Financial Performance Analysis of Pharmaceutical Companies: A Report

This report provides a detailed financial analysis of three pharmaceutical companies: GlaxoSmithKline, AstraZeneca Plc, and Shire Plc. It begins with an introduction to financial ratio analysis and its significance in assessing industry efficiency and capabilities. Section A focuses on the justification and selection of financial and non-financial ratios, including profitability, operational, and liquidity ratios, to evaluate the companies' performance. The report identifies the best-performing organization for investment and the worst-performing company, offering recommendations for financial improvement. Section B delves into the capital investment decision-making process, exploring investment appraisal methods. The analysis covers key financial ratios, including ROCE, ROA, profit margin, gross margin, net assets turnover, interest cover, collection period, current ratio, liquidity ratio, and gearing ratio. Non-financial ratios, such as profit per employee and costs of employees/operating revenue, are also assessed. The report concludes with a summary of findings and recommendations, offering valuable insights for investors and industry professionals.

ACCOUNTING AND
FINANCE FOR MANAGERS

TABLE OF CONTENTS
INTRODUCTION..............................................................................................................1
SECTION A (QUESTION 1).............................................................................................1
a) Justification and selection of 10 financial and 2 non-financial ratios of 3 industries
................................................................................................................................. 1
b) Identification of best performing organisation in context of making investment. 13
c) Determination of poor performing company and recommending the way to improve
financial performance of business.........................................................................14
SECTION B (QUESTION 2)...........................................................................................14
a) Stating the key stages in Capital Investment Decision making process and the role
of investment appraisal..........................................................................................14
Identifying and explaining the main methods of investment appraisal used in practice
...............................................................................................................................15
CONCLUSION............................................................................................................... 17
REFERENCES...............................................................................................................18
APPENDIX..................................................................................................................... 20
Appendix 1.............................................................................................................20
Appendix 2.............................................................................................................21
Appendix 3.............................................................................................................23

INTRODUCTION
Analysis of efficiency and capabilities in an industry will require proper financial
examination. Implications of ratio analysis technique will be assistive to users of such
information in context with judging the strength of business. The outcomes can be used
in investment decisions as well as internal operational improvements to rise market
value of business. In the present report, there will be discussion based on analysing
financial health of 3 companies pertaining to pharmaceutical industry namely
GlaxoSmithKline, Astrazenenca Plc and Shire Plc. Along with this, identification of poor
and the best performing organisation will be acknowledged as per ranking and relevant
suggestions will be facilitated to professionals of these industries. Further, it will provide
in-depth insight of how investment appraisal tools and techniques aid in financial
decision making.
SECTION A (QUESTION 1)
a) Justification and selection of 10 financial and 2 non-financial ratios of 3 industries
To demonstrate operational efficiency and ability of firm, there are various tasks
and objectives which will address various facts that are required for effective
management. In this context, there has been analysis made on profitability, liquidity and
various non-financial efficiency of 3 pharmaceutical companies.
PROFITABILITY RATIOS
ROCE using Net income (%): This a technique of identifying amount of net
income generated by an industry that will be payable to shareholders in terms of
debentures (Wijethilake, 2017). Thus, it will help in retaining the higher number of
investors associated with firm. This is a ratio which is determined to have effective
financial measurements and demonstration of profitability of an organisation (Limon and
Crozet, 2017). Moreover, these are the returns which have been payable by an
organisation with a motive of analysing its efficiency and operational increment.
1

Figure 1: ROCE using Net income (%)
Interpretation: To analyze profitability of these organizations as per net income
and total capital employed, this ratio will be helpful for analyzing returns obtained by firm
on capital employed. Thus, in this respect, the morality of outcomes determines huge
variations in GlaxoSmithKline and Shire Plc with respect of Astrazenenca which reflects
constant outcomes in each period. Along with this, it can be said that there has been
rise in the ratio of AZ in 2016 as 8.55% to 10.33% which determines that there was
increase in profitability in this period. However, with the impacts of such increment,
there will be rise in value of marketable securities of firm.
ROA using Net income (%):
2

Figure 2: ROA using Net income (%):
Interpretation: In consideration with the above listed analysis, return payable by
these organizations on their assets was measured. It ascertains large number of
changes in operations due to rise in assets of firm with respect to its debts. There has
been increment in capacity of making returns on assets. In analyzing the performance
of all organizations, GSK has higher variations in each year which shows drastic rise
and fall in ratios while Shire Plc has poor returns of assets. It demonstrates that there
has been reduction in ratios over the period. On the other side, AZ has reflected
consistency in performance which leads to have higher ratio in 2016. It was increased
from 4.70% to 5.60% on which it can be said that firm is capable of making proper
returns on their assets.
Profit margin (%)
It is the income of an organisation after making necessary adjustments and
payments of all operating expenses in business (Christ and Burritt, 2017). Thus, this
profit will be used in making payment to dividend holders and in further operational
practices.
3

