Financial Analysis and Ratio Application

This assignment delves into the field of financial analysis, focusing on the use of various financial ratios for assessing a company's strengths and weaknesses. It examines different types of financial ratios, such as liquidity, profitability, and solvency ratios, along with their interpretations and practical applications in business decision-making. The assignment draws upon several academic sources and online resources to provide a comprehensive understanding of financial analysis concepts and tools.

FINANCIAL ANALYSIS
AND MANAGEMENT
(PART1)

TABLE OF CONTENTS
TASK 1............................................................................................................................................3
Analysis of financial performance of the AstraZeneca Company over the five accounting
periods using financial ratios.......................................................................................................3
TASK 2..........................................................................................................................................15
Limitations and problems of the current analysis......................................................................15
TASK 3..........................................................................................................................................16
Suggestions to AstraZeneca firm in order to improvement and enhance financial performance
...................................................................................................................................................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18
1

TABLE OF FIGURES
Figure 2Gross profit ratio................................................................................................................3
Figure 3Operating profit ratio..........................................................................................................4
Figure 4Net profit ratio....................................................................................................................5
Figure 5Current ratio.......................................................................................................................6
Figure 6Quick ratio..........................................................................................................................7
Figure 7Debt to equity ratio.............................................................................................................8
Figure 8Interest coverage ratio........................................................................................................9
Figure 9Stock turnover ratio..........................................................................................................10
Figure 10Fixed assets turnover ratio..............................................................................................11
Figure 11Total assets turnover ratio..............................................................................................12
Figure 12Earnings per ratio...........................................................................................................13
Figure 13Return on equity.............................................................................................................14
2

INTRODUCTION
Finance is just like a lifeline of the every business firm because without the respective
source a businessman cannot establish as well as exists in the industry or market. In this context,
it is necessary to analyse firm’s performance in terms of several aspects such as financials,
technical, operational etc. Higher the performance of in every aspect is better for the firm
because it supports to make and create effective brand image in the segment. Along with the
analysis to manage the financial resource is also one of the key aspects of the company. For
understanding financial analysis and management in the current case AstraZeneca firm is
selected which is a public limited company and operates in the Pharmaceutical as well as
Biotechnology industry of UK. The present report shows financial performance of the chosen
entity by taking base of different financial rations. In the second and third part of current study
limitations which are comes into consideration while doing the analysis and suggestion to
improve financial performance to the AstraZeneca management is described respectively.
TASK 1
Analysis of financial performance of the AstraZeneca Company over the five accounting periods
using financial ratios
For every company it is highly compulsory to analyse financial performance in the
industry by which the respective entrepreneur can assess that in which kind of direction it
performs. If there are management know financial position of the firm then able to reduce those
financial shortfalls which comes into existence in the past by framing effectual business
strategies (Saunders and Cornett, 2014). The current case study is all about the AstraZeneca
company which currently provide its products and services in the Pharmaceutical and
Biotechnology industry. To analyse its financial there are different measurements are available in
the in the accounting and financing world. Of the most effective measurement criteria are
financial ratios where many types are adopted by the management. Further, liquidity,
profitability, efficiency, capital structure and stock performance ratios are calculated and
analysed as below:
Profitability ratios
Name of ratios Formula 2012 2013 2014 2015 2016
3

