(PDF) Analysis of financial statements

Case Study

Table of Contents
INTRODUCTION...........................................................................................................................3
1. EVALUATION OF FINANCIAL ANALYSIS..........................................................................3
Profitability ratio analysis ..........................................................................................................3
Limitations of Financial ratios ...................................................................................................8
2. INVESTMENT APPRAISAL.....................................................................................................8
Net present value (NPV):............................................................................................................9
Internal rate of return (IRR):.......................................................................................................9
3.1 Rationale of selecting the target company..........................................................................11
3.2 Synergistic gains over the acquisition.................................................................................12
3.3 Valve and financing of the proposed deal of acquisition....................................................12
3.4 Potential impact on performance regarding acquisition.....................................................12
3.5 Acquisition risk assesses and challenges...........................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
A case study is evaluation of facts and figures related to a specific phenomenon, case or a
company. This assessment can be numerical or theoretical with use and application of various
tools and techniques to determine different aspects related with performance, state and position
in industry, implication of case and others. In the present report a case study is presented over
AstraZeneca Plc which is British-Swedish multinational pharmaceutical and biopharmaceutical
organization established in 1913. The organisation have gained success in past few years and
acquiring business and firms from long, since 1939. The report includes evaluation of financial
performance of company through its ratio analysis and comparing it with one of its competitors.
Along with this, investment appraisal techniques are also explained in detail with their critical
discussion. For the last section of the report the potential of a target company are presented
which AstraZeneca is planning to acquire.
1. EVALUATION OF FINANCIAL ANALYSIS
Profitability ratio analysis
Gross profit ratio- It refers to the ratio that reveals the profit earned by the company after
making adjustment regarding the cost of goods sold from the sales. It depicts the relationship in
between the net sales and the gross profit of the organization. It helps in assessing the operational
efficiency of business (Linares-Mustaros, Coenders and Vives-Mestres, 2018). It is calculated
by dividing the gross profit with that of the Net sales. Higher the gross profit ratio, better is the
performance of the companies.
Year / companies AstraZeneca Johnson&Johnson
2014 77.60% 69.40%
2015 81.20% 69.30%
2016 82.10% 69.80%
2017 80.80% 66.80%
2018 77.70% 66.80%
Interpretation- The above table reflects that the gross profit ratio of AstraZeneca is
higher than Johnson&Johnson over the last five years. This indicates that the former company is
efficiency performing its operations by making optimum use of the resources. It also reflects that
after making the cost relating to the sale of the goods, the gross profit of AstraZeneca is better
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and showing an increasing trend which in turn shows that the company is performing with full
efficiency in comparison with its competitor.
Liquidity ratio analysis
Current ratio- It is referred as the most useful liquidity ratio that measures the ability of
an enterprise in paying off its short term liabilities. It tells about the liquidity position of the
company and in making the analysis regarding the use of the current assets made by an entity in
order to satisfy their current debt or the payables (Chen and et.al., 2018). It is computed by
dividing the short term assets with the current liabilities. Greater the current ratio, depicts a better
liquidity position od the company. An ideal quick ratio is stated as 2:1.
Year / companies AstraZeneca Johnson&Johnson
2014 0.96 2.36
2015 1.08 2.17
2016 0.87 2.47
2017 0.8 1.41
2018 0.95 1.47
Interpretation- From the above evaluation it has been interpreted that AstraZeneca has to
adopt corrective measures for making the effective use of its current assets because the resultant
current ratio of this company is lower than its competitor called as Johnson&Johnson. The
current ratio of Johnson&Johnson is good as it is close to the ideal ratio which means that they
are making effective use of their short term assets against meeting their current obligation. Thus,
the liquidity position of AstraZeneca is poor over its rivalry.
Solvency ratio analysis
Debt-equity ratio- It is the type of the gearing ratio which states the leverage position of
the company by showing the evaluation in relation to the capital that is been contributed by the
investors or the creditors and the owners funds present within the organization. It helps in
measuring the debt financing of an enterprise against its shareholders funds. This ratio reflects
ability of the shareholders in covering their outstanding debts at the time of the business
downturn (Barnes, 2015). This ratio is calculated by dividing the long term debts with the total
equities. Lower the ratio, better is the position of an entity in terms of their financial leverage.
