Comparison of Financial Position of Glaxo Smith Kline plc and Reckitt Benckiser Group plc

This project report compares the financial position of Glaxo Smith Kline plc and Reckitt Benckiser Group plc and suggests investors about which company to choose for investment. It includes calculations and interpretations of various financial ratios and investment appraisal techniques.

MANAGERIAL
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Portfolio 1....................................................................................................................................3
Portfolio 2..................................................................................................................................14
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The term managerial finance is form of finance that is also known as corporate finance.
This complies with the monetary decisions which are made in the companies in accordance of
commercial base (Huang, Shieh and Kao, 2016). It becomes essential for managers to take
suitable actions regards to management of finance so that all types of functions and activities can
be fulfilled. The project report is based on comparison of financial position of two companies
which are Glaxo Smith Kline plc and Reckitt Benckiser Group plc. Glaxo Smith Kline plc is a
British multinational pharmaceutical company whose headquarter is in Brentford, London. The
company was established in year 2000 (About Glaxo Smith Kline plc, 2019). While Reckitt
Benckiser Group plc is goods company which is located in Slough, England. It was founded in
year 1999 (About Reckitt Benckiser Group plc, 2019). The aim of project report is to suggest
investors about which company they should choose for investment. For this purpose vital range
of ratios are calculated and interpreted. In the next part of report, investment appraisal techniques
are applied in order to assess efficiency of given projects.
MAIN BODY
Portfolio 1.
(a) Calculation of ten financial ratio for two years. 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
Current assets 15907 16927 5424 4952
Current liabilities 26569 22491 6576 7614
Calculation 15907/26569 16927/22491 5424/6576 4952/7614
Current ratio 0.60 times 0.75 times 0.82 times 0.65 times
 Quick ratio = Quick assets / current liabilities
All data in £ Glaxo Smith Kline plc Reckitt Benckiser Group plc

million except
Quick ratio
2017 2018 2017 2018
Quick assets 10042 11121 4223 3676
Current liabilities 26569 22491 6576 7614
Calculation 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
Calculation 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
Gross profit 19844 20580 6870 7635
Net sales 30186 30821 11512 12597
Calculation 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
Calculation 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
Calculation 1361 / .3152 1491.2 / .7455 6841 / 8.3859 5964 / 2.9361
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
Net Profit 1532 3623 6172 2161
Ordinary Numbers 4860 4860 736 736

of Shares
Calculation 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
Calculation 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
 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
Cost of goods
sold
10342 10241 4642 4962
Calculation 5557/10342*365 5476/10241*365 1201/4642*365 1276/4962*365
Average 196 days 195 days 94 days 93.86 or 94 days

inventory turn
over 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
Calculation 3906/1532 3927/3623 1134/6172 1187/2161
Dividend payout
ratio
2.55 1.08 0.18 0.55
(b) Analysis of performance of both of companies.
 Current ratio
Analysis- On the basis of above presented graph, this can be find out that both of companies are
unable to meet criteria of ideal current ratio which is of 2:1. Such as Glaxo Smith Kline
2017 (in times) 2018 (in times)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.6
0.75
0.82 0.85
Glaxo Smith Kline plc
Reckitt Benckiser Group plc

company's current ratio is of 0.6 times and 0.75 times. While Reckitt Benckiser company's
current ratio is of 0.82 times and 0.85 times. It is indicating that Reckitt Benckiser company's
liquidity position is quite better in compare to Glaxo Smith Kline company.
 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
Analysis- On the basis of above presented graph, this can be find out that both of companies are
unable to meet criteria of ideal quick ratio which is of 1.5:1. Such as Glaxo Smith Kline
company's quick ratio is of 0.38 times and 0.49 times. While Reckitt Benckiser company's quick
ratio is of 0.64 times and 0.48 times. It is indicating that Reckitt Benckiser company's liquidity
position is quite better in compare to Glaxo Smith Kline company. This is so because in both of
years their quick ratio is producing positive result.
 Net profit margin:
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

Analysis- The above presented graph shows net profit margin of both of companies which is
different. Such as Glaxo Smith Kline company is able to generate net profit margin of 5.07% in
year 2017 and 11.75% times in year 2018. While Reckitt Benckiser company is able to gain net
profit margin of 53.61% and 17.15% for year 2017 and 2018 respectively. This is showing that
Reckitt Benckiser company's financial position is much stronger in compare to Glaxo Smith
Kline company.
 Gross profit margin:
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
Analysis- The above presented graph shows gross profit margin of both of companies which is
different. Such as Glaxo Smith Kline company is able to generate gross profit margin of 65.74%
in year 2017 and 66.67% times in year 2018. While Reckitt Benckiser company is able to gain
gross profit margin of 59.68% and 60.61% for year 2017 and 2018 respectively. This is showing
Glaxo Smith Kline company is generating higher gross margin that is indication of lower cost of
sales as compare to Reckitt Benckiser company.
 Gearing ratio:

Analysis- Analysis- On the basis of above presented graph, this can be find out that Glaxo
company's position was poor in year 2018 as compare to year 2017. such as in year 2017, this
ratio was of 12.31 while in year 2018, it was of negative whose value was of -830.13. In the
aspect of competitive company, this can be find out that their ratio was of 1.73 and 1.55 for same
time period. It is indicating that Glaxo company's performance is much better except year 2017.
 Price earning ratio:
Analysis: On the basis of above presented graph, it can be find out that price earning ratio is
different of both of companies. Such as the Glaxo Smith Plc, company's P/E ratio is of 4317.89
& 2000.27 for both of year 2017, 2018. On the other side, Reckitt plc's ratio is of 815.77 and
2031.36 for same time period. In the competitive manner, Glaxo company is better.
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
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

 Earning per share ratio:
Analysis: On the basis of above presented graph, this can be find out that both companies' are
generating different volume of earning on shares. Such as the Glaxo Smith Kline plc is
generating earning of 0.31 and 0.74 on each share. While Reckitt Benckisre company's per share
value is of 8.38 and 2.93 for year 2017 & 2018. This is showing that Reckitt company's
performance is better.
 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
Analysis- The above presented graph shows efficiency of generating return on employed capital.
In the aspect of above Glaxo Smith Kline plc, this can be find out they are generating return of
20.33% and 19.86% for year 2017 & 2018. On the other side, Reckitt Benckiser company's
producing lower return in compare which is of 9.73% and 10.92% for similar time period.
2017 2018
0
1
2
3
4
5
6
7
8
9
0.31 0.74
8.38
2.93
Glaxo Smith Kline plc
Reckitt Benckiser Group plc

Hence, Glaxo Smith Kline company is providing higher return to investors in comparison to
Reckitt plc.
 Average inventory 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
Analysis- The above presented graph shows inventory turn over days of both of companies.
Basically, higher turnover ratio shows that companies are taking less time to sell its goods. In the
context of Glaxo Smith Kline plc, this can be find out that their stock turn over days are of 196 &
195 days for year 2017 and 2018. On the other hand, Reckitt Benckiser company's inventory turn
over days are of 94 days in both of years. This is showing that Glaxo Smith Kline plc is more
effective in the aspect of managing inventories.
 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

Analysis- On the basis of above presented graph, this can be find out that efficiency of paying
dividend of Glaxo Smith Kline company is better. It is so because their dividend payout ratio is
of 2.55 and 1.08. While Reckitt Benckiser company's ratio is of 0.18 and 0.55 which lower. It
can be interpreted that Glaxo company is better in the aspect of paying dividend.
In the perspective of investors, Glaxo Smith Kline plc is better and they should make invest in
this company. It is so because company is performing well in some aspects such as dividend pay
out ratio, ROCE, P/E ratio, Gearing ratio. Though, Reckitt Benckiser company is also
performing well but its performance is better only in the internal aspect not for the investors.
(c) Recommendation to companies in order to enhance performance.
Recommendation – On the basis of above presented financial analysis of both of companies, this
can be assessed that both of business entities need some improvements. Herein, below
recommendation to these companies is done in such manner:
Glaxo Smith Kline plc:
 This company is needed to focus on improving liquidity position because their current
and quick ratios are performing poor result.
 As well as they should try to formulate new strategies regards to generating earning on
each share because their EPS ratio is weaker.
Reckitt Benckiser company:
 This company should try to improve their internal management so that their stock turn
over ratio can be improved.
 Along with finance department should focus on gaining higher return on capital
employed because this ratio is lower.
 In addition, company should try to minimise their cost of goods sold because their gross
margin is getting lower.
(d) Limitations of financial ratios.
In present context, if it is talked about financial ratio analysis then there are some of the
important tools that could have some limitations as well and these are presented underneath:

 Every single year, an organisation specifically make alterations among it's financial
statements at the end, which directly brings modifications among financial ratios as well
(Lee and Isa, 2015). This could effectively be considered as one of the crucial challenge
because, finance department would again have to make alterations among all the ratios.
 Another limitation that came in front i.e. relying over financial ratios, an organisation
could effectively see change among price levels as well. This may take place due to
inflation as well. Including this, it is said that ratios may also be calculated considering
the historical costs (Junkus and Berry, 2015). In between the period, an organisation
could face changed among them as well. Due to this, financial situation of the company
would not deliver correct data in regards to the same.
 Away with this, another limitation that came in front is accounting ratios do not resolve
any financial problems of the company, as they may not have appropriate information
due to rapid change among financial statements of the organisation.
 Lastly, it is also said that there are no standard definitions of the ratios. Therefore, it is
may be possible that considering different formulas for the ratio a company could get
information, but this is not up to the mark considering all the standards (Throsby, 2016).
Portfolio 2.
(a) Advice to management by help of applying various kinds of investment appraisal techniques.
Net Profit Project A Project B
Machine 1 Machine 2
£000’s £000’s
Initial Investment -110 -110
2019 45 10
2020 45 15
2021 45 25
2022 35 55
2023 35 65
2024 25 50
Salvage Value 0 8

