Managerial Finance: Financial Ratios and Performance Analysis

This document provides an analysis of the financial ratios and performance of Glaxo Smith Kline plc and Reckitt Benckiser Group plc. It includes calculations of different financial ratios for two years, such as current ratio, quick ratio, net profit margin, gross profit margin, gearing ratio, price earning ratio, earning per share, return on capital employed, and average inventory turnover period. The analysis helps investors in making informed investment decisions.

Managerial Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
(a) Calculation of different financial ratios for two years (2017 – 2018):..................................1
(b) Analysis of performance of both of companies.....................................................................5
...................................................................................................................................................10
(c). Recommendations of how the financial performance of the poorly performing business
can be improved:.......................................................................................................................11
(d) Limitations of financial ratios:............................................................................................11
TASK 2..........................................................................................................................................12
(a). Calculation of financial ratios for two years (2017 – 2018):..............................................12
(b) Limitations of using investment appraisal techniques.........................................................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19

INTRODUCTION
Managerial finance is way of finance which is an interdisciplinary approach that carry out
both types of accounting management and corporate. Through financial management develop
values and business eligibility based on the resources amongst competing business possibilities.
It is related with the term of financial activities that focus on the financial structure of an
organisation. On the basis of different roles and tasks management can take appropriate decision
and according that manage all the financial activities (Huang, Shieh and Kao, 2016). The
particular project study mainly based on the Glaxo smith Kline plc and Reckitt Benckiser Group
plc. Glaxo is British international Pharmaceutical production company which is established in
Brentford, England. On the other side, Reckitt plc is UK's international consumer goods
organisation the headquarter of the company is situated at Slough, England (About Reckitt
Benckiser Group plc, 2019). Both are manufacturing organisation and aware for hygiene, health
care and home products which is offer to customers. The main aim of this study that provide help
to all investors in decision making procedure which is related with the business which is more
viable as per the investment purpose. Along with there are defined about the different investment
appraisal techniques and compute all the relevant calculations in the context in decision making
procedure.
TASK 1
(a) Calculation of different financial ratios for two years (2017 – 2018):
Current ratio = Current assets/Current liabilities
All data in £
million except
current ratio
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…....CA 15907 16927 5424 4952
…....CL 26569 22491 6576 7614
…....Ratio
Analysis
15907/26569 16927/22491 5424/6576 4952/7614
…....Current ratio 0.60 times 0.75 times 0.82 times 0.65 times
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 Quick ratio = Quick assets / current liabilities
All data in £
million except
Quick ratio
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…....Quick assets 10042 11121 4223 3676
….....CL 26569 22491 6576 7614
…....Ratio
Analysis
10042/26569 11121/22491 4223/6576 3676/7614
…......Quick ratio 0.38times 0.49 times 0.64 times 0.48 times
 Net profit margin = Net profit / net sales x 100
All data in £
million except net
profit margin
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…....Net profit 1532 3623 6172 2161
…....Net sales 30186 30821 11512 12597
…....Ratio
Analysis
1532/30186*100 3623/30821*100 6172/11512*100 2161/12597*100
…...Net profit
margin
5.07% 11.75% 53.61% 17.15%
 Gross profit margin = Gross profit / Net sales x 100
All data in £
million except
gross profit
margin
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
….....GP 19844 20580 6870 7635
…........Net sales 30186 30821 11512 12597
