Comparative Analysis of Financial Statements of Square Pharmaceuticals Ltd and Renata Pharmaceuticals Ltd

INTRODUCTION:

Objectives of the Report:

1. To know the current financial performance of the two companies.
2. To know the future prospect of the companies.
3. To compare the financial position of the two companies.

Scope of the report:

1. Studying the pros and cons of the financial statements of a company, it is possible to predict the probable future growth of a company

Methodology:

Data were collected from Annual Reports of Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. from the year 2003 to 2008.

Three types of financial tools were used to analyze the data which are:

1. Horizontal Analysis
2. Vertical Analysis and
3. Ratio Analysis.

LITERATURE REVIEW:

Financial Analysis:

The art of transforming data from financial statements into information that is useful for informed decision making is financial analysis. Financial analysis involves the use of various financial statements. These statements do several things.  First the balance sheet summarizes the assets, liabilities and owners’ equity of a business at a moment in time usually the end of a year or a quarter. Next the income statement summarizes the revenue and expenses of the firm over a particular period of time, again usually a year or a quarter.

Need for Comparative Analysis:

Every item reported in a financial statement has significance. We know a company had a certain amount of cash on the balance sheet but we do not know whether the amount represents an increase over prior year or whether it is adequate in relation to the company’s need for cash. To obtain such information, we need to compare the amount of cash with other financial statements data.

Comparison can be made on a number of different bases:

1. Intracompany Basis: This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.
2. Industry Averages: This basis compares an item or financial relationship of a company with industry averages published by financial ratings organizations.
3. Intercompany Basis: This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. Analysts make these comparisons on the basis of the published financial statements of the individual companies.

Tools of Analysis:

Various tools are used to evaluate the significance of financial statement data. Three commonly used tools are these:

1. Horizontal Analysis evaluates a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place. This change may be expressed as either an amount or percentage.
2. Vertical Analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount.
3. Ratio Analysis expresses the relationship among selected items of financial statement data.

Background of the Companies:

Square Pharmaceuticals Ltd.:

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 1^st 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 5 Billion (US$ 90 million) with about 15% market share (April 2003 – March 2004) having a growth rate of about 16.The company was founded in 1958 by Samson Chowdhury along with three of his friends as a private firm.  It went public in 1994.

The first factory located in Pabna started operations in 1958.  The second, known as the “API Unit” began production in 1995.  The third unit located 50 kilometers north of Dhaka has been in operation since 2002.  This facility is geared oral capsules and tablets.  The company plans to use this factory as part of its export strategy.

Renata Pharmaceuticals Ltd.:

Renata Pharmaceuticals Ltd. was founded in 1972 as a subsidiary of Pfizer Inc. Ownership transferred from Pfizer Inc. to local institutions and the general public in 1993. Company name subsequently changed from Pfizer Laboratories (Bangladesh) Limited to Renata Pharmaceuticals Limited.

ANALYSIS & INTERPRETATIONS:

Horizontal Analysis of Balance Sheet:

By horizontal analysis of changes in asset, liabilities and share holders’ equity since base period 2003 we observed that in asset section current assets of Square Pharmaceuticals Ltd. increased from 39.85% in 2004 to 206.05% in 2008 whereas current assets of Renata Pharmaceuticals Ltd. increased from 25.99% in 2004 to 200.37% in 2008. The source data are given at the end of this report as Data Appendix.

Table 1: Horizontal Analysis of Balance sheet

In the liability section, Current liabilities increased from 0.22 % in 2004 to 180.52% in 2008 and from 24.88% in 2004 to 266.75% in 2008 in Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. respectively.  Share holders’ equity in Square Pharmaceuticals Ltd. increased 118.56% and in Renata Pharmaceuticals Ltd. 207.39% up to 2008.

Horizontal Analysis of Income Statement:

Net Sales of Square Pharmaceuticals Ltd. increased from 16.13% to 103.10% and in Renata Pharmaceuticals Ltd. from 21.78% to 28.93%. Gross profit in Square Pharmaceuticals Ltd. increased 30.03% to 132.00% and in Renata Pharmaceuticals Ltd. from 26.11% to 111.79%. Net income in Square Pharmaceuticals Ltd. increased from 26.82 % to 80.66% and in Renata Pharmaceuticals Ltd. from 37.82% to 97.20%.

Table 2: Horizontal Analysis of Income Statement

Vertical Analysis of Balance sheet:

By vertical analysis we saw that current assets in Square Pharmaceuticals Ltd. decreased from 39.04% of total assets in 2004 to 34.73% in 2008 and Current assets in Renata Pharmaceuticals Ltd. also decreased. Current liabilities increased in both Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. but share holders’ equity decreased in both the companies.

Table 3: Vertical Analysis of Balance sheet

Vertical Analysis of Income statement:

Gross profit in Square Pharmaceuticals Ltd. increased but net income decreased and in Renata Pharmaceuticals Ltd. both gross profit and net income increased.

Table 4: Vertical Analysis of Income statement

Ratio Analysis:

Liquidity Ratio: These ratios actually show the relationship of a firm’s cash and other current assets to its current liabilities.

1. 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).

Current Ratio = Current Assets/ Current Liabilities

Following table shows the Current ratio decreased in both the companies that is their liquidity decreased.

Table 5: Current Ratio

1. 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 current assets except inventories.

Quick Ratio= (Current Assets-Inventories)/Current Liabilities.

Following table shows that liquidity of both Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. decreased.

Table 6: Acid Test Ratio

1.   Inventory Turnover: The ratio is regarded as a test of efficiency and indicates the rapidity with which the company is able to move its merchandise.

Inventory turnover ratio = Cost of Goods Sold / Inventories

Inventory turnover in Square Pharmaceuticals Ltd. declined from 3.54 to 2.40 and that of Renata Pharmaceuticals Ltd. declined from 1.93 to 0.75.

Table 7: Inventory Turnover

 Profitability Ratio:

1. 1.        Profit Margin:

Profit Margin gives us the net profit that the business is earning per Tk. of sales. The equation is as follows:

Net Profit margin = Net income available to the Stockholders / Net Sales

Square Pharmaceuticals Ltd. experienced a decrease in its profit margin from 2004 to 2008 but Renata Pharmaceuticals Ltd. experienced an increase.

Table 8: Profit Margin (%)

2. Asset Turnover:

Sales of both Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. decreased from 2004 to 2008.

Asset Turn Over = Net Sales/ Total Assets

Table 9: Asset Turnover (%)

 Return on asset:

Return of total asset measures the amount of Net Income earned by utilizing each Tk. of Total Assets. The equation is:

Return on Total Assets (ROA) = Net income available to total common shareholders / Total assets

Return on assets of both Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. decreased from 2004 to 2008.

Table 10: Return on asset (%)

CONCLUSION:

From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been doing pretty good throughout the years. It is true that last year their 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. The Renata Pharmaceuticals Ltd. financial analysis indicates that it has been also doing pretty good throughout the years but not as well as the Square Pharmaceuticals Ltd.

REFERENCES:

Weygandt JJ, KiesoDE, Kimmel PD 2008. Accounting Principles. 8^th edition. John Wiley & Sons,  Inc. p 778-802.

Van Horne JC, Wachowicz JR. JM 2006. Fundamentals of Financial Management. 12^th edition. FT Prentice Hall. p 125-128.

Annual Reports of Square Pharmaceuticals Ltd. and Renata Pharmaceuticals Ltd. From 2003 to 2008.