Financial Accounting for Managerial Decision Making: GSK PLC Analysis

This report provides an analysis of EBIT (Earnings Before Interest and Tax) and EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) for Glaxo Smithkline PLC (GSK PLC). The introduction highlights the importance of investment valuation and the use of EBIT and EBITDA. The report computes and interprets these ratios for GSK, discussing their significance in financial analysis. It evaluates expert statements on revenue recognition and depreciation, concluding that both EBIT and EBITDA are crucial metrics for investors, reflecting a firm's earnings and expense control. The appendix includes tables showing EBIT and EBITDA margins, and relevant financial data for 2015-2017. The report also explores the usefulness of EBITDA, emphasizing its importance in assessing a company's performance and its impact on profitability. The evaluation of statements highlights how new revenue recognition standards assist stakeholders and how accurate depreciation practices produce accurate asset valuation. The analysis concludes with a summary of the findings and their implications for investors.

FINANCIAL ACCOUNTING FOR
MANAGERIAL DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
(1).....................................................................................................................................................1
(2) Usefulness of EBITDA for financial analysis............................................................................2
(3).....................................................................................................................................................3
(a) Evaluation of statement “The new revenue recognition standard requires companies to
break down their activities into obligations and this drives the recognition model”..................3
(b) Evaluation of statement “Depreciation, applied systematically, produces an accurate asset
valuation”....................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4
APPENDIX....................................................................................................................................................5
Table 1EBIT margin........................................................................................................................5
Table 2EBITDA margin..................................................................................................................5