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Year / companies AstraZeneca Johnson&Johnson
2014 0.43 0.22
2015 0.76 0.18
2016 0.98 0.32
2017 1.04 0.51
2018 1.39 0.46
Interpretation- By summing up the above table it has been highlighted that debt-to-
equity ratio of Johnson&Johnson is lower than AstraZeneca over the five years. This means that
leverage position of AstraZeneca is not sound as its long term borrowing or the debts are more
than its rivalry which in turn reflects that it has high financial burden in respect of its interest
expenses.
Investment ratios
Earnings per share- It is stated as the proportion of an enterprise profits which is been
allocated towards each of the outstanding shares from its common stock (Chalamandaris and
Vlachogiannakis, 2018). It is been computed by evaluating the difference in between the net
income and the preference dividend paid and thereafter dividing it by the average outstanding
number of shares. Higher the EPS, indicates better profitability and wealth maximisation for the
organization.
Year / companies AstraZeneca Johnson&Johnson
2014 0.49 5.7
2015 1.11 5.48
2016 1.38 5.93
2017 1.19 0.47
2018 0.85 5.61
Interpretation- The assessment in the above table states that overall the investment
position of Johnson&Johnson is better as its EPS is of a greater value than AstraZeneca. Thus,
AstraZeneca has to seek for corrective measures like increasing the profit margins so that its EPS
increases and could attain competitive edge against its competitor.
Working note-
Ratio analysis of AstraZeneca
Particulars Formul
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a
Profitability
ratio analysis
2014 2015 2016 2017 2018
Gross profit 20253 20062 18876 18147 17154
Net sales 26095 24708 23002 22465 22090
GP ratio
Gross
profit /
sales *
100 77.60% 81.20% 82.10% 80.80% 77.70%
Liquidity ratio
analysis
2014 2015 2016 2017 2018
Current assets 16697 16007 13262 13150 15591
Current
liabilities 17330 14869 15256 16383 16292
Current ratio
Curren
t
assets /
current
liabiliti
es 0.96 1.08 0.87 0.8 0.95
Solvency ratio
analysis
2014 2015 2016 2017 2018
Long-term debt 8337 14109 14495 15560 17359
Shareholder's
equity 19627 18490 14854 14960 12468
Debt-equity
ratio
Long-
term
debt /
shareho
lders’
equity 0.43 0.76 0.98 1.04 1.39
Investment
ratios
2014 2015 2016 2017 2018
Earnings per
share
(Net
income 0.49 1.11 1.38 1.19 0.85
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-
preferre
d
dividen
d) /
Number
of
shares
outstand
ing
Ratio analysis of Johnson&Johnson
Particular
s Formula
Profitabili
ty ratio
analysis
2014 2015 2016 2017 2018
Gross
profit 51585 48538 50205 51096 54490
Sales
revenue 74331 70074 71890 76450 81581
GP ratio
Gross profit /
sales * 100 69.40% 69.30% 69.80% 66.80% 66.80%
Liquidity
ratio
analysis
2014 2015 2016 2017 2018
Current
assets 59311 60210 65032 43088 46033
Current
liabilities 25085 27747 26287 30537 31230
Current
ratio
Current assets /
current
liabilities 2.36 2.17 2.47 1.41 1.47
Solvency
ratio
analysis
2014 2015 2016 2017 2018
Long-term 15122 12857 22442 30675 27684
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debt
Shareholde
r's equity 69752 71150 70418 60160 59752
Debt-
equity
ratio
Long-term
debt /
shareholders’
equity 0.22 0.18 0.32 0.51 0.46
Investmen
t ratios
2014 2015 2016 2017 2018
Earnings
per share
(Net income -
preferred
dividend) /
Number of shares
outstanding 5.7 5.48 5.93 0.47 5.61
Limitations of Financial ratios
In accordance with the Gabric, (2018) it has been stated that for making the financial
analysis, most of the companies uses ratios as a measure but it contains various limitations.