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…....Ratio
analysis
19844/30186*100 20580/30821*100 6870/11512*100 7635/12597*100
…....Gross profit
margin
65.74% 66.77% 59.68% 60.61%
 Gearing ratio = Total Debt / Equity
All data in £
million except
Gearing Ratio Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…...Total Debt 56449 53706 23480 22908
….....Equity -68 4360 13533 14742
….....Ratio
Analysis 56449 / -68 53706 / 4360 23480 / 13533 22908 / 14742
….....Gearing
Ratio -830.13 12.32 1.74 1.55
 Price earning ratio = Market value per share / earning per share
All data in £
million Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…...Market Price
Per Share 1361 1491.2 6841 5964
…....Earning Price
Per Share 0.3152 0.7455 8.3859 2.9361
…....Ratio Analysis 1361 / .3152 1491.2 / .7455 6841 / 8.3859 5964 / 2.9361
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…...Price Earning
Ratio 4317.89 2000.27 815.77 2031.26
 Earning per share = Net Profit / Ordinary Numbers of Shares
All data in £ Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…....NP 1532 3623 6172 2161
…..Ordinary
Numbers of Shares 4860 4860 736 736
…....Ratio
Analysis 1532/4860 3623/4860 6172/736 2161/736
…....EPS 0.3152 0.7455 8.3859 2.9361
 Return on capital employed = Operating profit (EBIT) / Capital employed *100
All data in £
million except
Return on capital
employed ratio
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…...EBIT 6061 7064 2963 3280
…...Capital
employed
29812 35575 30437 30036
…....Ratio
Analysis
6061/29812*100 7064/35575*100 2963/30437*100 3280/30036*100
….....ROCE 20.33% 19.86% 9.73% 10.92%
Working Note:
Capital employed = Total assets – current liabilities
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 Average inventory turn over period = Average stock / Cost of goods sold * 365 days
All data in £
million except
Average
inventory turn
over period
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…...Average
stock
5557 5476 1201 1276
….....COGS 10342 10241 4642 4962
…...Ratio
Analysis
5557/10342*365 5476/10241*365 1201/4642*365 1276/4962*365
….....Average
inventory turn
over days
196 days 195 days 94 days 93.86 or 94 days
 Dividend payout ratio = Dividend paid / Net income
All data in £
million except
Dividend payout
ratio
Glaxo Smith Kline plc Reckitt Benckiser Group plc
2017 2018 2017 2018
…...Dividend
paid
3906 3927 1134 1187
…....Net income 1532 3623 6172 2161
…...Ratio
Analysis
3906/1532 3927/3623 1134/6172 1187/2161
…....Dividend 2.55 1.08 0.18 0.55
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payout ratio
(b) Analysis of performance of both of companies.
 Current ratio
2017 (in times) 2018 (in times)
0
0.2
0.4
0.6
0.8
1
0.6
0.75
0.82 0.85
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: As per the analysis of the current ratio of the business evaluate the short
term liquidity position in certain period of time. Through above chart analysis there are current
ratio of the GSK are 0.6 and 0.75 in the year of 2017 to 2018 respectively. The ratio of RBG is
0.82 and 0.85 which is increase and reach on ideal ratio in these financial years. Due to
increment in the current ratio impact on the short term liquidation condition of the business. So it
is advised that short term liquidity of GSK is better as compare of RGB.
Quick Ratio
2017 (in times) 2018 (in times)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.38
0.49
0.64
0.48
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: As per the above chart short term liquidity condition more clearly and
this ratio apply to know about quick assets and exclude of stocks. GSK's quick ratio increased
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from 0.38 to 0.49 in the year of 2017 to 2018. Due to RBG's quick ratio has been reduced in
2017 to 2018 which is 0.64 to 0.48 in particular period of time.
Net Profit Margin Ratio
2017 (in %) 2018 (in %)
0
10
20
30
40
50
60
5.07
11.75
53.61
17.15
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: The above chart presentation it shows that through this ratio analysing of
business net profitability as per the business scenario. Through determination it is identified that
GSK's net profit ratio is 5.07% & 11.75% in the year of 2017 & 2018. While net profit of RGB is
same financial year are 53.61% and 17.15% respectively. The net profit of RBG has been
reduced with a major gap that presented the effectiveness of the business and net profit has been
declined in certain period of time. Whereas, GSK's net profit margin increment impact on the
achievement of the business and increase capacity of net profit generation.
