Accounting Financial Analysis Report

This report provides a financial analysis of Hikma Pharmaceutical Plc including ratio analysis, profitability ratios, liquidity ratios, and gearing ratios. The report also includes advantages and limitations of ratio analysis. The performance of the company over the last 4 years are deteriorating. Except the liquidity position, the company’s gearing position as well as the profitability position during the year 2017 were significantly lower. Moreover, during the year 2017 the company did not have any positive earnings to cover up any further expenses or creating returns to the shareholders.

Running head: ACCOUNTING FINANCIAL ANALYSIS REPORT
Accounting financial analysis report
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ACCOUNTING FINANCIAL ANALYSIS REPORT 1
Table of Contents
1.0 Introduction.....................................................................................................................2
2.0 Ratio analysis..................................................................................................................2
2.1 Advantages of ratio analysis............................................................................................2
2.2 Limitations of ratio analysis.............................................................................................3
3.0 Profitability ratios.................................................................................................................3
3.1 Gross profit ratio..............................................................................................................4
3.2 Operating profit ratio........................................................................................................4
3.3 Return on capital employed.............................................................................................5
3.0 Liquidity ratio..................................................................................................................5
4.1 Current ratio.....................................................................................................................5
4.2 Acid test or liquid ratio....................................................................................................6
5.0 Gearing ratio.........................................................................................................................6
5.1 Gearing ratio.....................................................................................................................7
5.2 Interest coverage ratio......................................................................................................7
6.0 Conclusion............................................................................................................................7
7.0 References............................................................................................................................8
8.0 Appendix..............................................................................................................................9

ACCOUNTING FINANCIAL ANALYSIS REPORT 2
1.0 Introduction
Hikma Pharmaceutical Plc was formed with the objective of transforming the lives of
the people through delivering quality support and medicines they require on daily basis. The
company manufactures, develops and markets wide range of non-branded as well as branded
generic medicines. Further the company creates affordable and high quality medicines and
makes them accessible to the people who require them. The therapeutic categories involve
cardiovascular, diabetes, pain management, respiratory and anti-infective. The vision of the
company is to move towards the healthier world that will enrich all the communities (Hikma
2018).
2.0 Ratio analysis
Ratio analysis is the analysis of the financial information that helps in evaluating
different aspects of the financial and operating aspects of the company. It includes the
measurement of performance with the solvency, profitability, liquidity and efficiency aspects.
It is done for evaluating the relationships among the items from the financial statement
(Palepu, Healy and Peek 2013).
2.1 Advantages of ratio analysis
Various advantages that can be obtained through the analysis of financial ratios are as
follows –
 It is used to analyse the liquidity of the company for evaluating whether the company
is able to meet its future obligations or not
 It is helpful to compare the values of the current year with the previous year. Further,
the comparisons assist the analyst to recognize the weaknesses and strengths of the
company’s financial position and assess the future risks (Vogel 2014).

ACCOUNTING FINANCIAL ANALYSIS REPORT 3
 It helps in implementing the plans for improving the liquidity, profitability and market
value and gearing issues of the company.
2.2 Limitations of ratio analysis
Apart from the advantages, the ratio analyses are associated with various limitations
as follows –
 Ratios are generally calculated and analysed based on the past figures and not on the
projected future figures. However, the the analyst makes various assumptions
regarding the future performance through the ratios.
 Ratios are only useful when used for comparing the performance over the long period
of time or is compared against the peer company in the same industry (Brigham and
Ehrhardt 2013)
 Ratios mainly deal with the numbers and various other factors like customer service,
product quality are not taken into consideration that plays major role in financial
performances.
3.0 Profitability ratios
Ratio Formula 2017 2016 2015 2014
Profitability
Ratio
Gross profit ratio
Gross profit / sales
*100 49.95 50.56 54.94 57.15
Operating profit
ratio
Operating profit / Sales
*100 -38.58 15.49 25.59 27.00
Return on capital
employed
PBIT/ Capital
employed * 100 -28.83 8.77 19.00 28.51

ACCOUNTING FINANCIAL ANALYSIS REPORT 4
2017 2016 2015 2014
-40
-30
-20
-10
0
10
20
30
40
50
60
Profitability ratio
Gross profit margin
Operating profit margin
Return on capital
employed
3.1 Gross profit ratio
Gross profit margin is the percentage of profit left with the company after the
payment of cost of selling the goods. This ratio is used to measure the efficiency of the
company regarding the cost of the goods sold by the company as compared to the income
generated from the sales (Jordan 2014). It can be seen from the annual report of the company
that the gross profit margin of the company over the last 4 years is in decreasing trend. It has
been reduced from 57.15% to 49.95% over the years from 2014 to 2017.
3.2 Operating profit ratio
This ratio is used for measuring the operating efficiency and pricing strategy of the
company. It is the measurement of the percentage of revenue left after meeting the variable
production cost like raw materials, labours and overheads (Uechi et al. 2015). It can be seen
from the annual report of the company that the operating profit margin of the company over
the last 4 years is in decreasing trend. It has been reduced from 27% to 15.49% over the years
from 2014 to 2016. It further fell to -38.58% in 2017 as the operating expenses exceeded the
sales revenue.