Lewellen, (2016) viewed that, Financial ratios does not counts the size of an entity at the time of
making the evaluation of the performance and the position of the firm. Horrigan, (2015) also
identified that it does not considers contingent liability which is been counted as one of the major
external factor that affects the financial state of the company in the long-run. Financial ratios are
not useful in case of making the industry based comparison as the operations of different
industries differs and this in turn cannot be compared. Ratio analysis is made on the basis of the
historical figures and predicts that same will be happen in the future which is very vague
estimation. Financial ratios also not takes into account the effect of the inflation as it does not
adjust for any of the changes that happens due to the increase in the price level.
2. INVESTMENT APPRAISAL
Investment appraisal's most common technique includes net present value, pay back
period and internal rate of return and average rate of return for eventuating a capital investment
and its potential of bring adaption.
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Net present value (NPV):
NPV is the most important and significant techniques of investment appraisal for
checking the feasibility of a project. This is due to the fact that there is consideration of present
value of the inflow form a project. This means in this method the future incomes are considered
at level of present value with use of discounting factor to establish the fact that what was the
value of this income if it was earned in present times. However, there are certain issues related
with NPV method which includes non consideration of any income after the investment period.
Also, this techniques do not take the value of asset at the end of investment period. For the
manufacturing product this is the best method I order to determine the level of profit generation
by a machine and the time take to recover the initial cost of investment. But as far as commercial
project of real estate this does not provide much of assistance as there is rise and fall in the prices
of material, rent and other factors related with it.
Internal rate of return (IRR):
The internal rate of return is another method of discounted cash flow techniques for
evaluation of a capital investment by a company (Internal Rate of Return – IRR, 2019).
Generally, an IRR between 12-15% is considered to be good which is the rate of return generated
by the project on which investment is supposed to be done. IRR is used commonly to assess the
profit generating capacity of a project.
However, it can give misleading results as it does not account for the size f the project
when comparison of two project is done. IRR presents the annualised rate of earning's over an
investment but it only compares the cash floes of the project at existing cost excluding the factor
of project duration, future cost and size of the project.
Application of investment appraisal techniques:
Project A
Particular Details
Initial cost of purchasing a machine £30 m
Expected life 5 years
Cash inflow each year £ 5M
Discounted Rate of return 15.00%
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Time Cash flow DF (15%) Present value
0 -30 1.000 -30
1 5 0.870 4.35
2 5 0.756 3.78
3 5 0.658 3.29
4 5 0.572 2.86
5 5 0.497 2.49
NPV= Cash inflow -cash outflow -18.33
IRR= NPV/ -18.07%
Project B
Particular Details
Initial cost of purchasing a machine £30 m
Expected life 4 years
Cash inflow each year £ 8M
Discounted Rate of return 20.00%
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Time Cash flow
0 -30
1 13
2 13
3 13
4 13
5 13
NPV= Cash inflow - cash outflow= 33.65
IRR= cash inflow /cash outflows= 26.31%
Potential implication of the investment:
To of the machines are given A and B which same initial investment of £30m. It can be
seen that through the life of project B is less but the inflow are high for 4 years. The NPV I of
this project is positive while for project A it can be seen that project life is more but inflows are
less and still the NPV is negative. Hence this gives an answer to select a project B for investment
purpose in machine. The above calculation present the fact that NPV and IRR methods assist the
organisation in selection of a project correctly.3. POTENTIAL ACQUISITION
The organisation AstraZeneca Plc is planing to acquires another small pharmaceutical
organisation Bial which is operating in UK which have its headquarter in Portugal. The company
was founded in 1924 and is a large company in Portugal with selling connection in Europe,
America, Africa and Asia. Though the operations are extended but it only have 950 employees,
so it is a small company decided to be acquired by AstraZeneca Plc.
3.1 Rationale of selecting the target company
Bial is an organization which deals in same products as AstraZeneca Plc and its
operations re limited to Portugal only so it is likely cause lesser cost which can be arranged from
profits, cash reserves and borrowings form banks and other financial institution. Bial is deals
under the drug and health care industry and have a long existence of 95 years which with limited
number of extension and employee which makes its operations not too widened (Geary, 2015).
Moreover, on the organization the European investment Bank have signed a EUR45 million for
researching in UK regarding discovering, developing and providing therapeutic solution in
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nervous, cardiology and allergen immunotherapy fields (Bial Sells Allergic Immunotherapy
Business, 2019). So this makes it a potential business for the AstraZeneca Plc to acquire.