Gross income 22580 20450 20253 20062 18876
Operating income 8148 3712 2137 4114 4902
Net income 6297 2556 1233 2825 3499
Net sales 27973 25711 26095 24708 23002
Gross profit ratio Gross income / net sales * 100 80.72% 79.54% 77.61% 81.20% 82.06%
Operating profit
ratio
Operating income / net sales *
100 29.13% 14.44% 8.19% 16.65% 21.31%
Net profit ratio Net income / net sales * 100 22.51% 9.94% 4.73% 11.43% 15.21%
Gross Profit Ratio
Figure 1Gross profit ratio
Findings and analysis
On the basis of the gross profit ratio the AstraZeneca firm able to know that up to which
level there is cost of goods sold incur. In the current scenario, in the FY 2012 the company is
able to generate gross profit which is 80.72% and reduce up to the accounting period 2014. It can
be said that the management has not effectual cost control methods which lead to reduce the
performance in the overall industry (Lan, 2017). After the FY 2014 the AstraZeneca generates
more amount of profit by enhancing the sales at the end of year. In the year 2016 GP ratio
increasing from 77.61% to 82.06% which shows that company has the effective cost
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management strategies as well as methods. It can be criticised that it not having those kinds of
strategies which supports to manage and reduce costing to produce medicines and drugs.
Operating Profit Ratio
Figure 1Operating profit ratio
Findings and analysis
According the above prepared graph of operating profit ratio it can be analysed that
company generates better operating income at the financing year ending 2012. In the current
study OP ratio of AstraZeneca Plc declines from 29.13% to 8.19% from the accounting year
2012 to the FY 2014. It clearly states that in the production and manufacturing process of
medicines and other pharmaceutical products there is cost incurs higher as compare to the
previous years (Bodie, 2013). Furthermore, from the FY 2014 to the financing period 2016
financial performance gets improve because of enhancing OP ratio from 8.19% to 21.31%. It can
be said that firm not able to use operation strategy in effective manner which lead to decline the
respective analysed ratio. In the current era, performance in terms of finance of AstraZeneca
entity is higher and profitable. It can suggested that the firm needs to carry on and continue with
the existing business strategies along with eliminating past techniques.
Net Profit Ratio
5

Figure 2Net profit ratio
Findings and analysis
The above graph is made using data of the net profit ratio of AstraZeneca firm which
indicates that management is how much able to improve sales along with reducing total indirect
costs. In the fiscal year 2012 the company had NP ratio 22.51% which reduce in the future year
up to 2014 and reaches to 4.73%. After the respective period NP ratio consistently enhance
which indicates that in the FY 2015 and 2016 total expenses which are associated with
AstraZeneca in indirect manner are reduces continuously. At the end of accounting year 2016 the
NP ratio of AstraZeneca enterprise is 15.21% which is better compare to the previous year
(Brigham and Houston, 2012). In the opposite side to this, overall financial and profitable
performance of the AstraZeneca is highly better at the period ending 2012 compare to other all.
Liquidity ratios
Name of ratios Formula 2012 2013 2014 2015 2016
Current assets 19048 20335 16697 16007 13262
Current liabilities 13903 16051 17330 14869 15256
Stock 2061 1909 1960 2143 2334
Prepaid expenses 0 1571 136 0 0
Current ratio
(CR) Current assets / current liabilities 1.37 1.27 0.96 1.08 0.87
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Quick ratio
Current assets – (inventory +
prepaid expenses) / current
liabilities 1.22 1.05 0.84 0.93 0.72
Current Ratio
Figure 3Current ratio
Findings and analysis
Another kind of ratio which bsupports to assess financial performanec in the
Pharmaceutical and Bitechnology sector is current ratio by which the firm analsye that up to
which level it able to fulfil obligations in terms of debt and loan. It has been asceratined from the
aformentioned graph that at the end of 2012 current ratio was 1.37:1 which reduces continuolsy
up to the FY 2014. Apart from this, in the FY 2015 it was increase up to 1.08:1 and then deline
in the further FY that is 2016 and touch up to 0.87:1. While making comparison with the
standard ratio that is 2:1, the AstraZeneca not able to grab it and improve from the respective
benchmark. It can be said from this that current assists are more and higher in comparison to the
current liabilities which are having nature of cash convertible.
Quick Ratio
7

