can be calculated by taking the total amount of dividends paid
and dividing it by the total shares outstanding.
Year
2014
2013
2012
2011
2010
DPS (TK)
42
30
15
15
20
14
Interpretation: In 2010, the DPS for the common shareholders was 20tk but
in 2011 it fell down. It became constant up to 2013. In 2014 shareholders
receive 42tk for each shares outstanding which is greater than the previous
year.
5.5| Market Ratio:
5.5.1| P/E Ratio:
The price/earnings ratio (P/E) is the best known of the investment valuation
indicators. The P/E ratio has its imperfections, and commonly used to assess
the owners appraisal of share value.
Year
2014
2013
2012
2011
2010
P/E ratio
22.04
21.08
28.15
28.37
33.17
2014
2013
2012
2011
2010
Market
to book
ratio
151.23
95.57
57.00
66.45
112.96
firm sold its share at a lower rate. In 2012 it decreases at a greater amount
and became 57. But in 2013 it rises and GSK sell its share at a higher value
151.23.
Du-pont analysis
The Du-pont analysis also called the Du-pont model is a financial ratio based
on the return on equity ratio that is used to analyze a company's ability to
increase its return on equity. In other words, this model breaks down the
return on equity ratio to explain how companies can increase their return for
investors. The Du-pont analysis looks at three main components of the ROE
ratio
Operating efficiency - as measured by profit margin.
Asset use efficiency - as measured by total asset turnover.
Financial leverage - as measured by the equity multiplier
Analysis
2010
16
2011
17
18
2012
19
reduced because the net income significantly goes down from $282068 to
$243967. This year the total asset turnover ratio is higher than the last year.
2013
2014
Overall Comparison
1. Although GSK is maintaining a fair current ratio, but from 2011 to 2014
it is gradually decreasing which is an indication that current liabilities
are increasing. So, GSK must concentrate on this issue and should be
careful to control the debts.
2. The debt ratio of GSK is not so high but it is increasing gradually and in
2012 it was above .52. Although the figure is no so violent but if it is
below .5 then more secured condition is expressed. So, from now GSK
should check that its dependency on the trade creditors is increasing
or not. If it is increasing then GSK must take effective steps to reduce
it.
3. There is an upward trend in debt to equity ratio, again it is pointing out
that debts are increasing. Although higher debts can give financial
leverage but there is also a risk of meeting up the debt obligations. So,
GSK should realize that higher debts can lead it to higher risk. From
now it should be little conservative in case of taking debts.
4. Most of the profitability ratios are decreasing. So, it means the growth
is lowering day by day. In this case GSK must needs to think that how
more profit can be achieved and needs to find ways to capture the
significant portion of the market thus profit level goes up.
5. GSK needs to change its policy of not pursuing the doctors to prescribe
its drugs, otherwise it will not be able to cope up with the local giants.
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Part II
Pro-Forma Income Statement:
A Pro-Forma Income statement is planned and prepared in advance to of a
transaction to project the future status of the company. Pro forma income
statement includes revenue, COGS, operational expenses and nonoperational expenses. To prepare the Pro-Forma Income statements; we have
forecasted the Sales revenue with the help of Forecast function in Microsoft
Excel. To make a simple pro forma income statement by evaluating this
year's sales to date as compared to last year's total sales. Then we calculate
the percentage change of this year's sales compared to last year's sales.
Taking the current "Total Sales," divide by the number of months into the
year it represents and multiply by 12 to annualize the number. After that we
compare that number to "Total Sales" for last year and figure out the
percentage change: In 2015 the growth rate was 6% and 2016 it was 13%
By multiplying the tax rate with consecutive years Sales we have calculated
the total amount of tax. Next to find the Finance cost (Interest expense) we
have kept the ratio of Interest expense to Long term debt constant. Then we
have calculated each years interest expense by multiplying that ratio with
the consecutive years Long term debt. Addition to Retained Earnings is
calculated by multiplying the Net Income with the Retention Ratio. Other
components of Income Statement were just changed according to the growth
rates.
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Retained earnings represent what is left after expenses, taxes, and dividends
are paid. However, if there is a loss and the retained earnings from a
previous period will not be enough to cover it, there may be a negative
retained earnings figure.
