Analysis of Ratios for Pharmaceutical Companies Listed on London Stock Exchange

This article provides an analysis of financial ratios for three pharmaceutical companies listed on the London Stock Exchange. The ratios include current ratio, quick ratio, net profit margin, return on assets, return on equity, interest coverage ratio, net assets turnover ratio, inventory turnover ratio, collection period and credit period. The article also includes graphs and tables to support the analysis.

Running Head: ANALYSIS OF RATIOS 1
Analysis of Ratios

Running Head: ANALYSIS OF RATIOS 2
Table of Contents
Question 1..................................................................................................................................4
Part A......................................................................................................................................4
Financial ratios....................................................................................................................4
Overall ranking.................................................................................................................16
Part B....................................................................................................................................17
Part C....................................................................................................................................17
Question 2................................................................................................................................17
MEMORANDUM................................................................................................................17
Part A................................................................................................................................18
Part B....................................................................................................................................19
References................................................................................................................................23

Running Head: ANALYSIS OF RATIOS 3
Question 1
Part A
Analysis of financial position – ratio analysis
Financial ratios
Below are the financial ratios which are used to measure the financial strength of the
company and provides an overview of the same. These ratios possess several categories and
aspects of the performance of the company (Grieser, Sunak and Madlener, 2015). These
aspects include the profitability, liquidity, solvency and efficiency of a firm. The table below
shows an in-depth analysis of the three pharmaceuticals companies for the three consecutive
years on the basis of the annual report. These companies are listed on the London Stock
Exchange.
Particulars
GLAXOSMITHKLINE
PLC
2014 2015 2016
Current ratio 1.10 1.24 0.88
Quick ratio 0.79 0.89 0.61
Net profit margin (%) 12.73 43.37 6.85
Return on assets (%) 6.78 15.76 1.54
Return on equity (%) 94.86 18.38

Running Head: ANALYSIS OF RATIOS 4
55.84
Interest coverage ratio 4.96 0.83 2.94
Net assets turnover ratio 0.85 0.61 0.71
Inventory turnover ratio 5.51 5.15 5.55
Collection period 55.00 57 59
Credit period 43.00 46 46
Gearing ratio (%) 461.89 355.78 714.27
Particulars ASTRAZENECA PLC
2014 2015 2016
Current ratio 0.96 1.08 0.87
Quick ratio 0.85 0.93 0.72
Net profit margin (%) 4.56 12.1 15.08
Return on assets (%) 2.1 4.7 5.6
Return on equity (%) 6.28 15.26 20.99
Interest coverage ratio 2.46 2.97 2.68
Net assets turnover ratio 0.66 0.56 0.5
Inventory turnover ratio 13.95 11.83 10.09
Collection period 63 66 39

Running Head: ANALYSIS OF RATIOS 5
Credit period 46 49 46
Gearing ratio (%) 115.68 145.16 194.76
Particulars SHIRE PLC
2014 2015 2016
Current ratio 1.72 0.61 0.97
Quick ratio 1.54 0.44 0.51
Net profit margin (%) 53.83 21.58 4.27
Return on assets (%) 24.98 7.85 0.49
Return on equity (%) 39.31 13.26 1.13
Interest coverage ratio 49.68 33.86 2.02
Net assets turnover ratio 0.57 0.5 0.19
Inventory turnover ratio 11.07 10.11 3.2
Collection period 62 67 83
Credit period 15 26 29
Gearing ratio (%) 32.29 46.66 115.42
Current ratio: Current ratio is one of the liquidity ratios that have the capacity to measure
the firm’s ability to pay its current obligations with the use of its current assets. Ideally the
ratio is 2:1 and it incorporates all the current assets and current liabilities (Rich and Rose,
2014).

Running Head: ANALYSIS OF RATIOS 6
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Current ratio
From the above graph it can be concluded that, GlaxoSmithKline PLC is having a sound
current ratio as compared to the other companies in overall terms. In the year 2014 and 2015
the company performed better and is in association with the ideal ratio. On the contrary the
Astrazeneca PLC is having a current ratio less than 1 in the year 2016. In 2014 and 2015,
current ratio of Astrazeneca PLC was 0.96 and 1.08 respectively. The shire company could
not perform satisfactory as can be seen by the ratios of the year 2014 and 2016 (Hermann, et
al 2016).
Quick ratio: This ratio measure the firm’s liquidity where the most liquid assets of the
company are taken into consideration. The Ideal ratio is considered as 1:1. It is also known as
the acid test ratio. The quick ratio is considered as the conservative ratio in terms of other
known liquidity metric ratios (Wang and Du, 2016).

