Ratio Analysis of Shire Plc: Accounting and Finance
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This article provides a detailed analysis of the financial ratios of Shire Plc, a biopharmaceutical company. The article covers profitability ratios, liquidity ratios, and gearing ratios. The analysis is useful for investors, creditors, and management.
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Running head: ACCOUNTING AND FINANCE Accounting and finance Name of the student Name of the university Student ID Author note
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1ACCOUNTING AND FINANCE Table of Contents 1.0Introduction.....................................................................................................................2 2.0Ratio analysis..................................................................................................................2 2.1 Advantages of ratio analysis............................................................................................2 2.2 Limitations of ratio analysis.............................................................................................2 3.0 Profitability ratios.................................................................................................................3 3.1 Gross profit margin..........................................................................................................3 3.2 Operating profit margin....................................................................................................4 3.3 Return on capital employed.............................................................................................4 4.0 Liquidity ratio.......................................................................................................................5 4.1 Current ratio.....................................................................................................................5 4.2 Acid test or liquid ratio....................................................................................................5 5.0 Gearing ratio.........................................................................................................................6 5.1 Gearing ratio.....................................................................................................................6 5.2 Interest coverage ratio......................................................................................................7 6.0 Conclusion............................................................................................................................7 7.0 References............................................................................................................................8 8.0 Appendix..............................................................................................................................9
2ACCOUNTING AND FINANCE 1.0Introduction Shire Plc, specialized in biopharmaceutical products, is registered in Jersy and have it’s headquarter in Irish. Shire is considered as the champion for the people who are struggling with the rare diseases all over the world. The main purpose of the company is enabling the people with the life-altering circumstances for leading a better life. The innovative therapies delivered by the company help to treat the life threatening and rare kind of diseases. The company’s portfolio for the specialist therapies involves the products those are available over more than 100 countries all over the world (Shirepharmaceuticals.co.uk 2018). 2.0Ratio analysis Ratio analysis is the quantitative analysis for the information available through the financial statement of the company. It is used for analysing different aspects of the financial and operating performance of the company that includes profitability, solvency, liquidity and efficiency (Palepu, Healy and Peek 2013). 2.1 Advantages of ratio analysis It is useful tool for measuring the financial health of the company and assists the management to analyse the financial performances of the company. It assists the investors and creditors to decide on matters like whether it is fruitful to invest in the company or whether to provide credit to the firm (Zack 2013). The analysis is useful for the purpose of benchmarking and comparing the operation result of the company with its peers in the industry.
3ACCOUNTING AND FINANCE 2.2 Limitations of ratio analysis ï‚·The computation of ratios will be correct if only the data based on which the calculations ate made are correct ï‚·Regular fluctuations in the level of price significantly affect the comparison or validity of the ratios computed for various periods and therefore the comparisons become difficult. ï‚·Different organization use different techniques for accounting and hence, the validity of peer comparison get affected significantly. 3.0 Profitability ratios 2017201620152014 0 10 20 30 40 50 60 70 80 90 Profitability ratio Gross profit margin Operating profit margin Return on capital employed Ratio2017201620152014 Profitability Ratio Gross profit margin67.4764.9484.1183.20 Operating profit margin16.998.8523.2729.12 Return on capital employed3.621.448.5512.46
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4ACCOUNTING AND FINANCE 3.1 Gross profit margin It is the profitability ratio that computes the percentage of the sales revenue that exceeds cost of sales. To be more specific, it measures the efficiency of the company with respect to usages of the labours and materials for producing the selling the products to generate profits. It has been observed that the gross profit margin of the company has been significantly reduced over the years from 2015 to 2016. However, the company was able to increase the gross profit margin from 64.94% to 67.47% over the years from 2016 to 2017. 3.2 Operating profit margin It is the profit margin of the company that is available to the company before deducting the interest and tax expenses. Looking into the above presented calculation it has been identified that operating profit margin of the company has been significantly reduced over the years from 2015 to 2016. However, the company was able to increase the operating profit margin from 8.85% to 16.99% over the years from 2016 to 2017. 3.3 Return on capital employed It is the profitability ratio and expressed in percentage form. It is calculated through dividing net income before tax and interest by the employed capital. It further, measures success of the business for generating the satisfactory profit on the invested capital. It can be observed from the calculation that the return on employed capital for the company is in decreasing trend till the year 2016, however, it was able to increase the ratio to 3.62% in the year 2017. Therefore, the overall profitability ratio of the company for all the years from 2014 to 2017 through not stable, it is strong for long – term sustainability.