Figure 4Quick ratio
Findings and analysis
It has been analysed that the AstraZeneca management able to combat and grab the ideal
ratio of quid or acid test in the FY 2012 and 2013 which is such as 1:1. The overall trend of the
quick ratio is reducing which shows that AstraZeneca is less capable to pay the debt amount
using the current assets and liabilities. At the initial year 2012 the ratio was 1.22:1 which reduce
up to 0.72:1 in the financial year 2016. It can be clearly visualized that quick ratio of
AstraZeneca company continuously fluctuating because of having lesser current liabilities and
assets other than prepaid costs and stock level (Doucette and et.al., 2012). In this, the firm needs
to frame techniques and tactics for improve the financial position and performance in the
Biotechnology and Pharmaceutical segment.
Capital structure ratios
Name of ratios Formula 2012 2013 2014 2015 2016
Debt 9409 8588 8397 14137 14495
Equity 23737 23224 19627 18490 14854
Debt to equity
ratio Debt / equity 0.40 0.37 0.72 0.78 0.98
EBIT 8148 3712 2137 4114 4902
Interest expenses 958 495 418 469 680
Interest coverage EBIT / expenses on interest 8.51 7.50 5.11 8.77 7.21
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ratio
Debt to Equity ratio
Figure 5Debt to equity ratio
Findings and analysis
On the basis of above calculated and presented debt to equity ratio it can be interpreted
that it is incrsaing over the every years. From the FY 2012 to the fiscal period 2014 it increases
which is from 0.4:1 to 0.72:1. Afterwards at the end of the year 2016 the debt to equity ratio in
AstraZeneca goes up which is 0.98:1. On the basis of this trend of debt to equity ratio it has been
said that it takes more amount every year from the different source of finance. Along with this
the shareholders not invest and put sum of money in AstraZeneca to purchase its shares (Healy
and Palepu, 2012). Profit level improves in the last two years where AstraZeneca not need to
take debt but due to providing lesser return and dividend amount equity fund goes down
continuously which is the result that dent equity ratio increase from 0.4:1 to 0.98:1 from FY
2012 to 2016.
Interest Coverage Ratio
9

Figure 6Interest coverage ratio
Findings and analysis
The interest coverage ratio is the proportion of interest amount and earnings before
interest and tax (EBIT) which indicates that with the help of operating income AstraZeneca is
how much able to pay interest expenses. In the current case, interest coverage ratio of
AstraZeneca is 8.51 which reduces in FY 2013 and 2015 to 7.5and 7.21 respectively. Moreover,
in the accounting period of 2016 the mentioned ratio reduce from 2015 which is from 8.77 to
7.21 where it can be clearly analysed that it has cash flows as compare to the payments and
expenses of the interest charge. Apart from this, due to more amount of debt compare to equity
finance the management has to pay higher interest amount which lead to reduce such ratio (Aebi,
Sabato and Schmid, 2012).
Efficiency ratios
Name of ratios Formula 2012 2013 2014 2015 2016
Net sales 27973 25711 26095 24708 23002
Stock or inventory 2061 1909 1960 2143 2334
Stock turnover
ratio Net sales / stock 13.57 13.47 13.31 11.53 9.86
Net sales 27973 25711 26095 24708 23002
Fixed assets 34486 35564 41898 44117 49264
Fixed assets Net sales / fixed assets 0.81 0.72 0.62 0.56 0.47
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turnover ratio
Net sales 27973 25711 26095 24708 23002
Total assets 53534 55899 58595 60124 62526
Total assets
turnover ratio Net sales / total assets 0.52 0.46 0.45 0.41 0.37
Stock Turnover ratio
Figure 7Stock turnover ratio
Findings and analysis
It has been assessed from the above presented column chart that AstraZeneca entity is
less efficient for generating income from the accounting year 2012 to 2016. At the end of 2012
the management of AstraZeneca optimum utilized inventory where the stock turnover ratio was
13.5. The continuously declining ratio of AstraZeneca clearly shows that the employees are less
efficient as compare to every year which is adverse for the firm. At the financial period ending of
2016 the ratio goes at the lowest value which is such as 9.86 where the financial performance of
AstraZeneca in respective industry is very lower.
Fixed Assets Turnover ratio
11