Running Head: ANALYSIS OF RATIOS 7
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Qucik ratio
From the above graph it can be depicted that the quick ratio of AstraZeneca PLC is up to the
mark in contrast to the other two companies which are compared. It has maintained its quick
ratio throughout the past three years. In the year 2014 and 2015, company possess a quick
RATIO of 0.85 and 0.93 which was greater than the GlaxoSmithKline’s quick ratio.
However, Shire PLC reported a quite high current ratio and quick ratio as well in the year
2014. After that a huge diminishing figure are seen in the ratios (Vogel, 2014).
Net profit margin: This ratio determines the profitability of the organisation by expressing
the net profits of the company in terms of the percentage form. A low net profit margin
generally does not mean that the company is having the low profits.

Running Head: ANALYSIS OF RATIOS 8
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
10.00
20.00
30.00
40.00
50.00
60.00
Net profit margin (%)
The diagram plotted above features that the AstraZeneca has demonstrated a consistent
increment in the trends of its net benefit which accelerated its net overall revenue
appropriately by 11.08% in from 2015 to 2016. In this way, it can be inferred that in terms of
productivity the AstraZeneca's organization has performed much better as its overall revenue
has been nearly at the equal level. GlaxoSmithKline company is having highest net profit
margin in 2015 which is equivalent to the Shire company but in the year 2014.
Return on asset: This ratio is an indicator of how a company’s profits are relatable to the
assets which are in a company’s pool. The ratio determines the amount generated in terms of
the revenue by utilizing the assets of the company. Basically, it is a measure of the efficiency
factor (Warren and Jones, 2018).

Running Head: ANALYSIS OF RATIOS 9
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
5.00
10.00
15.00
20.00
25.00
30.00
Return on assets (%)
The comparable patterns can be found in the ROA of AstraZeneca. Despite the fact that the
measure of return is low yet it is constantly expanding and increasing. In any case, after
taking ROAs of different organizations, it can be interpreted that in the year 2015 and 2014
there were high proportions however similar tumbles, as it was, in 2016. If only considering
the year 2016 explicitly, ROA of AstraZeneca is 5.6% and is significantly more than the
other organisation’ ROAs of 1.54% and 0.49% (Weygandt, Kimmel and Kieso, 2009).
Return on Equity: This ratio indicates the amount of return given by the company to its
shareholders. Higher the ROE, more the profitable the organisation will be (Vogel, 2014).
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
Return on equity (%)

Running Head: ANALYSIS OF RATIOS 10
The above diagram demonstrates that GlaxoSmithKline has most stable profit for value in
year 2014 and 2015 with a ratio of 55.84% and 94.86%. But after analysing it, the same
fell down to 18.38% of every 2016. In any case, its ROE was more than its rivals in the
course of recent years.
Interest Coverage ratio: This financial ratio shows the interest is paid by the company. This
ratio is also known as times interest earned ratio. It declares the solvency of a firm.
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
10.00
20.00
30.00
40.00
50.00
60.00
Interest coverage ratio
The above diagram depicts that Shire PLC is the one which had a most elevated interest
coverage ratio in 2014 and 2015 as contrast with the other two organizations. In these years,
the interest coverage ratio of Shire was 49.68 times and 33.86 times (Levi and Segal, 2015).
However similar ratio falls down to 2.02 times in 2016. Relatively in 2016, GlaxoSmithKline
has high interest coverage ratio of 2.94 times which is placed after by AstraZeneca with 2.68
times.
Net asset turnover ratio: This ratio comes under the category of the efficiency ratios and is
used to measure the amount of revenue generated by a company by efficiently utilizing its net
assets.

Running Head: ANALYSIS OF RATIOS 11
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Net assets turnover ratio
Among all the three organizations, GlaxoSmithKline PLC has a much stable ATR when
contrasted with its rivals. In 2014, the organization had most consistent net resource
turnover of 0.85 which at that point decreases to 0.61 of every 2014. Further, it again
escalates to 0.71 out of 2016. In opposition to this, AstraZeneca demonstrates a
decreasing pattern with a proportion of 0.5 of every 2016 and the same follows on
account of Shire PLC (Marketrealist.com, 2018).
Inventory turnover ratio: It shows the capability of the company as to how quickly it
can convert its inventory into cash. A high ITR is more favourable for the companies who
are dealing in the inventory seasons more.

