Financial Marketing

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Financial Marketing

Table of Contents
Portfolio 1........................................................................................................................................3
a. Computation of the financial ratios .........................................................................................3
b. Analysing the financial performance and position of the 2 firms ...........................................1
c. Suggestion regarding the ways that the firm should adopt to improve its performance .........7
d. Limitation of financial ratios ..................................................................................................7
Portfolio 2........................................................................................................................................8
a. Recommending the profitable project for the company ..........................................................8
b. Limitations of an investment appraisal tool ..........................................................................12
REFERENCES..............................................................................................................................14

Portfolio 1
a. Computation of the financial ratios

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b. Analysing the financial performance and position of the 2 firms
Current ratio- It is referred as the popular tool in evaluating the current solvency position
of an enterprise. It is computed by dividing the current assets with that of the current liability. It
measures the firms' capability in meeting its short term liabilities by making use of its current
assets effectively (Griffin and et.al., 2016). The ideal current ratio is stated as 2:1 which means
that current assets must be doubled the current liability. Therefore. Higher ratio shows better
liquid state of the company while lower ratio is seen as ineffective use of the short term funds.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Current assets
(CA) 15907 16927 5406 4942
Current
liabilities (CL) 26569 22491 6576 7614
Current ratio
(CR)
Current
assets/Current
liabilities 0.60 0.75 0.82 0.65
Interpretation- from the above assessment, it has been analysed that the current ratio of
Glaxo smith is increasing over the 2 years as compared to Reckitt. This means that Glaxo Smith
is making optimum use of its current assets than its competitor and depicts that it is having
sufficient cash in paying off its current debts.
Quick ratio- It is been considered as the more conservative outlook than current ratio that
involves current assets over the current liabilities (Hancock and Kent, 2016). Higher ratio results
in the better liquidity and the financial health of the company whereas lower the value of ratio,
more likely an entity struggles in paying the debts.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Current assets
(CA) 15907 16927 5406 4942

Inventory 5557 5476 1201 1276
Quick assets
(QA) 10350 11451 4205 3666
2

Current
liabilities (CL) 26569 22491 6576 7614
Quick ratio
(QR)
Quick
assets/Current
liabilities 0.39 0.51 0.64 0.48
Interpretation- The above evaluation reflects that though the quick ratio of Glaxo Smith
over the 2 years is showing a increasing trend but the ratio of Reckitt is resulted as higher than
Glaxo Smith. This clearly indicates that Reckitt is more able in converting its assets into cash for
the purpose of meeting immediate cash funds in comparison to Glaxo Smith.
Net profit margin- This is said as the profitability ratio which indicates the amount of the
net income that an entity generates with its total revenue or the sales (Pasciuto and et.al., 2017).
Greater the net profit ratio states that the firm is more and more efficient and effective in
converting its sales into the profits. As the result it depends on complexity and the size of an
organization as it is calculated by dividing the net profits to the net sales.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Net profit (NP) 2169 4046 6189 2181
Net sales
(Revenue) 30186 30821 11449 12597
Net profit
ratio (NPR)
Net profit/Net
sales*100 7.19% 13.13% 54.06% 17.31%
Interpretation- The results shows that net profits ratio of Recknitt is higher than Glaxo
Smith in both the years that is 2017 and 2018. This in turn depicts that after paying off all the
expenses and the cost, Reckitt is earning greater profits than Glaxo Smith.
Gross profit margin- It is the metric that analyse financial health of the firm and the
business model through revealing an amount that is left from the sales after deducting cost of
sales (Mei and et.al., 2018). It is expressed as the sales percentage and might be called as the
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gross margin. High GP ratio means that corporate has done well in managing its cost in relation
to the production of goods.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Gross Profit
(GP) 19844 20580 6823 7635
Net sales 30186 30821 11449 12597
Gross profit
ratio (GPR)
Gross
profit/Net
sales*100 65.74% 66.77% 59.59% 60.61%
Interpretation- The analysis depicts that the gross profit ratio of Glaxo Smith is of higher
value in comparison to Reckitt. It shows that an entity is having more in covering for an
operating financing and the other related costs. This also indicates that Glaxo Smith is generating
sufficient amount of earnings after making payment of the variable cost that incurs in producing
the goods and selling it to the consumers.