Figure 8Fixed assets turnover ratio
Findings and analysis
Apart from above all the ratios when talking about the fixed assets turnover ratio the it
can be determined that along with stock the management of AstraZeneca firm not utilized
noncurrent assets in optimum way in every year (Brigham and Ehrhardt, 2013). In the FY 2012
fixed assets turnover ratio was 0.81 which consistently declines up to the year 2016 and touch
value up to 0.47.As per the current analysed ratio the AstraZeneca and overall management is
very less efficient and not take any step to overcome this. Due to the respective cause the ratio
reduces on continuous basis from FY 2012 to 2016.
Total Assets Turnover ratio
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Figure 9Total assets turnover ratio
Findings and analysis
It has been found from total assets turnover ratio is that again AstraZeneca entity not has
effectual strategies to manage and optimum utilising current and fixed assets. The value of
respective ratio was such as 0.52 at the end of FY 2012 which declines over the each accounting
phase. By consistently reducing it goes up to 0.37 in the fiscal period of 2016. It can be said by
the fixed assets turnover ratio that financial performance of AstraZeneca company is very poor
and it is very less efficient for generating income and sales by using such aspects available
within working environment (Lee, Lin and Shin, 2012).
Stock market performance Ratio
Name of ratios Formula 2012 2013 2014 2015 2016
Net profit 6297 2556 1233 2825 3499
Number of shares
outstanding 1264 1254 1264 1265 1266
Earnings per
share Net profit / EPS 4.98 2.04 0.98 2.23 2.76
Net profit 6297 2556 1233 2825 3499
Shareholder's
equity 23737 23224 19627 18490 14854
Return on equity Net profit / shareholder's equity 0.27 0.11 0.06 0.15 0.24
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Earnings Per Share
Figure 10Earnings per ratio
Findings and analysis
The measurement and criteria by which the AstraZeneca able to analyse that it how much
generates earnings behind each share of firm which are issued in the stock market is known as
Earnings per share. In the current scenario, EPS was 4.98 in the fiscal phase 2012 which reduces
and goes at the lowest position in 2014 which is such as 0.98. Afterwards, from the accounting
phase 2014 up to 2016 the earnings per ratio enhances on the consistent basis which is from 0.98
to 2.76. Hence, from such analysis it can be said that in the stock market AstraZeneca enterprise
able to perform well after the FY 2014 but before that it performs very poor (Petty and et.al.,
2015).
Return On Equity
14