Gross Profit margin ratio
2017 (in %) 2018 (in %)
56
58
60
62
64
66
68 65.74 66.67
59.68 60.61 Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: The presented graph shows that efficient business is easily earn profit by
its business operation and focus on gross profit that achieve after less amount cost of sales from
sales. The above chart presented that GSK's gross profit margin level is greater than RBG. The
gross margin of GSK in the year of 2017-18 are 65.74% to 66.67% (increase) whether RBG are
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59.68% and increased by 60.61% continuously. In regard of gross profit margin generation
capacity business of GSK is become more effective as compare of RBG.
Gearing Ratio
2017 2018
0
2
4
6
8
10
12
14
0
12.32
1.74 1.55
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: There is gearing ratio presented at zero in the chart which is better
presentation ans some times come in negative like – 803.13. This ratio of GSK is negative in the
year of 2017 but it is increased in the year of 2018 and reach on 12.32%. Negative gearing ratio
of 2017 presents of negative figure and equity of the business through financial reporting.
Therefore, 1.74 in 2017 ratio of RBG but in the year 2018 decreased and reach on 1.55. After the
determination it is getting that gearing ratio of RBG is lesser than of GSK.
P/E Ratio
2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
4317.89
2000.27
815.77
2031.36 Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: A high P/E ratio shows that the price of inventories is high as compared
with incomes and may be over valued. There is mostly reduction in P/E ratio of GSK from
4317.89 to 2002.27 in particular period of time 2017 to 2018. On the other side RBG's P/E ratio
is increased which is 815.77 in 2017 & 2031.36 in 2018 continuously. As compare of RBG's
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performance in regard of gearing ratio is much better than GSK is improved so it is presented
trust of shareholders.
Earning Per share:
2017 2018
0
2
4
6
8
10
0.31 0.74
8.38
2.93
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: Earning per share impact on the position of business and analysis of
profitability effectively. These profits are distributed to each shareholders as per the investments.
EPS of GBK in the year of 2017 was 0.31 that has been increased on 0.74 in 2018. While EPS of
RBG in year of 2017 & 2018 was 8.98 and 2.93 respectively. The level of earning per share of
RBS is better than of GSK because its EPS decrease in the year of 2018 which is not good sign
of the business. After decline RBG's EPS is higher than EPS of GSK.
Return on capital Employed
2017 (in %) 2018 (in %)
0
5
10
15
20
25
20.33 19.86
9.73 10.92 Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: The above chart of ratio analysis it is presenting that the performance of
the business is utilised by employed capital to receive effective return from the employed capital.
Through calculation it is getting that ROCE of GSK plc in 2017, 20.33% and in 2018, 19.86%.
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On the other side RBG have about 9.73% and 10.92% in the year of 2017 & 2018 respectively in
certain period of time. So overall analysis it is getting that GSK's ROCE is better than to RBG.
Average inventories turn over period
2017 (in days) 2018 (in days)
0
50
100
150
200
250
196 195
94 93.86 Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: The above chart of average inventory ratio is presented that how much
time take by business to convert their stock into revenues/cash. Through this diagram evaluate
the GSK's inventory ratio 196 & 195 days in year of 2017 & 18 respectively. While RBG group
in same financial period have turn over in 2017, 94 days in 2018 93.86 days. Hence, it is getting
that RBG's inventories turn over is more better as compare with GSK.
Dividend payout ratio
2017 2018
0
0.5
1
1.5
2
2.5
3 2.55
1.08
0.18
0.55
Glaxo Smith Kline plc
Reckitt Benckiser Group plc
Interpretation: Through calculation of this ratio it is getting that dividend per share of
GSK is 2.55 in a year of 2017 and in 2018 is 1.08. On the other side RBG's dividend payout ratio
are in 2017, 0.18 and in 2018 is 0.55 respectively. So from this ratio it is presenting that
company how much return get from every share that offer to people. Along with GSK's dividend
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pay out ratio reduced over the time as compare with RBG's dividend pay out of the business is
greater than.