5ACCOUNTING AND FINANCE 4.0 Liquidity ratio 2017201620152014 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 Liquidity ratio Current ratio Acid test ratio Ratio2017201620152014 Liquidity ratios Current ratio0.970.970.611.72 Acid test ratio0.520.490.431.52 4.1 Current ratio Current ratio is used for measuring the efficiency of the company to meet its current liabilities with the available short term assets. It is used as a measure to analyse the liquidity position of the company (Delen, Kuzey and Uyar 2013)It can be identified from the calculation that current ratio of the company significantly fell from 1.72 to 0.61 over the year from 2014 to 2015. However, it was able to increase the ratio to 0.97 for the year 2016 and 2017. 4.2 Acid test or liquid ratio It shows the efficiency of the company with regard to the fact that how quickly the company can transform the assets into cash for paying off the current liabilities (Babalola and Abiola 2013). The ratio also reveals the quick asset level of the company as compared to the current liabilities. Looking into the quick ratio calculation of the company it is observed that
6ACCOUNTING AND FINANCE the quick ratio significantly fell from 1.52 to 0.43 over the year from 2014 to 2015. However, it was able to increase the ratio for the year 2016 and 2017. Therefore, the overall liquidity position of the company is in improving trend for the years 2016 and 2017 as compared to the year 2014. 5.0 Gearing ratio 2017201620152014 0.00 10.00 20.00 30.00 40.00 50.00 60.00 Gearing ratio Gearing ratios Interest coverage ratio Ratio2017201620152014 Gearing ratios Gearing ratios39.5851.1823.8318.35 Interest coverage ratio4.242.0534.1255.13 5.1 Gearing ratio It is the general segregation that describes the financial ratio comparing the owner’s equity to the borrowed funds of the company. Generally the gearing ratio of 50% or lower is considered healthy for a company (Jarrow 2013). Though the gearing ratio of the company is in increasing trend till the year 2016, the company was able to reduce it from 51.18% to 39.58% over the years from 2016 to 2017.
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7ACCOUNTING AND FINANCE 5.2 Interest coverage ratio It measures the company’s ability to meet the interest expenses from the operating income available with it. If the ratio is 2.5 or more, it is considered as efficient (Acheampong, Agalega and Shibu 2014). Though the interest coverage ratio of the company is significantly in decreasing trend till the year 2016, the company was able to increasing it from 2.05 times to 4.24 times over the years from 2016 to 2017. 6.0 Conclusion From the above discussions regarding the performance of last 4 years it is concluded that if the profitability area is analysed, the company has higher gross profit margin over all the past years. However, the operating profit margin and return on capital employed is significantly fell during 2015 but the company was able to improve those areas in 2017. On the other hand the liquidity ratios and gearing ratios are revealing that the though the position for the year 2014 is considerably bad, however during the year 2017 the company was able to improve its position. However, to further improve the ratio the company shall raise further borrowing through debt-equity mix and make payment for the short term dues.
8ACCOUNTING AND FINANCE 7.0 References Acheampong, P., Agalega, E. and Shibu, A.K., 2014. The effect of financial leverage and market size on stock returns on the Ghana Stock Exchange: evidence from selected stocks in the manufacturing sector.International Journal of Financial Research,5(1), p.125. Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making.International journal of management sciences,1(4), pp.132-137. Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach.Expert Systems with Applications,40(10), pp.3970-3983. Jarrow,R.,2013.Aleverageratioruleforcapitaladequacy.JournalofBanking& Finance,37(3), pp.973-976. Palepu, K.G., Healy, P.M. and Peek, E., 2013.Business analysis and valuation: IFRS edition. Cengage Learning. Shirepharmaceuticals.co.uk 2018. Shire: The Leading Global Biotech Focusing on Rare Diseases. [online] Available at: https://www.shirepharmaceuticals.co.uk/ [Accessed 3 Apr. 2018]. Zack, G.M., 2013. Financial Statement Analysis.Financial Statement Fraud: Strategies for Detection and Investigation, pp.209-213.