Profitability Analysis of GSK PLC and Zero-Based Budgeting Report

This report provides a comprehensive financial analysis of GSK PLC and its competitor AstraZeneca, focusing on profitability using ratios like return on capital employed, operating profit margin, and earnings per share for 2016 and 2017. It further explores zero-based budgeting (ZBB), discussing its advantages and implementation scenarios. The report also examines the balanced scorecard approach, highlighting its components, strengths, and weaknesses. Finally, it considers critical financial issues in investment decision-making, ranking them by importance, and concludes with recommendations for ensuring business profitability. Desklib provides access to similar solved assignments and study resources for students.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
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Table of Contents
Introduction:....................................................................................................................................3
Company overview of GSK Plc and its competitor, Astrazeneca Plc:............................................3
Part 1: Ratio Analysis......................................................................................................................5
Introduction:................................................................................................................................5
Return on capital employed:........................................................................................................5
Conclusion:................................................................................................................................10
Part 2: Zero-Based Budgeting.......................................................................................................10
Introduction................................................................................................................................10
Advantages of ZBB:..................................................................................................................11
Circumstances under which the Zero based budgeting can be implemented:...............................13
Conclusion.....................................................................................................................................14
Part 3: Balanced Scorecard............................................................................................................15
Introduction................................................................................................................................15
Four essential components of balanced scorecard.....................................................................15
Strength and weakness...............................................................................................................16
Design failure:...........................................................................................................................18
Process failure:...........................................................................................................................18
Conclusion.................................................................................................................................19

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Part 4: Consideration of Financial Issues for undertaking Investment Decision...........................20
Introduction:..............................................................................................................................20
Financial issues according to descending order of weight:.......................................................20
Conclusion:................................................................................................................................23
References:....................................................................................................................................24
Appendix:......................................................................................................................................28

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Introduction:
The first section of the assignment would focus on brief overview of the financial
condition of GSK Plc and its competitor, Astrazeneca Plc, which are two of the leading
healthcare service providers in UK for the periods 2016 and 2017. By evaluating the financial
position of these two organisations, it becomes possible for the different stakeholders in
identifying the strengths and loopholes inherent within the organisations. Secondly, the study
focuses on the “Zero Based Budgeting” system. In this method, the budget is made through
justifying all expenses for each new period. As the name suggests the method starts budgeting
from a “zero base” and each and every function of an organization is analysed based on its need
and cost. Thirdly, the balanced scorecard refers the company’s strategy to identifying the growth
of an outcome. This examines the results through comparing the outcomes. This enables the
management to makes a decision through evaluating the growth of a function. Finally, it would
be evaluated that there are a number of factors to be taken into account before any investment
decision is undertaken. In case of large organisations, the selection of projects is a serious
challenge. This is due to the number of viable alternatives, which might lead to rise in profit
level.
Company overview of GSK Plc and its competitor, Astrazeneca Plc:
GSK Plc is a British pharmaceutical organisation GSK Plc deals with creation, invention,
development, production and marketing of vaccines as well as health-related consumer products
in the international markets (Gsk.com 2019). The organisation has primary listing on the London
Stock Exchange and at present, it is a constituent of FTSE 100 index. At August 2016, GSK Plc
has market capitalisation of £81 million, which is the fourth largest in the London stock
exchange. The top selling products of the organisation in the global market include Advair,

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Flovent, Augmentin, Avodart, Lamcital and Lovaza. The goal of GSK Plc is to become the most
innovative, trusted healthcare and best performing global healthcare organisation. The main
values include focus on the patients, respect, transparency, integrity and others. On the other
hand, the expectations comprise of accountability, courage, teamwork and development. In 2010,
GSK Plc has acquired Laboratorios Pheonix, an Argentine pharmaceutical organisation for $253
million, and UK-based sports nutrition organisation for $256 million and currently it has staff
base of around 95,400.
Astrazeneca Plc is a British-Swedish multinational biopharmaceutical and pharmaceutical
organisation. In 2013, it has shifted its headquarters to Cambridge in UK and it concentrated on
three sites including Cambridge, Maryland and Gaithersburg. It is involved in developing,
discovering and commercialising prescription medicines in the areas of cardiovascular,
oncology, metabolism, autoimmunity and gastroenterology in the healthcare sector with an
employee base of around 64,400 (Astrazeneca.com 2019). In 2010, Astrazeneca Plc has acquired
Novexel Corporation, which has assisted in diversifying its asset base further in the global
market. The organisation has been focusing on science on significant therapy areas along with
accelerating its pipeline. In addition, it has placed additional efforts on transformation of
business through devices, specialty care and biologics. The targeted business development assists
in reinforcement of efforts. Furthermore, the organisation is evolving its culture along with
simplifying its business processes by drawing and retaining the best talent in the market. Hence,
Astrazeneca Plc has focused on these moves for maintaining competitive advantage in the global
market.

