FIN 601 - Principles of Finance: Financial Analysis of GlaxoSmithKline

This report provides a comprehensive financial analysis of GlaxoSmithKline (GSK), a major multinational pharmaceutical company. It utilizes ratio analysis, including gross profit margin, net profit margin, current ratio, quick ratio, inventory turnover, accounts receivable turnover, and debt-to-equity ratio, to evaluate GSK's performance over a four-year period (2015-2018). The report compares GSK's financial health with its competitor AstraZeneca (AZN), highlighting key differences in profitability, liquidity, and debt management. Furthermore, trend analysis is employed to assess revenue, cost of sales, operating income, and net profit trends. The analysis reveals GSK's strengths and weaknesses, offering an investor's perspective and concluding with recommendations to enhance future financial performance, such as improving liquidity and managing debt. The report also acknowledges the limitations of ratio and trend analysis, considering factors like inflation and the aggregation of financial data.

Running head: PRINCIPLES OF FINANCE
Principles of Finance
Name of the Student
Name of the University
Author’s Note

1PRINCIPLES OF FINANCE
Table of Contents
Section A.........................................................................................................................................2
Introduction..................................................................................................................................3
Company Introduction and Overview of Financial Performance and Position...........................3
Ratio Analysis..............................................................................................................................4
i) Comparison of Financial Performance over the Past Four Years............................................4
ii) Comparison with the Competitor............................................................................................7
Trend Analysis...........................................................................................................................10
Comment on Business from Investors’ Perspective..................................................................11
Conclusion and Recommendation to Enhance Financial Performance in Future.....................12
Limitation of Analysis and Any Reservation............................................................................13
Conclusion.................................................................................................................................13
Section B........................................................................................................................................15
Problem 2...................................................................................................................................15
References......................................................................................................................................16
Appendix........................................................................................................................................18

2PRINCIPLES OF FINANCE
Section A
Executive Summary
Investors all over the world adopt different method, techniques and tools for analyzing the
financial statements of the business organizations so that they can assess the financial
performance and position of the firms. This helps in making investment decisions. This report
involves in applying ratio analysis and trend analysis for measuring the financial performance of
GlaxoSmithKline Plc. Findings of the report show that the company is a well-performing
company that is suitable for investing in.

3PRINCIPLES OF FINANCE
Introduction
Assessment of the financial performance of the business organizations is a key technique
for analyzing the financial performance and financial position of those companies. Under this
technique, the key financial statements of the firms along with the notes to the financial
statements are taken into account by the investors and other stakeholders for the purpose of
analysis. Some major methods under this are the analysis of ratios, analysis of trends and others
since these methods help in assessing and comparing the companies’ performance with other
competitors and different timeline of the same companies. The aim of this report is the analysis
of the financial performance and position of GlaxoSmithKline Plc (GSK) through the analysis of
relevant ratios and trends. This also compared the financial performance of GSK with one of its
main competitors named AstraZeneca (AZN).
Company Introduction and Overview of Financial Performance and Position
GSK is one of the major multinational pharmaceutical companies of Britain that is
headquartered in Brentford, London. GSK operates in the pharmaceutical biotechnology
consumer goods industry; and the main products of the company are pharmaceuticals, vaccines,
nutritional products, oral healthcare and over the counter medicines. GSK is known as a science-
led global healthcare corporation with the purpose of helping people to do more, feel better and
live longer (gsk.com 2020).
GSK has performed well in terms of revenue as it has continuously increased from 2015
to 2018. Both operating profit and profit after taxation has decreased from 2015 to 2016; but
these have continuously increased from 2016 to 2018. EPS has improved from 2016 to 2018.
Major improvements can be seen in return on capital employed from 2016 to 2018. Total assets

4PRINCIPLES OF FINANCE
have increased from 2015 to 2016, the decreased in 2017 and finally increased in 2018. Total
liabilities have increased from 2015 to 2018. Total equity has decreased from 2015 to 2018
(gsk.com 2020).
Ratio Analysis
i) Comparison of Financial Performance over the Past Four Years
2018 2017 2016 2015 2018
66.77% 65.74% 66.69% 62.99%
13.13%
7.19% 3.81%
35.00%
Profitability Ratios
Gross Profit Margin Net Profit Margin
Gross profit margin of GSK has continuously increased from 2015 to 2016. This is a sign
of improvement for the company. However, net profit margin of GSK had a massive fall from
2015 to 2016; and this keeps improving from 2016 to 2018 in a slow pace (Innocent, Mary and
Matthew 2013).