The company Bial have received this Rand D funds in 2015 which means it is nit under
research so if good prises are offered they are likely to start their business here in short time and
lesser investments. A friendly takeover is much more feasible for Bial rather than a hostile
takeover as it is owned by a single person who is CEO of the company, Antonio Portela.
3.2 Synergistic gains over the acquisition
The synergies are expected to be many with acquisition of Bial by AstraZeneca Plc where
the total values of both the organisation combined will be increased with an extension in there
area of operations and market share beyond national territories and reputation of both the
business. With the exiting funding or the research and development available to Bial it can be
used by AstraZeneca Plc for extended research and offer new services and products around the
globe. Bial have its selling connection in 4 continents and combined with its present operations
can gran a significant area of markets in major nations.
3.3 Valve and financing of the proposed deal of acquisition
With a net income of $23.94 for 2018 it can be seen that with international operation also
the earning of the organisation is not too much and also financial information of Bial is limited.
The turnover of the company in 2018 was $223milion. The company is at a profits earning
position form past 5 years but the profits levels are too low. The liquidity position of company is
not too good as the cash and cash equivalents of the company are not good and current liabilities
are also high and organisation not where near the standard ratio of 2:1. This means AstraZeneca
Plc very well among its competitors.
3.4 Potential impact on performance regarding acquisition
Due to the lower level of profits of Bial AstraZeneca Plc must concentrate over having
sufficient funds for next two three years for debt payments for these period for both the
companies (Descamps and et.al., 2016). It must inform the investor that for this time dividends
will be little as with acquisition the company can spread its wings to extended market.
3.5 Acquisition risk assesses and challenges
There is an association of the potential risk also of a general downturn in the London
demand of certain drugs and ben on them due to
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economic Brexit a legal impositions. Some of the drugs which are in high demand are ben by
government for consumption and sell due to side effects of such drugs so the R and D done for
therapeutic treatment can also be get ben or imposed with different legal requirements.
CONCLUSION
To conclude the above report it can be stated that the gross profits and debt equity ratio
of AstraZeneca Plc are better as compared to Johnson&Johnson but current ratio and earning er
share of Johnson&Johnson is better. This means that company tough earning good profits unable
to pay good returns to its shareholder stating a week control over expenses and a poor liquidity
position. It have been articulated that NPV and IRR two of the discounting method techniques
which assist an organisation in selection of a project for capital investments. Moreover, it have
been interpreted that with acquiring a small pharmaceutical company Bial, can extent is
operation and get operations and enhance the value of both organisations.
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REFERENCES
Books and journals
Barnes, P., 2015. The analysis and use of financial ratios: A review article. Journal of Business
Finance & Accounting. 14(4). pp.449-461.
Chalamandaris, G. and Vlachogiannakis, N. E., 2018. Are financial ratios relevant for trading
credit risk? Evidence from the CDS market. Annals of Operations Research. 266(1-2).
pp.395-440.
Chen, C.W. and et.al., 2018. Financial statement comparability and the efficiency of acquisition
decisions. Contemporary Accounting Research. 35(1). pp.164-202.
Descamps, S and et.al., 2016. When relative allocation depends on total resource acquisition:
implication for the analysis of trade‐offs. Journal of evolutionary biology. 29(9). pp.1860-
1866.
Gabric, D., 2018. Determination of Accounting Manipulations in the Financial Statements Using
Accrual Based Investment Ratios. Economic Review: Journal of Economics and
Business. 16(1). pp.71-81.
Geary, D. C., 2015. Evolution of paternal investment. The handbook of evolutionary psychology,
pp.1-18.
Horrigan, J. O., 2015. The determination of long-term credit standing with financial
ratios. Journal of Accounting Research. pp.44-62.
Lewellen, J., 2016. Predicting returns with financial ratios. Journal of Financial
Economics. 74(2). pp.209-235.
Linares-Mustaros, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting. 40. pp.1-10.
Online
Bial Sells Allergic Immunotherapy Business. 2019. [online]. Available through
:<https://www.biospace.com/article/releases/bial-sells-allergic-immunotherapy-
business-/>.
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Internal Rate of Return – IRR. 2019. [online]. Available through
:<https://www.investopedia.com/terms/i/irr.asp>.
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