230 220
Payback Period
Machine 1
Time (Year)
Cash
Flows
(£000’s) Cumulative Cash flow
0 -110 -110
1 45 -65
2 45 -20
3 45 25
4 35 60
5 35 95
6 25 120
Payback Period = 2.44
Assuming that the cash flows occur evenly, payback period
will be 2 years
Machine 2
Time (Year)
Cash
Flows
(£000’s) Cumulative Cash flow
0 -110 -110
1 10 -100
2 15 -85
3 25 -60
4 55 -5
5 65 60
6 50 110
Payback Period = 4.08
Assuming that the cash flows occur evenly, payback period

will be 4 years
Recommendation- On the basis of above calculated value of payback period of both of projects,
this can be find out that machine 1's invested cost will be recovered in 2.44 years while machine
2's cost will be recovered within 4.08 years. This indicates that machine 1 will be suitable as
compare machine 2.
NPV
Machine 1
Time (Year)
Cash
Flows
(£000’s)
Discount
Factor @
16%
Present
Value
0 -110 1 -110
1 45 0.8621 38.79
2 45 0.7432 33.44
3 45 0.6407 28.83
4 35 0.5523 19.33
5 35 0.4761 16.66
6 25 0.4104 10.26
NPV 37.32
Machine 2
Time (Year)
Cash
Flows
(£000’s)
Discount
Factor @
16%
Present
Value
0 -110 1 -110
1 10 0.8621 8.62
2 15 0.7432 11.15
3 25 0.6407 16.02
4 55 0.5523 30.38
5 65 0.4761 30.95

6 50 0.4104 20.52
8 0.4104 3.28
NPV 10.91
Recommendation- On the basis of above calculated value of net present value of both of projects,
this can be find out that machine 1's net present value is of 37.32 while machine 2's net present
value is of 10.91. This indicates that machine 1 will be suitable as compare machine 2. It is so
because its net present value is higher.
Accounting Rate Of Return
ARR =
Average annual profit
from investment * 100
Average investment
Machine 1
Time (Year)
Cash
Flows
(£000’s)
1 45
2 45
3 45
4 35
5 35
6 25
230
Ave. Annual Profit =
(230-
110)/6 20
Average Investment = 110 / 2 55
ARR =
(20 / 55) *
100 = 36.4%

Machine 2
Time (Year)
Cash
Flows
(£000’s)
1 10
2 15
3 25
4 55
5 65
6 50
8
228
Ave. Annual Profit =
( 228 –
110 ) / 6
19.666666666
7
Average Investment = 110 / 2 55
ARR =
(19.67 /
55) * 100
= 35.8%
Recommendation- On the basis of above calculated value of accounting rate of return of both of
projects, this can be find out that machine 1's ARR is of 36.4% while machine 2's ARR is of
35.8%. This indicates that machine 1 will be suitable as compare machine 2. It is so because its
accounting rate of higher.
So overall senior management of Harris private limited company should opt project A because
all techniques of investment appraisal are presenting positive result for this project.
(b) Limitations of using investment appraisal techniques.

There are different types of techniques in order to assess efficiency of projects. These
techniques have some limitations and benefits (Uchide and Imanishi, 2016). Herein, below
limitation of using investment appraisal techniques are mentioned in such manner:
1. Payback period technique- Under this, estimated time period is calculated which may occur in
order to recover invested amount. It has some limitations like:.
 The key drawback of this technique is that it neglects time value of money which makes
outcome wrong. Due to ignorance of time value of money, this becomes difficult for
business entities to relay its result for long term decision making.
 In addition, this technique does not consider profitability of project. It just focuses on
computation of time period of recovering investment amount (Suzuki, Esaka, Miyamoto
and Magara, 2015).
2. NPV- In this method, current value of a particular project is computed so that further decisions
can be taken by companies. Below, its limitations are mentioned which are as follows:
 Its main drawback is that this can not be applied for making critical evaluation of projects
whose size is different.
 As well as there is no any specific guidelines in order to compute required rate of return
(Harris, 2017). So, these are the key issues which makes this technique ineffective in the
aspect of taking long term decisions.
3. ARR- In this technique, expected rate of return is computed so that further decisions can be
taken out by managers. Its limitations are mentioned below in such manner:
 Similar as payback period technique, under this time value of money is completely
ignored which makes results doubtful and inaccurate.
 As well as this techniques' calculations based on the book values, rather then cash flows
which is wrong (Alkaraan, 2015).
CONCLUSION
On the basis of above project report, it has been concluded that managerial finance is too
crucial in order to accomplish overall activities. The report concludes about comparison of
monetary performance of two companies. In accordance of computed ratios, this can be

concluded that Glaxo Smith Kline plc is better to make invest. As well as from second part of
report, it can be concluded that project A is better in compare to project B.

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/>