Running Head: ANALYSIS OF RATIOS 12
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Inventory turnover ratio
From the above diagram, it is observed that AstraZeneca has high interest coverage ratio with
13.95 times, 11.83 times and 10.09 times in 2014, 2015 and 2016 separately. In spite of the
fact that it has been fallen over the three years yet at the same time the pace was more than
the interest coverage ratio of its rivals (Porter and Norton, 2007).
Collection period: This ratio reflects the time period which is taken by the company to
collect its account receivables on the time. In other way, the collection period showcases the
efficiency of the firm.
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Collection period

Running Head: ANALYSIS OF RATIOS 13
The number of days for collecting the debt from the individual has expanded in case of
GlaxoSmithKline and Shire PLC. In 2014, both the organizations had high number of years
which additionally increased to 59 days and 83 days in 2016. Then again, AstraZeneca's
accumulation period had turned out to be only half in 2016, making an organization more
productive (Saleem and Rehman, 2013).
Credit period: The credit period of the company reflects the amount of time companies take
to pay back to its creditors. This concept is more important because it indicates the amount of
working capital used by the company to invest in its accounts receivable.
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
10.00
20.00
30.00
40.00
50.00
60.00
Credit period
The quantity of days for gathering indebted individuals has expanded if there should be an
occurrence of GlaxoSmithKline and Shire PLC. In 2014, both the organizations had high
number of years which additionally increased to 59 days and 83 days in 2016. Then again,
AstraZeneca's accumulation period had turned out to be only half in 2016, making an
organization more productive (Ahmed, 2013).

Running Head: ANALYSIS OF RATIOS 14
Gearing ratio- This ratio comes under the category of capital structure. This ratio shows the
portion of company’s debt in relation to its equity, the company is holding.
2014 2015 2016 2014 2015 2016 2014 2015 2016
GLAXOSMITHKLINE PLC ASTRAZENECA PLC SHIRE PLC
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
Gearing ratio (%)
Shire PLC has the most minimal ratio in the course of the last three year, which makes the
organization less unsafe in contrast with different ones. In 2014, its gearing ratio was 32.29%
which increased to 115.42% out of 2016. Still the rate was not as much as equal in terms of
ratio of GlaxoSmithKline and AstraZeneca.
Non-financial ratios
These are those ratios which cannot be expressed in terms of dollars or in any monetary
figure. The two of the non-financial ratios which can be calculated for the purpose of
pharmaceutical companies are shown below.
 Employee turnover ratio
GLAXOSMITHKLINE
PLC ASTRAZENECA PLC SHIRE PLC
2014 2015 2016 2014 2015 2016 2014 2015 2016
Number of 97921 101255 99300 57500 61500 59700 5016 5548 24000

Running Head: ANALYSIS OF RATIOS 15
employees
Difference 3334 -1955 4000 -1800 532 18452
Employee
turnover 3.3% 2.0% 6.5% 3.0% 9.6% 76.9%
Shire PLC has high worker turnover ratio in light of the fact because the number of the
employees working in the organization had abruptly expanded in 2016 in contrast with that of
in the year 2014 and 2015. Its worker turnover proportion was 9.6% in 2015 which
accelerated to 76.9% out of 2016. The other organizations determined a reduction in their
worker turnover ratio.
Market share
A 4.4% share in the global market has been captured by the GlaxoSmithKline followed by
Bayer and Sanofi. AstraZeneca has an overall market share of 4.8%. The market share of
Shire is reported to be at 3.9%. So, it can be concluded that AstraZeneca has the highest
market share among the three.
Overall ranking
Company AstraZeneca PLC GlaxoSmithKline
PLC
Shire PLC
Rank I II III

Running Head: ANALYSIS OF RATIOS 16
Part B
From the above ranking, one might say that AstraZeneca has performed well and has
indicated exceeding patterns in the course of recent years. Its net overall revenue has
consistently escalated over the past three years. Furthermore its stock turnover ratio is
additionally more I comparison to the other two organizations. Additionally, the organization
has a high piece of bread in the market and is about to expand its execution in coming years.
AstraZeneca can be a positive venture as it offers exceptional yields on value. However, from
the standpoint of gearing ratios, the company shows high financial risk which can make
investors rethink on their decision of investing in it.
Part C
The most inadequately performing organization is Shire PLC. Reason being, in 2016,
organization's execution degraded to a great extent. Its productivity, liquidity and profitability
have fallen considerably. Thus, it is prescribed to Shire PLC that the organization must work
on improving its productivity and profitability to bring itself similar to the past level. Despite
the fact that its turnover has increased in 2016 however but it shall focus in improving the
financial assets of the company and making the company bear the less risk (Bierman and
Smidt, 2012).
Question 2
MEMORANDUM
To: Department of Finance
From: Financial Analyst
Date: 21 May 2018
Subject: Appraisal of Investment