INTRODUCTION
Investment matter a lot for any company whether it is made in any company or financial
security. Before making investment in any company it is very important to consider number of
factors. Hence, majority of investors make use of EBIT and EBITDA for investment valuation.
In the present research study, EBIT and EBITDA ratio of GSK are computed and their results are
interpreted. Apart from this, detail discussion is carried out on earnings before interest and tax
and earning before interest, tax, depreciation and amortization. In middle part of the report
statement that were given by the experts in the conference are evaluated and comments are made
on same. At end conclusion is prepared and, in this way, entire research work is carried out
(1)
EBIT and EBITDAEBIT stands for the earnings before income and tax and EBITDA stands
for earnings before income and tax as well as depreciation. EBIT is also known as operating
profit of the business which is computed by subtracting all operating expenses from the gross
profit. Operating expenses are those expenses are those expenses which are made on daily basis
as usual by the business firm. EBIT or earnings before interest and tax have due importance for
the firm because it reflects extent to which firm have control on its direct and indirect expenses
in the business (Bouwens, De Kok and Verriest., 2019. If earnings before interest and tax are
low then it means that firm is not able to control its expense or its business reach at saturation
point and due to this reason revenue is low in the business. In such kind of situation investment
must not be made in any company. This is because if earning before interest and tax is already
low then in that case due to tax payment and interest payments profit will reduce further which is
not good for the firm. Hence, firm with low earning before intertest and tax are not considered
good from the investment point of view. On other hand, there is another term EBITDA which is
also very common and have due importance for the firm. In calculation of earnings before
interest, tax and depreciation interest, tax and depreciation are taken into account in order to
compute earning amount (Rodano and Sette, 2019). There is difference between earning before
interest and tax (EBIT) and earnings before interest and tax as well as depreciation (EBITDA). In
calculation of EBIT only interest and tax amount are taken in to account but in case of EBITDA
both interest, tax and depreciation amount is considered. Thus, it can be said that earnings before
interest, tax and depreciation as well as amortization give broader picture of earning then
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earnings before interest and tax (EBIT). Depreciation is considered as non-cash expenditure
because it is not expense that is made in cash in the business. With passage of time value of the
asset decline and due to this reason is value decrease. Value by which asset value reduce is
considered as depreciation. It is considered as expense because due to it firm have to make
expenditure to buy new machine or to repair it if not working. Machine need to be repair because
its value decrease and not able to work efficiently (Pongrangga and Kurniawati, 2020). Hence,
depreciation is considered as expense and due to this reason, it is also very important for one to
consider EBIT and EBITDA while evaluating company earning.
It can be seen from the table that is given in the appendix that EBIT margin in the year
2015 was 0.36% which decline to 0.80% in the year 2016 but further this percentage increased to
2.59% in the year 2017. Hence, it can be said that there is consistency in the GSK performance.
On other hand, in case of EBITDA Margin it can be seen that EBIT Margin value was 53% in
the year 2015 and it reduce to 17% in the year 2016. Further in the year 2017 EBIT Margin value
was 24%. So, it can be seen that EBITDA margin also fluctuate consistently from year 2015 to
2016 it declines sharply which is a matter of concern for the firm. Main reason behind sharp
decline in the EBITDA Margin is that firm earn less profit on the investment amount. Thus, GSK
is not right for investment because its business is fluctuating at rapid pace.
In the calculation of EBITDA profit on disposal of interests in associates is taken into
account because it is non-recurring in nature and results due to business operations.
(2) Usefulness of EBITDA for financial analysis
EBITDA which is also known earning before interest, tax and depreciation as well as
amortization have a very high importance for the firm because it reflects the overall performance
of the firm. In calculation process interest, tax and depreciation as well as amortization is taken
into account. EBITDA value if is very low then it means that operating expenses burden is very
high on the business firm ( Pinto, 2020). By looking at the value of the EBITDA one can easily
estimate likely impact of tax, interest and depreciation and amortization on the firm profitability.
Overall, it can be said that through income statement one comes to know about the company
performance but through EBITDA vale when become able to more accurately track company
performance.
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(3)
(a) Evaluation of statement “The new revenue recognition standard requires companies to break
down their activities into obligations and this drives the recognition model”
Yes, follow up of standard will assist stakeholders in knowing revenue that is earned from
multiple sources. Through relevant information one come to know about stream through which
higher amount of profit is earned (du Jardin, Veganzones and Séverin, 2019). Thus, it can be said
that investors in better way get information about reason in terms of revenue that is responsible
for low EBITDA.
(b) Evaluation of statement “Depreciation, applied systematically, produces an accurate asset
valuation”
It is true that depreciation is if accurately applied on the assets then their accurate value can
be estimated in proper manner. It is well known fact that every year firm charge depreciation on
the assets and identify their value but sometimes asset value decreases more than its value that is
estimated by the company then in such kind of cases business firm usually do impairment of
assets and identify their actual value. Thus, it is rightly said that depreciation, applied
systematically then in that case accurate asset valuation can be done by the business firm. It can
be said that there is huge importance of the depreciation as a tool that is used in the asset
valuation (Sharma, 2019). Fixed rate of depreciation is charged every year on the assets and
sometimes value decline more than percentage considered for depreciation. Hence, revaluation
of assets must also be done so as to estimate value of the asset accurately and in proper manner.
CONCLUSION
On the basis of above discussion, it is concluded that there is significant importance of
the EBIT and EBITDA metric for the investors. This is because both these tools indicate the
earning of the firm and firm ability to control expenses in the business. Both these tools also
reflect extent to which interest and tax have impact on the firm performance. Thus, it is very
important for the investor to make use of both these metrics to evaluate firm financials.
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REFERENCES
Books and Journals
Bouwens, J., De Kok, T. and Verriest, A., 2019. The prevalence and validity of EBITDA as a
performance measure. Comptabilité-Contrôle-Audit. 25(1). pp.55-105.
du Jardin, P., Veganzones, D. and Séverin, E., 2019. Forecasting corporate bankruptcy using
accrual-based models. Computational Economics. 54(1). pp.7-43.
Pinto, J.E., 2020. Equity asset valuation. John Wiley & Sons.
Pongrangga, G.L.S. and Kurniawati, A.D., 2020. The Effect of Earnings Volatility on Borrowers'
Cost of Debt: Evidence from Indonesia. Media Ekonomi dan Manajemen. 35(1). pp.19-33.
Rodano, G. and Sette, E., 2019. Zombie firms in Italy: a critical assessment. Bank of Italy
Occasional Paper. (483).
Sharma, M., 2019. Variant-Triggered Multiple-Based Probabilistic Valuation Model (VTMP) for
Private Equity Investments. The Journal of Private Equity. 22(2). pp.66-68.
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APPENDIX
Table 1EBIT margin
2015 2016 2017
Total sales 23923 27889 30176
COGS 8853 9290 10342
Operating
expenses 12792 16399 16113
Depreciation 892 978 988
Impairment 563 202 1017
Amortization 738 796 934
EBIT 85 224 782
Margin 0.36% 0.80% 2.59%
Table 2EBITDA margin
2015 2016 2017
Net profit 8372 1062 2169
Interest 757 736 734
Tax 2154 877 1356
Depreciation 892 978 988
Impairment 563 202 1017
Amortization 738 796 934
Profit on disposal of interest in
associates 843 0 94
EBITDA 12633 4651 7104
Total sales 23923 27889 30176
EBITDA Margin 53% 17% 24%
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Table 3EBITDA
2015 2016 2017
Net profit 8372 1062 2169
Interest 757 736 734
Tax 2154 877 1356
Depreciation 892 978 988
Impairment 563 202 1017
Amortization 738 796 934
Profit on disposal of interest in
associates 843 0 94
EBITDA 12633 4651 7104
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Table 4EBITDA
2015 2016 2017
Net profit 8372 1062 2169
Interest 757 736 734
Tax 2154 877 1356
Depreciation 892 978 988
Impairment 563 202 1017
Amortization 738 796 934
EBITDA 13476 4651 7198
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