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Part 1: Ratio Analysis
Introduction:
The current part would provide a brief overview of the financial condition of GSK Plc
and its competitor, Astrazeneca Plc, which are two of the leading healthcare service providers in
UK for the periods 2016 and 2017. For performing the profitability analysis of the two
companies, three important ratios have been considered that include operating profit margin,
return on capital employed and earnings per share. These ratios would aid in gaining an overview
of the two selected firms in 2016 and 2017.
Return on capital employed:
As indicated by Loughran and McDonald (2016), return on capital employed denotes the
efficacy of a firm to use its capital for generation of profit. Specifically, this ratio assists in
measuring returns accomplished by a firm from capital employed denoted in percent form. The
investors mainly utilise this ratio so that they could ascertain the feasibility of investment within
the concerned firm (Gippel, Smith and Zhu 2015). The ratio for the two organisations is
computed briefly as follows:
Return on Capital Employed = Operating Profit/ (Total Assets – Current Liabilities)
Table 1: Return on capital employed of GSK Plc and Astrazeneca Plc for 2016 and 2017
(Source: Gsk.com 2019: Astrazeneca.com 2019)

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2016 2017 2016 2017
GSK Plc Astrazeneca Plc
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
6.48%
13.71%
10.37%
7.83%
Return on capital employed
Figure 1: Return on capital employed of GSK Plc and Astrazeneca Plc for 2016 and 2017
(Source: Gsk.com 2019: Astrazeneca.com 2019)
The above figure makes it evident that GSK Plc has experienced an increase in return on
capital employed to 13.71% in 2017 from 6.48% in 2016. On the other hand, the trend is
observed to be declining from 10.37% in 2016 to 7.83% in 2017 for Astrazeneca Plc. The
primary reason that the ratio is found to increase for GSK Plc is due to the significant increase in
operating profit with fall in capital employed in 2017. For Astrazeneca Plc, the reason that this
ratio has declined is the generation of lower operating income along with the acquisitions of
Pearl Therapeutics for $569 million and 100% shares of Omthera Pharmaceuticals for $323
million. In addition, there has been acquisition of Almirall Sofotec for $878 million
(Astrazeneca.com 2019). In this context, McLaney and Atrill (2014) remarked that high
investments generate lower return on capital compared to the current business. Therefore, in
terms of return on capital employed, GSK Plc is observed to be in a better position than
Astrazeneca Plc in the UK market.

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Operating profit margin:
In the words of Hoyle, Schaefer and Doupnik (2015), operating profit margin signifies
the proportion of profit made by an organisation after incurring variable costs of production such
as wages and raw materials. Along with this, it denotes the return obtained from standard
operations and it does not consider unique or one-time transactions. The detailed breakdown of
this ratio for the two selected companies is provided as follows:
Operating profit margin = Operating Profit/ Sales Revenue
Table 2: Operating profit margin of GSK Plc and Astrazeneca Plc for 2016 and 2017
(Source: Gsk.com 2019: Astrazeneca.com 2019)
2016 2017 2016 2017
GSK Plc Astrazeneca Plc
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
9.32%
13.54%
21.31%
16.37%
Operating profit margin
Figure 2: Operating profit margin of GSK Plc and Astrazeneca Plc for 2016 and 2017