Gearing ratio- It is the ratio that measures proportion of the firm's borrowed funds to that
of its equity. Higher gearing ratio is an indicator of the great leverage deal where a company is
making use of the debts in respect of paying for the routine operations (Mechler, 2016). This
ratio depicts financial risk towards which the business is been subjected as excessive borrowed
funds or debts leads to the financial difficulties.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Long term
debts (LT) 14264 20271 11515 9670
Total assets
(TA) 56381 58066 37013 37650
Current
liabilities (CL) 26569 22491 6576 7614
Capital Total assets- 29812 35575 30437 30036
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employed (CE)
Current
liabilities
Gearing ratio
(GR)
Long term
debts/Capital
Employed 47.85% 56.98% 37.83% 32.19%
Interpretation- As gearing ratio of Glaxo Smith is seen as higher than its rivalry which
means that it has high borrowed funds than Reckitt. However, this in turn shows that leverage
position of Reckitt is better than Glaxo in previous as well as current year.
Price Earning ratio- It is counted as the ratio relating to company's current price of the
shares with that of its earnings attained for each of the share. It provides an idea about the
willingness of the stakeholders in paying for an earnings of the firm. It is calculated by dividing
the share price in the market with earnings per share. High P/E ratio means that the stock price
highly relates to the earnings and considered as overvalued. However, lower ratio may reflects
that present stock price is very low to the earnings.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Share price 15.62 13.23 55.91 56.59
Earnings Per
share (EPS) 31 72.9 324.6 339.9
Price Earning
ratio (P/E)
Share
price/Earning
s per share 0.50 0.18 0.17 0.17
Interpretation- The above ratios shows that as the P/E ratio of Glaxo is higher than
Reckitt, this means that its stock price highly relates to its earnings & the profits and in turn
reflects better position of company (Financial statement of Reckitt, 2017).
Earnings per share- It is called as the net income earned per share and is the market
prospect ratio which measures an amount of the net profit earned for each share of the stock that
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is outstanding (De Mooij and Hebous, 2018). Higher the EPS, better is the market position of
the company and is computed by dividing the net income to that of an average number of the
shares.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Net income 2169 4046 6189 2181
Average
number of
shares
outstanding 4886 4914 69200 52760
Earning per
share (EPS)
Net
income/Avera
ge shares
outstanding 0.44 0.82 0.089 0.041
Interpretation- The ratios accounted represents that the as the earning per share of Glaxo
Smith is greater in comparison to Reckitt, it states that the firm tends to be more and more
profitable and has generated larger profits for distributing it to the shareholders. It has also been
determined that higher earning per share helps in increasing the stock price of an enterprise.
ROCE- It is the profitability ratio which measures an efficient way in which an entity
could generate higher profits from the use of capital employed. It is calculated by making
comparison of the net profits to that of the capital employed. Higher ROCE ratio is seen as more
favourable as it clearly shows that by making use of the capital employed, more returns could be
gained.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Operating
profit 4087 5483 2737 3047
Capital
employed 29812 35575 30437 30036
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Return on
capital
employed
(ROCE)
Operating
profit/Capital
employed*100 13.71% 15.41% 8.99% 10.14%
Interpretation- It has been highlighted from above table that as Glaxo Smith is earning
higher rate of return on its capital employed than Reckitt. This presents that Glaxo Smith is
making effective and efficient use of its capital so that higher profitability could be generated in
the future periods.