(c). Recommendations of how the financial performance of the poorly performing business can
be improved:
As per the above analysis it is determined that GSK;s financial efficiency present for
particular financial period which is deducted in the comparison of the RBG which is far better. In
context of RBG the performance of current ratio, net profit margin and quick ratio, EPS and
ROCE is better. On the other side, performance of GSK in context of gearing ratio, gross margin,
average inventory ratio as well as dividend pay out back is good of the business. After overall
determination in the end it is understanding that the business RBG is more efficient in case of
financial performance, solvency, liquidity which is noticed as decreasing in the year of 2018
because of Brexit.
It is has been recommended that RBG business should control the activities which is
changing at existing level of profit and increase it for the keep on market share in particular
enterprise. The business must enhance in new market to improve their income. Additionally,
there is required to control liquidity situation and should take steps for long time as well as short
time debts. It is mainly increase percentage of the ROCE that has to take steps regarding to
effective allocation of capital by investing more and growing for the geographical locations at
the market activities.
(d) Limitations of financial ratios:
Financial ratio important for the business but have some limitations that face by the
organisation in different situation such as:
 Financial ratio analysis is advantageous for two different organisation of same industry
are compared with each other. Most of the business entity have different departments in
organisation and have a holistic view of the business. It is mainly based on the accounting
figure which is recorded in financial statements. These figures are manipulating,
approximations, diversified some extent. So these ratio are not helpful for effective
conclusion (Junkus and Berry, 2015).
 Ratio have problem of comparability otherwise organisation same may occupy various
type of accounting methods that became reason of comparing reason in particular
relation.
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 Every organisation have own system to produce financial reports and according to that
they conduct different activities. Such as, changes in financial statement of the business is
essential. As instance, if one business prepare its IFRS financial accounts and other adopt
US GAAP so the IFRS financial statement should be converted to US GAAP or vice
versa.
TASK 2
(a). Calculation of financial ratios for two years (2017 – 2018):
1. Payback Period:
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Recommendations: As per the above calculation it has been analysed that Payback
period calculate for the machine 1 or machine 2. Initial investment for both machine is different
so received different pay back period. To calculate from this method apply cumulative cash flow
technique and according to that get 2 years from machine one and 4 years from machine two. So
useful life of machine are 6 years that means company have enough cash flow from the starting
cost that invest in the project. If company both machine so machine one would be more useful
due to have less pay back period.
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Recommendation: From the above table it is evaluated that to calculate net present value
take discounting cash flow about 16% for both machines. The initial investment of machine first
is £37320 and machine second is £10910. Through NPV method get result that machine first is
higher than to machine second and less time so it is advised that there are preferring to machine
first.
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15

Recommendation: There are applying method of accounting rate of return and according
to that Machine first is 36.4% on the other side second machine is 35.8%. So it is analysed that
machine first is good as compare of second machine. In this method set average annual profit
and calculate average investment effectively. From machine one calculate ARR 36.4% and from
machine second 35.8%. So company should select option first because of it is more profitable for
the business.
From overall analysis it is recommended that various types of investment appraisal
techniques applied on both machine to know that which is good. After application it is getting
that machine first id better than to second machine in order to viability as well as profitability. So
at the end it is suggested that top executives of Harris private limited must select the project A
and installing machine first instead of project B/Machine second.