Figure 3: Profit margin (%)
Interpretation: To evaluate profitability of selected firms, which were analyzed in
those respective years. In this respect, AZ has effective profitability and favorable
outcomes as compared with GSK and Shire Plc. GSK had reduction in the profit margin
in 2016 from 43.37% to 6.85%. Thus, firm has poor performance in the year while in
analyzing AZ’s profitability, there was a favorable reform in this ratio. It had raised in
2016 from 12.10% to 15.08%. Thus, firm has control over its operating expenses more
effectively than other competitors. Administrating each transaction will be helpful to the
entity in terms of developing fruitful gains.
Gross margin (%):
These are the profits which have been generated by an organization over its
sales as well as for adjusting costs of production. It will ensure profitability of entity
based on its expenses incurred in manufacturing process. However, the below listed
graphical presentation will be helpful in reflecting GP margin of respective firms.
4

Figure 4: Gross margin (%)
Interpretation: As per addressing the above listed graph, it reflects GP margin of
GSK, AZ and Shire Plc. These firms have favorable outcomes as they reflect analysis
which is more than 65% in each year. GSK was reflecting consistent margin as they
have managed to perform operations which have brought them suitable gains. Among
these companies, Astrazenenca has the most effective sales and less cost implied over
activities. It reflected the rise in ratio as in 2016, it was at 85.60% which is higher as
compared with other entities.
OPERATIONAL RATIOS
Net assets turnover (x):
5

Figure 5: Net assets turnover
Interpretation: Operating profitability of a firm demonstrates ability to make the
future operations and paying off shareholders of a business. In analysing the net asset
turnover of business, GlaxoSmithKline has comparatively positive outcomes that other
competitors are more capable of having effective net asset. As compared with other
entities, GSK was more efficient in making operating expenses. It increased in the year
2016 from 0.61 to 0.71. Thus, such operational increment will be helpful in meeting
goals at the right time.
Interest cover (x):
6

Figure 6: Interest cover
Interpretation: The above graphical presentation represents changes in results
of interest cover ratio. The interest cover that has been payable by an organization to
shareholders will be effective in making payment to their returns. Shire Plc has huge
reduction in the ratio from 2014 to 2016. On the other side, GSK and AZ had consistent
returns. In 2016, GSK had effective dividend policies which will be helpful in making
payments to shareholders as well as increase in ratios.
Collection period (days):
7

Figure 7: Collection period (days)
Interpretation: As per ascertaining the outcomes, GSK, AZ and Shire Plc have
been analyzed for their efficiency in accounts receivables. Thus, with respect with the
same, AZ is more capable in collecting the receivables. Reduction in ratios of firm
presents that 66 days in 2015 reduced to 39 days in 2016. Thus, lower accounts
receivables reflect less time to recover them.
LIQUIDITY RATIOS
Current ratio (x)
8

Figure 8: Current ratio
Interpretation: Outcome of financial ratio shows fluctuating trend in the current
ratio of all the 3 selected pharmaceutical companies. In the accounting year 2016,
current ratio of GSK and AZ decreased significantly. On the other side, current ratio of
Shire Plc inclined from .61 to .97 at the end of accounting year 2016. In accordance with
the ideal ratio, firms need to maintain 2 current assets in against to 1 obligation.
Referring current liquidity position, it can be presented that all the three firms were failed
to maintain enough assets as per obligations. Hence, such concerned companies need
to focus on maintaining enough assets which in turn can be used for meeting the
obligations on time.
Liquidity ratio (x)
9

Figure 9: Liquidity ratio
Interpretation: The above depicted column graph presents declining pattern in
the quick ratio of GSK, AZ and Shire Plc. In FY 2016, quick ratio of GSK, AZ and Shire
Plc implied for .61, .72 & .51 respectively. On the basis of ideal measure, business units
must have 1 asset which can easily be converted into cash over 2 liabilities. Hence, in
accordance with graphical presentation, liquidity position of such three firms were in line
with ideal measure. Thus, it can be entailed that GSK, AZ and Shire plc is capable to
meet the current obligations from quick assets such as cash, debtors, etc.
Gearing (%):
10