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(Source: Gsk.com 2019: Astrazeneca.com 2019)
The above figure clearly identifies the rise in operating margin of GSK Plc to 13.54% in
2017 from 9.32% in 2016. On the other hand, the ratio has fallen from 21.31% in 2016 to
16.37% in 2017 for Astrazeneca Plc. The ratio for GSK Plc has increased owing to the change in
management strategy resulting in fall in overall operating expenses over the year. On the other
hand, the reason behind the declining trend for Astrazenca Plc is due to the expenditure related to
growth platforms like research and development expenses. The rise in selling, distribution and
administrative expenses have resulted in downfall of the net operating margin. One such reason
is the denominations in currencies, since cash is converted and held in US dollars (Hillier et al.
2014). Hence, operating income could be affected in US dollars by the exchange rate
movements. However, despite such downfall, the ratio is still found to be higher for Astrazeneca
Plc compared to GSK Plc. Hence, in terms of operating profit ratio, the position of Astrazeneca
Plc is found to be better than GSK Plc in the UK market.
Earnings per share:
Earnings per share, termed as net income per share, are a market prospect or profitability
ratio measuring the amount of profit earned per share of outstanding stock (Cleverley and
Cleverley 2017). Precisely, such earnings could be explained as the amount to be earned by each
share of stock; in case, the total profit is divided into outstanding shares at the end of the year.
Moreover, by calculating earnings per share, the profitability of a firm could be understood
effectively on shareholder basis. Thus, a bigger firm needs to distribute its earnings among
increased shares of stock than a smaller firm. The detailed computation of the ratio for the two
firms is represented in the form of a table and a figure as follows:

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Earnings per share = Net Income/ Number of Outstanding Shares
Table 3: Earnings per share of GSK Plc and Astrazeneca Plc for 2016 and 2017
(Source: Gsk.com 2019: Astrazeneca.com 2019)
2016 2017 2016 2017
GSK Plc Astrazeneca Plc
£-
£0.500
£1.000
£1.500
£2.000
£2.500
£0.314 £0.188
£2.241
£1.749
Earnings per share
Figure 3: Earnings per share of GSK Plc and Astrazeneca Plc for 2016 and 2017
(Source: Gsk.com 2019: Astrazeneca.com 2019)
From the above figure, it is clearly visible that the earnings per share of GSK Plc have
declined to £0.188 in 2017 from £0.314 in 2016 and the trend is similar for Astrazeneca Plc as
well from £2.24 in 2016 to £1.75 in 2017. A higher ratio is found to be suitable in contrast to a
lower ratio, as it signifies more profit level of the company and it has the capability of adding
more profits to the shareholders. In case of both GSK Plc and Astrazeneca Plc, the ratio has

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declined from 2016 to 2017; however, the position is still found to be better for Astrazeneca Plc
in the UK market.
Conclusion:
The above discussion clearly makes it evident that for carrying out the profitability
evaluation of GSK Plc and Astrazeneca Plc, operating profit ratio, earnings per share and return
on capital employed are taken into account. The performance of Astrazeneca Plc is found to be
better than GSK Plc in terms of earnings per share and operating profit ratio, while GSK Plc is
enjoying competitive edge over Astrazeneca Plc in terms of return on capital employed.
However, the trend is declining for Astrazeneca Plc, which makes it necessary for the
management of the organisation to undertake necessary steps for ensuring business profitability
in future.
Part 2: Zero-Based Budgeting
Introduction
This segment of the study focuses on the “Zero Based Budgeting” system. In this method
the budget is done through justifying all expenses for each new period. As the name suggests the
method starts budgeting from a “zero base” and each and every function of an organization is
analysed based on its need and cost. Then the budgets are being built based on what is needed for
the upcoming period regardless the fact that expects the budget can either be higher or lower than
of previous period. Further, the segment compares the benefits and drawbacks of the ZBB
system and lastly understanding the importance of this budgeting system the circumstances at
which the ZBB system can be implemented has been explained below.

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Advantages of ZBB:
The benefit of using that method into the accounting system has been explained below:
Accuracy:
This method of budgeting system provides accuracy in identifying the future budget, as
the ZBB makes a detailed overview on the each sector of the cash flow and calculates the
operational expenses of each sector (Brusca et al., 2016). This helps in reducing cost and brings
cost efficiency into the business operation, as this gives a clear overview of expenses that are not
assumed rather practically evaluated.
Efficiency:
The budgeting system achieves efficiency through identifying the exact fund resource
and each operational expense has been identified based on the real figure rather than focusing on
the assumptions (Langfield-Smith et al. 2017).
Justification of operating expenses:
This process forces managers to justify all operating expenses and identifies the area of
revenue that the company is generating (Becker, Jagalla and Skærbæk 2014).
Reducing the unnecessary activities:
With the help of this measure, it is possible to eliminate the unnecessary activities from
the budgeting system. This method helps to identify the opportunities and more cost effective
way of achieving things through removing all unproductive activities and unnecessary functions
into the business.