Figure 11Return on equity
Findings and analysis
According to this the business entity can assess that it how much capable to provide
return to the shareholders on the money which is invested in the shares of AstraZeneca. From the
above graph it has been analysed that return on equity ratio of AstraZeneca was 0.27 in the year
2012 which reduced and declined up to 2014. Further, outcome of the ratio of return on equity
declines from 0.27 to 0.06 from 2012 to 2014. After that because of enhancing profitability ratios
the firm allow shareholders more return of the amount invested in equity. Due to such reasons
respective ratio of AstraZeneca increases in the 2016 which is such as 0.24.
Hence, it can be said that financial performance of AstraZeneca in stock market is very
poor up to the FY 2014 and then starts to perfume well in the Biotechnology and Pharmaceutical
industry.
TASK 2
Limitations and problems of the current analysis
The financial ratio analysis is highly useful for the AstraZeneca organisation to assess
financial performance. In contradict to this, it has several limitations or drawbacks which are
described as below:
 One of the main limitations of the financial ratio analysis is that it provides financial
performance of the AstraZeneca on the basis of facts and figures. It not provides reasons and
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causes of occurring any kind of financial shortfalls under which the chosen firm not able to
take corrective decisions for the business.
 Other drawback which is identified from the above analysis is that there are many types of
several formulas have to use to calculate each and every financial ratio (Peavler, 2017).
Further, it is not necessary that any kind of employee will calculate and then provide
information to the management. For this key financial employee has to hire and recruit who
will charges higher pay compare to others.
 In firm while preparing financial statements then various companies use and implement
different accounting practices and standards at where accounting treatments also differ. Due
to this appropriate data will not available which is the key reason to reduce financial
performance in selected firm and sector.
 The financial ratio analysis is the technique in which all the calculation part is there which
relies from the quantitative method (Sheikhi, Ranjbar and Oraee, 2012). Further, it totally
ignores the qualitative approach which provides all the facts and figures to the firm in order
to analyse about financial performance of AstraZeneca firm.
TASK 3
Suggestions to AstraZeneca firm in order to improvement and enhance financial performance
 The management of AstraZeneca needs to frame those kinds of techniques which are useful
attract more number of users. For this it must adopt effectual marketing and promotional
activities using social media sites or networks by which it can improve sales up to the better
extent.
 In addition to this, AstraZeneca business organisations requires to make different cost
control and cost management strategies under which it can reduce total expenses incur to
produce medicines and drugs. When costing level will goes down and at lower level then it
can improve the operating and net profit ratios on consistent basis and then make
AstraZeneca highly healthier in the Biotechnology as well as Pharmaceutical industry
(Zelgalve and Zaharcenko, 2012).
 Furthermore, the company needs to allow more amount and higher dividend to the potential
stockholders or shareholders by which they will more attract towards AstraZeneca firm for
buying its shares. When level of total shareholder’s equity will improve then the
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management will not go for the debt and loan amount. Moreover, debt to equity ratio will
reduce along with this it has not to pay interest amount from the operating profit generated
by it.
 It can be suggested and recommended to the AstraZeneca enterprise that its policymakers
should frame various policies which attract local community of country and make the sales
level higher (Cirocchi and et.al., 2013). In regard to this, the policymakers should allow
discounts and profitable offers to the consumers by which they will attract in more number
and improve its financial performance within industry.
 After analysing financial performance of AstraZeneca entity it can be recommended to it
that the managers need to use as well as implement the corporate social responsibilities
strategies which lead to create positive reputation. Along with this, through CSR activities
the AstraZeneca able to create brand image in eyes of Pharmaceutical industry as well as
local community and people of the country.
CONCLUSION
It can be analysed and concluded by summing up the current study is that, at the
workplace of AstraZeneca firm it is necessary to analyse financial condition along with
managing it in fair manner. From the financial ratios it can be concluded that AstraZeneca
organisation performing bad and poor from the FY 2012 to 2014. After the accounting year 2014
financial performance of the company improve up to the fiscal period 2016 but still not well. In
short, overall financial performance of AstraZeneca in Pharmaceutical and Biotechnology is not
good from over the period of five years. In order to improve and enhance business performance
in form of finance the management should adopt and frame several effectual strategies.
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REFERENCES
Journals and Books
Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank
performance in the financial crisis. Journal of Banking & Finance. 36(12). pp. 3213-
3226.
Bodie, Z., 2013. Investments. McGraw-Hill.
Brigham, E. F. and Ehrhardt, M. C., 2013. Financial management: Theory & practice. Cengage
Learning.
Brigham, E. F. and Houston, J. F., 2012. Fundamentals of financial management. Cengage
Learning.
Cirocchi, R. and et.al., 2013. Safety and efficacy of endoscopic colonic stenting as a bridge to
surgery in the management of intestinal obstruction due to left colon and rectal cancer: a
systematic review and meta-analysis. Surgical oncology. 22(1). pp. 14-21.
Doucette, W. R. and et.al., 2012. Three-year financial analysis of pharmacy services at an
independent community pharmacy. Journal of the American Pharmacists
Association. 52(2). pp. 181-187.
Healy, P. M. and Palepu, K. G., 2012. Business analysis valuation: Using financial statements.
Cengage Learning.
Lee, P. T. W., Lin, C. W. and Shin, S. H., 2012. A comparative study on financial positions of
shipping companies in Taiwan and Korea using entropy and grey relation
analysis. Expert Systems with Applications. 39(5). pp. 5649-5657.
Petty, J. W. and et.al., 2015. Financial management: Principles and applications. Pearson
Higher Education AU.
Saunders, A. and Cornett, M. M., 2014. Financial institutions management. McGraw-Hill
Education,.
Sheikhi, A., Ranjbar, A. M. and Oraee, H., 2012. Financial analysis and optimal size and
operation for a multicarrier energy system. Energy and buildings. 48. pp. 71-78.
Zelgalve, E. and Zaharcenko, A., 2012. Transformation of the role of financial analysis in
enterprise management. Management of Organizations: Systematic Research. 27. pp.
147-167.
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Online
Lan, J., 2017. 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses.
[Online]. Available through: <http://www.aaii.com/journal/article/16-financial-ratios-for-
analyzing-a-companys-strengths-and-weaknesses.touch> [Accessed on 16th April 2017].
Peavler, R., 2017. Limitations of Ratio Analysis. [Online]. Available through:
<https://www.thebalance.com/limitations-of-financial-ratio-analysis-393236> [Accessed
on 16th April 2017].
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