ACCOUNTING FINANCIAL ANALYSIS REPORT 5
3.3 Return on capital employed
This profitability ratio measures the efficiency of a company with regard to the
employed capital of the company as compared to the net operating earnings. Generally the
amount of capital employed is equal to total assets of the company reduced by current
liabilities. It has been reduced from 28.51% to 8.77% over the years from 2014 to 2016. It
further fell to -28.83% in 2017 as the operating expenses of the company was more than the
revenue generated from sales (Hikma 2018).
3.0 Liquidity ratio
Ratio Formula 2017 2016 2015 2014
Liquidity ratios
Current ratio
Current assets/Current
Liabilities 1.97 1.58 2.30 1.20
Acid test ratio (Current assets -Stock)/
Current liabilities 1.36 1.08 1.87 0.88
2017 2016 2015 2014
0
0.5
1
1.5
2
2.5
Liquidity ratio
Current ratio
Acid test ratio
4.1 Current ratio
Current ratio is used by the financial analysts and investors to analyse the company’s
liquidity and its ability to make the payment for short-term obligations like payables and debt

ACCOUNTING FINANCIAL ANALYSIS REPORT 6
with the short term assets like receivables, inventories and cash. It is calculated through
dividing the currents assets by its current liabilities. Looking into the calculation table it is
observed that the current ratio of the company is fluctuating. However, the company was able
to improve the liquidity position in 2017 as compared to 2016 (Hikma 2018).
4.2 Acid test or liquid ratio
Quick ratio is the liquidity indicator and it filters current ratio through measuring most
liquid current asset amount for covering up the current obligations (Ozturk and Acaravci
2013). Looking into the calculation table it is observed that the quick ratio of the company is
fluctuating like current assets of the company. However, the company was able to improve
the liquidity position in 2017 as compared to 2016 (Hikma 2018).
5.0 Gearing ratio
Ratio Formula 2017 2016 2015 2014
Gearing ratios
Gearing ratios Long term debt / (long term
debt + Equity) * 100 41.03 30.01 32.57 13.76
Interest
coverage ratio
Profit before interest and tax /
Interest payable -8.69 2.90 6.68 10.58
2017 2016 2015 2014
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
Gearing ratio
Gearing ratios
Interest coverage ratio

ACCOUNTING FINANCIAL ANALYSIS REPORT 7
5.1 Gearing ratio
It states the percentage of assets that is held by the shareholders of the company and
percentage of assets that is generated through borrowing. If the company’s gearing ratio is
50% or lower than that it is considered as the company is in better position. It can be
observed that the gearing ratio of the company has significantly increased over the last 4
years and it went up to 41.03 in 2017 from 13.76 in 2014 (Hikma 2018).
5.2 Interest coverage ratio
It states the efficiency of the company in paying off the interest on the debt
outstanding. It can be observed that the interest coverage ratio of the company is in
decreasing trend over the last 4 years. Moreover, during the year 2017 the company did not
have any positive earning to pay off its interest (Zack 2013).
6.0 Conclusion
From the above discussion it can be concluded that the performance of the company
over the last 4 years are deteriorating. Except the liquidity position, the company’s gearing
position as well as the profitability position during the year 2017 were significantly lower.
Moreover, during the year 2017 the company did not have any positive earnings to cover up
any further expenses or creating returns to the shareholders.

ACCOUNTING FINANCIAL ANALYSIS REPORT 8
7.0 References
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Hikma. 2018. Home. [online] Available at: https://www.hikma.com/home/ [Accessed 4 Apr.
2018].
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.
Ozturk, I. and Acaravci, A., 2013. The long-run and causal analysis of energy, growth,
openness and financial development on carbon emissions in Turkey. Energy Economics, 36,
pp.262-267.
Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition.
Cengage Learning.
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance
ratio analysis of financial markets. Physica A: Statistical Mechanics and its
Applications, 421, pp.488-509.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Zack, G.M., 2013. Financial Statement Analysis. Financial Statement Fraud: Strategies for
Detection and Investigation, pp.209-213.

ACCOUNTING FINANCIAL ANALYSIS REPORT 9
8.0 Appendix
Ratio 2017 2016 2015 2014
Profitability Ratio
Gross profit margin =967/1936*100 =986/1950*100 =818/1489*100 =851/1489*100
Operating profit
margin
=-747/1936*100 =302/1950*100 =381/1489*100 =402/1489*100
Return on capital
employed
=-747/(3388-
797)*100
=302/(4363-
918)*100
=381/(2597-
592)*100
=402/(2251-
841)*100
Ratio 2017 2016 2015 2014
Liquidity ratios
Current ratio =1574/797 =1448/918 =1360/592 =1013/841
Acid test ratio =(1574-488)/797 =(1448-459)/918 =(1360-251)/592 =(1013-273)/
841
Ratio 2017 2016 2015 2014
Gearing ratios
Gearing ratios =1063/
(1063+1528)*10
0
=1034/
(1034+2411)*100
=653/
(653+1352)*100
=194/
(194+1216)*10
0
Interest coverage ratio =-747/86 =302/104 =381/57 =402/38

ACCOUNTING FINANCIAL ANALYSIS REPORT 10