Inventory days- It means an average number of the days for which an inventory remains
as a stock at the workplace before it is been sold. It is measured by dividing the cost of sales to
that of the average inventory for the period. Longer period states that the firm is taking more
time in concerting its inventory into the sales while shorter the time period, more quickly an
inventory is been converted into cash.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Cost of goods
sold 10342 10241 4626 4962
Average
inventories 5557 5476 1201 1276
Inventory
turnover ratio
COGS/Avg.
Inventory*365 679.3 682.6 1405.9 1419.4
Interpretation- The results shows that Reckitt is taking longer period of time in making
its inventory sold to the customers as compared to its rivalry Glaxo Smith (Alkaraan, 2017).
This conveys better efficiency position of Glaxo Smith as it is taking very less time compared to
its competitor in selling its inventory.
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Dividend payout ratio- It refers to the fraction of the net income that a company pays to
its stakeholders in terms of dividends. This ratio is been expressed as dividing DPS by EPS that
is dividend per share by earning per share. Higher ratio means greater returns are distributed to
the shareholders and vice versa.
Glaxo smith Reckitt Benckiser Group Plc
Particulars Formula 2017 2018 2017 2018
Dividend per
share 0 2.16 97.7 70.5
Earnings Per
share 31 72.9 324.6 339.9
Dividend
payout ratio
Dividend per
share/Earning
s per share 0 2.96% 30.10% 20.74%
Interpretation- As by looking over the results of the ratio it has been assessed that
Reckitt is distributing higher percentage of the profits to its shareholders than Glaxo Smith
(Financial statement of Glaxo Smith, 2018). This directly maximizes the wealth of the
shareholders of Reckitt and in turn increases the market value of the shares. This also shows that
the performance of Reckitt is better than Glaxo Smith.
c. Suggestion regarding the ways that the firm should adopt to improve its performance
From the assessment, it has been summarized that overall liquidity position of Glaxo
Smith is seen as better because its current and quick ratio is increasing over the years (Glaeser
and et.al., 2018). In order to improve the liquidity ratios, Reckitt should convert its receivable on
a faster basis, by paying off the current liabilities, selling off an unproductive assets, improve its
short term assets by increasing the funds of the shareholders. Glaxo Smith need to take
appropriate measures for improving its net profit margin that could be done by ensuring control
on the labour costs, operational costs and increasing the sales revenue. Moreover, as gross profit
ratio of Reckitt is lower so it should increase its sales revenue and reduce the cost relating to
sales so that its gross profit ratio could be improved. For improving the gearing or leverage
position, Glaxo should pay off its debts and use make very less use of the borrowed funds.
Reckitt should take corrective action in respect of improving its earning per share, return on
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capital employed and inventory days so that it could enhance its efficiency and solvency position
adequately (van Duuren, Plantinga and Scholtens, 2016). In order to improve its EPS, Reckitt
should increase its income by rising the sales and increasing the profits margin to each value of
the shares.
d. Limitation of financial ratios
Some of the major drawbacks of financial ratios are as follows-
Inflationary effects- As final reports are been released on the periodic basis and
therefore, there exist a time differences between each of the release. In case an inflation occurred
between the periods then exact prices could not be reflected in final reports (Martín-Barrera,
Zamora-Ramírez and González-González, 2016). This makes the numbers non-comparable
across several periods until and unless they are been adjusted for an inflation.
Operational changes- An entity might change its operation structure starting from its
supply chain strategy to product that it is selling. When the significant operational changes
happens, comparison of the financial metrics prior and after an operational change might lead to
the misleading conclusion about performance and the future prospects of the firm.
Modification in the accounting policies- In case the key financial performance metrics
used in the ratio analysis are been altered and financial results that are recorded after a change
are not tend to be comparable to results that had been recorded before the change.
Historical information- The financial information used in analysis is recorded on the
basis of the previous results that had been released by firm (Navimipour and Charband, 2016).
Thus, ratio analysis does not represent future performance of an organization.
Manipulation- Ratio analysis is made based on an information which is reported by a
firm in its financial statements. Such information might be manipulated by management of the
company for reporting better result than actual performance.