Running Head: ANALYSIS OF RATIOS 17
Part A
Capital investment decision making is a layered process through which a project is evaluated
and examined and the best alternative is chosen. Following are the key layers included in the
process of capital investment decision making.
 Identification
The primary stage includes in managing the recognition of the opportunities available for the
purpose of investments. The opportunities are nothing but the investment proposals available
in the business environment.
 Defining of the Proposals
Under the second stage the proposals are sent for the screening processes. Further, a detailed
comparison is done between the investments proposals which are available for the
competitors as well as the capital markets of the imperfect nature. After a complete in-depth
analysis the project which is strategically and economically fit is selected. Keeping in mind
the company’s resources and strengths (Atrill and McLaney, 2011).
 Examination and accepting of investment proposals
It is that phase where the different techniques of the investment appraisal have been shown
up. It becomes imperative for the organisation analyses and accepts the selected proposals in
order to make sure that they tend to be profitable for the company in the future. To conduct
such level of evaluation different appraisal techniques have been used like NPV, IRR, and
PAY BACK. These techniques check the possibility, feasibility and productivity of an
investment.
 Approvals

Running Head: ANALYSIS OF RATIOS 18
The most appropriate and desirable proposition is handled by the significant level expert
after a profound investigation and assessment. The experts than approve such proposals to
implement the same in the organisation. Typically extensive capital ventures are
confirmed by governing body though the little ones are permitted by the divisional
administrators.
 Implementing and monitoring approved proposal
This is the last phase of basic investment proposal process where the proposal is finally
executed inside the business. The size and complexity of the proposal decides the time
required for such implementation. After usage, it is particularly vital for the organizations to
check their execution and watch that whether they are working as indicated by the
authoritative objectives or not.
Therefore, the key stages as discussed above are incorporated into investment proposals.
With the assistance of such strategies, distinctive proposals of various sizes are effectively
estimated and assessed. The techniques help in determining the best investment proposal.
Part B
The main methods of investment appraisal that are been used in practice are as follows:
1. Net present value
It is the most appropriate technique used for checking the profitability of a project. It takes
into account the present values of cash inflows and outflows by discounting them at required
rate of return (Baker and English, 2011). The basic principle of NPV method is that, a project
having high and positive NPV will be acceptable and the one with the negative one will be
rejected for example:

Running Head: ANALYSIS OF RATIOS 19
Years 0 1 2 3 4 Total
Cash
Flows
$ -
1,00,000.00
$
50,000.0
0
$
55,000.00
$
60,000.0
0
$
65,000.00
Pvf@1
0% 1
0.909090
909 0.826446281
0.751314
801 0.683013455
Present
value
$ -
1,00,000.00
$
45,454.5
5
$
45,454.55
$
45,078.8
9
$
44,395.87
$
80,383.
85
Here the NPV of a project is $80,383.85 which is positive and is greater than zero. So, the
project can be accepted.
2. Payback period
Pay-back period in the capital budgeting refers to the time required to recollect the funds
which have been expensed for the purpose of investments.
It shows the number of years taken by an investment proposal to recover its initial
investment. If the period is short, the projects will be more viable. Considering the above
example, the payback period is calculated as:
Years 0 1 2 3 4
Present value
$ -
1,00,000.00
$
45,454.55
$
45,454.55
$
45,078.89
$
44,395.87
Cumulative $ - $ - $ $

Running Head: ANALYSIS OF RATIOS 20
Value 54,545.45 9,090.91 35,987.98 80,383.85
In its four years of life, the project will take approx. 2 years to recoup its initial investment of
$100,000.
3. Internal rate of return
Internal rate of return is a metric of measure used to determine the profitability of
potential investments. It is a discounted rate makes NPV equal to zero. It means that the
present value of the cash inflow as well the outflow is equal. A high IRR is more
desirable for the purpose of investments. A higher IRR which is greater than the cost of
capital is also acceptable (Marketrealist.com, 2018).
Years 0 1 2 3 4
Cash
Flows
$ -
1,00,000.00
$
50,000.00
$
55,000.00
$
60,000.00
$
65,000.00
IRR 42%
Discounting cash flow
Under this method the valuation is undertaken to estimate the investment project. Net present
value method and payback period method uses discounted cash flows. By the means of a
suitable rate of return discounted cash flows are calculated. Normal cash is multiplied and it
flows with the discounting rate (Cornell, 2016).
Techniques like profitability Index, modified internal rate of return, accounting rate of return,
equivalent annuity are used apart from the above methods. Each method has its own
significance which measures the project in its own way. However, the major objective of

Running Head: ANALYSIS OF RATIOS 21
applying such techniques is to check the viability, profitability and feasibility of a proposal to
check the strategic as well as economic point of view.

Running Head: ANALYSIS OF RATIOS 22
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