(b) Limitations of using investment appraisal techniques
There are different types of techniques which is applied by an organisation in order to
analysis the effectiveness of any project. Through these methods analysis of their advantages and
disadvantage for the business entity. There are mainly focused on the limitations which is
important and identify the accuracy that helps in decision making procedure. There are
mentioned limitations of various types of investment appraisal techniques underneath:
Pay Back Period Technique: It is defined as amount of time which is related before an
investment and will be returned in future with invested amount. There are comparing of two or
more investments that make by the business in particular project and predict in how many times
get returned as compare with other projects. This term is mainly applied by the organisation for
capital and financial budgeting. But it has been utilised for cost saving as well as energy efficient
technology (Uchide and Imanishi, 2016). There are defined limitation of this technique such as:
 Ignore the time value of money: It is one of the main disadvantage of this method that is
not focus the time value of money. There are providing value to those projects which was
received early as compare of later received in cash flow at the end of years. There are two
projects which have same pay back period but it is identified that one project generate
more cash flow in previous year on the other side another project has generated higher
cash flow in future time. Such as, the payback method does not provide a clear evaluation
as to which project to select.
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 Neglects cash flow received after pay back period: In order to work on some projects,
there is focused on the largest cash flow may not happen until after the pay back period
has ended.
Net Present Value: It is the value of all future cash flow may be positive or negative
over the whole life of an investment provide discounted to the present. NPV toll is mainly
utilised by business to determine present value of the project and according to that generate cash
flow and consist of those initial income of the project. It is mainly utilised to assess the highest
profit of the project (Suzuki, Esaka, Miyamoto and Magara, 2015).. There are discussed
limitation of this method such as:
 It is consisting of different applications which are based on the predication and analysis
related rate in which cash flow provided discounted. On the basis of assumptions are
work done on basis of guess that puts question mark on results and utilise this method for
effective decision making.
 Through this method is not possible to invest different initial amount in different projects
that reduce its utilisation in chosen of particular project out of totally assort projects.
Accounting rate of return: To measure the profitability of the business utilise this
method and investment proposal as well as project. ARR based on the average return that will
provide in context of initial investment made into it. Herein defined different limitations of this
method as following:
 In this method is no value of money and get different outcomes through calculation
which create problem in decision making procedure.
 This method is not applied as per the situation when require to made investment in a
particular project and involve greater risk that impact on the business activities
(Alkaraan, 2015).
CONCLUSION
As per the above method it has been articulated that managerial finance is important part
of any business which is consist of both types of accounting like managerial and financial
accounting. It covers all those different areas which can conduct different operations that deal
with the effectiveness and arrange of all resources in appropriate manner. These are conducting
comparison of both organisation through financial ratios and know actual condition of business
and compare with other organisation but these ratio have limitation so according to company
17

apply this. Here in apply different investment appraisal technique to know which machine is
better and get is machine first is better and profitable.
18

REFERENCES
Books and Journal
Huang, J. Y., Shieh, J .C. and Kao, Y. C., 2016. Starting points for a new researcher in
behavioral finance. International Journal of Managerial Finance. 12(1). pp.92-103.
Lee, S. P. and Isa, M., 2015. Directors’ remuneration, governance and performance: the case of
Malaysian banks. Managerial Finance. 41(1). pp.26-44.
Junkus, J. and Berry, T. D., 2015. Socially responsible investing: a review of the critical
issues. Managerial Finance. 41(11). pp.1176-1201.
Uchide, T. and Imanishi, K., 2016. Small earthquakes deviate from the omega‐square model as
revealed by multiple spectral ratio analysis. Bulletin of the Seismological Society of
America. 106(3). pp.1357-1363.
Suzuki, D., Esaka, F., Miyamoto, Y. and Magara, M., 2015. Direct isotope ratio analysis of
individual uranium–plutonium mixed particles with various U/Pu ratios by thermal
ionization mass spectrometry. Applied Radiation and Isotopes. 96. pp.52-56.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
Alkaraan, F., 2015. Strategic investment decision-making perspectives. In Advances in mergers
and acquisitions (pp. 53-66). Emerald Group Publishing Limited.
Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts,
methods and data. City, Culture and Society. 7(2). pp.81-86.
Online:
About Glaxo Smith Kline plc, 2019. [Online] available through:<https://www.gsk.com/>
About Reckitt Benckiser Group plc, 2019. [Online] available through: <https://www.rb.com/>
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