Seasonal effects- An analyst need to be aware of the seasonal factors that can potentially
leads to limitation of the ratio analysis. This results in the false interpretations of the generated
figures and wrong conclusions are drawn.
Portfolio 2
a. Recommending the profitable project for the company
Proposal 1
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Project A
Years Annual cash inflows less: depreciation EBIT
2019 45000 7500 37500
2020 45000 7500 37500
2021 45000 7500 37500
2022 35000 5833.33 29166.67
2023 35000 5833.33 29166.67
2024 25000 4166.66 20833.34
Years Cash inflows PV Factor @16%
Discounted cash
inflows
2019 37500 0.84 31500
2020 37500 0.71 26460
2021 37500 0.59 22226.4
2022 29166.67 0.50 14521.25
2023 29166.67 0.42 12197.85
2024 20833.34 0.35 7318.71
Sum of the discounted
cash flows 114224.210707598
Less: Initial investment 110000
NPV 4224.2
Years Cash inflows
-110000
2019 37500
2020 37500
2021 37500
2022 29166.67
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2023 29166.67
2024 20833.34
IRR 20.70%
Years Cash inflows Cumulative CF
2019 37500 37500
2020 37500 75000
2021 37500 112500
2022 29166.67 141666.67
2023 29166.67 170833.34
2024 20833.34 191666.68
Initial investment 110000
Payback Period 2
0.9333333333
Payback Period 2 Years and 9 months
Years Cash inflows
2019 37500
2020 37500
2021 37500
2022 29166.67
2023 29166.67
2024 20833.34
Average profit or cash inflow 31944.4466666667
Average initial investment 110000
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average initial investment [(initial investment +
scrap value) / 2]
ARR 29.04%
Proposal 2
Project B
Years Annual cash inflows less: depreciation EBIT
2019 10000 333.3333333333 9666.7
2020 15000 1166.6666666667 13833.3
2021 25000 2833.3333333333 22166.7
2022 55000 7833.3333333333 47166.7
2023 65000 9500 55500
2024 50000 7000 43000
Years Cash inflows PV Factor @16%
Discounted cash
inflows
2019 9666.7 0.84 8120
2020 13833.3 0.71 9760.8
2021 22166.7 0.59 13138.27
2022 47166.7 0.50 23482.93
2023 55500 0.42 23210.76
2024 43000 0.35 15105.82
Sum of the discounted
cash flows 92818.58
Less: Initial investment 110000
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NPV -17181.42
Years Cash inflows
-110000
2019 9666.7
2020 13833.3
2021 22166.7
2022 47166.7
2023 55500
2024 43000
IRR 14.11%
Years Cash inflows Cumulative CF
2019 9666.7 9666.7
2020 13833.3 23500
2021 22166.7 45666.7
2022 47166.7 92833.3
2023 55500 148333.3
2024 43000 191333.3
Initial investment 110000
Payback Period 4
0.4
Payback Period 4 Years and 4 months
Years Cash inflows
2019 9666.7
2020 13833.3
2021 22166.7
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2022 47166.7
2023 55500
2024 43000
Average profit or cash inflow 31888.9
Average initial investment 110000
average initial investment [(initial investment +
scrap value) / 2]
ARR 28.99%
Interpretation- From above assessment, it has been interpreted that Machine 1 is tended
to be most suitable comparing to machine 2 because its investment appraisal techniques shows
better results. As net present value of project 1 is seen as positive that is equated to 4224 but
NPV of project 2 resulted as negative which clearly shows that machine 1 will generate profits
and machine 2 leads to losses. Furthermore, an internal rate of return of project A as 20.70% is
greater than project B as 14.11% which depicts that more return is been earned from installation
of machine 1. The payback period of proposal one is indicated as shorter as 2 years 9 months in
comparison to proposal 2 as 4 years 4 months. This shows that machine 1 is suitable because it
will take less time in recovering its initial investment cots comparing to machine 2. Moreover,
accounting rate of return of both the projects seems to be same which in turn states that 29% of
the returns or profits will be earned by the firm from both of the machines. However, on overall
basis machine 1 counted as most useful and profitable for an organization as it shows feasibility
and desirability of the project in the future and shows larger amount of profits will be generated
from the proposal.
b. Limitations of an investment appraisal tool
Payback period- This method does not considers time value of the money concept while
computing the time period within which an initial outlay is recovered. Under this the cash flows
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that are received during beginning years of the project gets a higher weight as compared to the
cash flows that are been received in the later years.