Part III
Annual & Market Return:
Recession can have a negative effect on companys annual rate of return. For
example, in 2010 GSks annual rate of return is 55% where in 2011 it has a
yearly return on -41% and later on negative value goes down at 2012 at
14%. In 2013 ARR rises 67.7% and 50.51% in 2014. But DSE yearly rate of
return is 81.4% in 2010 and -36.7% in 2011. If we compare to DSE index then
we will get a clear view that in 2011 and 2012 both have negative value and
in 2013 and 2014 both of them positive. So GSK is slightly in better position
in annual rate of return than DSE index as in 2013 GSKs ARR was higher
than DSEs ARR.
We use Excel formula to calculate Annual Rate of Return. ((last day of year
price first day of year price) / first day of year price.)
25
Beta Co-efficient:
We know if the stocks price experiences movements greater (more volatile)
than the stock market, then the beta value will be greater than 1. If a stocks
price movements are less than the market fluctuations then the beta value
will be less than 1. And if the stock price is moving along with the market
movement then the beta will be near about 1. Since beta also represents risk
factor then a beta value higher than 1 will indicate more risk and in turn
more expected return for invest. GSK has a beta value of near 75.6% So, GSK
is riskier and investors will expect more return in GSK. Companies growth
opportunities are a very important determinant of their beta value. Generally
firms with more growth opportunities tend to have higher betas. Another
indicator is GSK has a beta near to 1 so their stock price is moving according
to market movement.
We use Excel to find Beta Co-efficient which is attached with this project later
on.
Treasury bill Rate
We searched it on the Bangladesh Bank website to find out the Treasury bill
rate of 365 year government bonds. The Treasury bill rate is 9.85% for 365
days bonds in 2014.
26
Why it matters:
It's important for a company to know its weighted average cost of capital as
a way to gauge the expense of funding future projects. The lower a
company's WACC, the cheaper it is for a company to fund new projects. A
company looking to lower its WACC may decide to increase its use of
cheaper financing sources. For instance, GSK may issue more bonds instead
27
of stock because it can get the financing more cheaply. Because this would
increase the proportion of debt to equity, and because the debt is cheaper
than the equity, the company's weighted average cost of capital would
decrease.
Part IV
Free Cash Flow
In order to calculate the free cash flow of both of the companies, we have
followed the straight forward direction. We took the earnings before income
and tax for both of the companies and found out the after tax value of it. As
there was no depreciation mentioned in the annual reports, we have taken
the amortization of deferred IPO expense. In order to find the capital
expenditure for GSK, we have subtracted the previous year fixed asset from
the current year fixed asset for the three forecasted year. Then we just
applied the formula mentioned to us which is FCF= EBIT (1-T)+Amortization
of deferred IPO-Capital expenditure-Change in net working Capital.
Stock price of the last pro-forma year
In order to calculate the stock price of the last pro-forma year, firstly we have
found out the earnings per share of the last pro-forma year. We have
calculated it by the formula of net income/ number of shares. As we are
supposed to keep the price earning ration constant, we have not changed it.
Then, we have just us the formula of Price earnings ratio to calculate the
stock price of both of the companies. Stock price of GSK is 280.96tk.
price of last pro- forma year with the number of shares. Then we have
calculated the enterprise value by adding both the market capitalization and
book value of debts as it would be difficult for us to calculate the market
value of it. Then, we have subtracted the cash and bank balances of the last
pro-forma year to calculate the enterprise value. In case of GSK, it is Tk.
1,272,160,821 in the last pro-forma income statement.
Value of the Companies
In order to calculate the value of GlaxoSmithKline in 2014, we have found out
the present value of all the forecasted free cash flow. In this case, we have
taken the weighted average cost of capital for each of the preceding year for
both of the companies. Then, we have found out the present value of the
enterprise value using the 2019 of the weighted average cost of capital.
Then, we have just added both of these values to calculate the value of each
of the companies. The value of GSK is1,310,334,618 which means in order to
acquire the company the acquirer needs to have that amount of value.
29
Conclusion
First of all we have calculated their ratios to understand their financial
statements. In part 1, we calculated their liquidity ratios to understand
whether they have the capability to pay their short term obligations, then we
calculated their asset management ratios to compare their assets to their
sales revenue, then we calculated their profitability ratios to generate their
earnings as compared to its expenses. In part 2 we make pro forma income
statement, balance sheet and EFN for both companies. In part 3, we
calculated their cost of capital. In part 4 we calculated their value of the
enterprise. Thus we completed the whole project.
References:
1.
2.
3.
4.
5.
http://www.gsk.com.bd/publications/annual-reports.aspx
http://www.dsebd.org/
http://www.dsebd.org/latest_share_price_scroll_l.php
We collect information from Dhaka Stock Exchange.
Fundamentals of Corporate Finance by Randolph W. Westerfi eld
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