NPV- The biggest limitation of this method is that it needs some of the guesswork
relating to the cost of capital of an enterprise. By assuming the capital cost which is very low
results in making an investments suboptimal. However, assuming capital cost as very high result
in the forgoing of much of the good investments.
Accounting rate of return- This investment appraisal tool is mainly based on the profits
rather than on the cash flows (Awojobi and Jenkins, 2016). It is been impacted by the subjective
and the non-cash items as depreciation rate. It also fails in taking timing of the profits that in turn
provides inaccurate results.
Internal rate of return- This technique so not takes into account an important factors
such as duration of the project, size of project and the future cost. It compares cash flows of the
project with the existing cost of the project excluding such factors.
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REFERENCES
Books and journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions (pp. 67-82). Emerald Publishing Limited.
Awojobi, O. and Jenkins, G. P., 2016. Managing the cost overrun risks of hydroelectric dams:
An application of reference class forecasting techniques. Renewable and Sustainable
Energy Reviews. 63. pp.19-32.
De Mooij, R. and Hebous, S., 2018. Curbing corporate debt bias: Do limitations to interest
deductibility work?. Journal of Banking & Finance. 96. pp.368-378.
Glaeser, E. L. and et.al., 2018. Big data and big cities: The promises and limitations of improved
measures of urban life. Economic Inquiry. 56(1). pp.114-137.
Griffin, T. P. and et.al., 2016. A cross-sectional study of the effects of β-blocker therapy on the
interpretation of the aldosterone/renin ratio: can dosing regimen predict effect?. Journal of
hypertension. 34(2). pp.307-315.
Hancock, M. and Kent, P., 2016. Interpretation of dichotomous outcomes: risk, odds, risk ratios,
odds ratios and number needed to treat. Journal of physiotherapy. 62(3). pp.172-174.
Martín-Barrera, G., Zamora-Ramírez, C. and González-González, J. M., 2016. Application of
real options valuation for analysing the impact of public R&D financing on renewable
energy projects: A company′ s perspective. Renewable and Sustainable Energy
Reviews. 63. pp.292-301.
Mechler, R., 2016. Reviewing estimates of the economic efficiency of disaster risk management:
opportunities and limitations of using risk-based cost–benefit analysis. Natural
Hazards. 81(3). pp.2121-2147.
Mei, Z. and et.al., 2018, June. Limitations of the DuPont Financial Index System and Its
Improvement. In International Conference on Intelligent and Interactive Systems and
Applications (pp. 985-993). Springer, Cham.
Navimipour, N. J. and Charband, Y., 2016. Knowledge sharing mechanisms and techniques in
project teams: Literature review, classification, and current trends. Computers in Human
Behavior. 62. pp.730-742.
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Pasciuto, I. and et.al., 2017. Overcoming the limitations of the Harmonic Ratio for the reliable
assessment of gait symmetry. Journal of biomechanics. 53. pp.84-89.
van Duuren, E., Plantinga, A. and Scholtens, B., 2016. ESG integration and the investment
management process: Fundamental investing reinvented. Journal of Business
Ethics. 138(3). pp.525-533.
Online
Financial statement of Glaxo Smith. 2018. [Online]. Available through:
<https://www.gsk.com/media/5349/annual-report-2018.pdf>
Financial statement of Reckitt. 2017. [Online]. Available through:
<https://www.rb.com/investors/annual-report-2018/>
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