5PRINCIPLES OF FINANCE
2018 2017 2016 2015
0.75
0.60
0.88
1.24
0.51
0.39
0.61
0.88
Liquidity Ratios
Current Ratio Quick Ratio
Liquidity position of GSK has deteriorated from 2015 to 2018 as both current and quick
ratio is below 1. Current ratio of GSK has fallen from 2015 to 2017 and has slightly improved in
2018. The same trend can be seen in case of quick ratio as this majorly deteriorated from 2015 to
2017; and slightly improved in 2018. This is not a good sign for GSK (Williams and Dobelman
2017).
2018 2017 2016 2015
1.86 1.94 1.89 1.98
5.03 5.02 4.79 4.68
Activity Ratios
Inventory Turnover Accounts Receivable Turnover

6PRINCIPLES OF FINANCE
The inventory turnover ratio of GSK has not been changed much over the course of the
last four years; it has decreased from 2015 to 2016, increased in 2017 and finally decreased in
2018. However, improvement can be seen in the accounts receivable turnover ratio of GSK as
this has continuously increased from 2015 to 2018.
2018 2017 2016 2015
14.81 15.16
10.90
5.02
7
6
4
14
Debt Ratios
Debt to Equity Interest Coverage
The debt to equity ratio of GSK has largely increased from 2015 to 2016 and 2016 to
2017; and has slightly fallen in 2018. Interest coverage ratio registered a large fall from 2015 to
2016; but it has improved from 2016 to 2018. This is because of the increase in total debts of the
company (Dahmen and Rodríguez 2014).

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2018 2017 2016 2015
97% 181% 367% 46%
73.7
31.4 18.8
174.3
Market Ratios
Dividend Payout Ratio Earnings Per Share (EPS)
Dividend payout ratio of GSK registered a huge increase from 2015 to 2016; and then it
decreased from 2016 to 2017 and 2017 to 2018. EPS of the company also decreased largely in
2016 from 2015; but it has increased from 2016 to 2017 and 2017 to 2018. This fluctuation is not
a good sign for the financial performance of GSK.
ii) Comparison with the Competitor
Gross Profit Margin Net Profit Margin
66.77%
13.13%
77.66%
9.28%
Profitability Ratios
GSK AZN

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When compared with AZN, GSK has less gross profit margin in 2018, but GSK has
better net profit margin as compared to AZN. It implies that GSK has increased efficiency in
managing its indirect expenses for generating profit (Kim, Kraft and Ryan 2013).
Current Ratio Quick Ratio
0.75
0.51
0.96
0.78
Liquidity Ratios
GSK AZN
Despite of the fact that both GSK and AZN has liquidity ratios less than 1, AZN has
better liquidity position as it has better current and quick ratio as compared to GSK. This is a key
aspect to consider for the investors.
Inventory Turnover Accounts Receivable Turnover
1.86
5.03
1.67
4.17
Activity Ratios
GSK AZN

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GSK has turned over its inventory more time than AZN as the inventory which indicate
efficient management of inventory by GSK as compared to AZN. Since GSK has better accounts
receivable turnover ratio that AZN, this means GSK has been able in collecting the dues from the
debtors more time than AZN (Delen, Kuzey and Uyar 2013).
Debt to Equity Interest Coverage
15
7
3 2
Debt Ratios
GSK AZN
Higher debt ratio of GSK implies the presence of more debt capital in its capital structure
as compared to AZN. For this reason, interest coverage ratio of GSK is also more than AZN.
This is a negative aspect for GSK.

10PRINCIPLES OF FINANCE
Dividend Payout Ratio Earnings Per Share (EPS)
1.0
73.7
2
170
Market Ratios
GSK AZN
GSK has lower dividend payout ratio than AZN which indicates towards the payment of
less dividend to the shareholders than AZN. EPS of GSK is also less than AZN in 2018 (Kim,
Kraft and Ryan 2013).
Trend Analysis
The result of the trend analysis shows that the revenue of GSK has increased from 2015
to 2018, but the rate of increase in revenue has decreased almost at a double rate from 2015 to
2016, 2016 to 2017 and 2017 to 2018; and this is a sign of worry for the company. Another
worrisome matter is the large increase in cost of sales from 2015 to 2017; 2018 has witnessed a
little drop in cost of sales but the prior large increase cancels out this small fall (Balarabe,
Abdullah and Nawawi 2015). Through gross profit of GSK has increased from 2015 to 2016, but
the growth rate has fallen from 23.42% in 2015-2016 to 3.71% in 2017-2018; and his is mainly
because of the large increase in cost of sales and show increase in sales. Selling and
administrative expenses have increased 2015 to 2018; and research and development related
expenses have decreased in 2018. There is a large fall in the operating income of GSK from 2015

11PRINCIPLES OF FINANCE
to 2018; and the growth rate has also decreased from 2016-2017 to 2017-2018. Finance expenses
have increased from 2015 to 2018. Profit before taxation of GSK has largely decreased from
2015 to 2016, but it has improved from 2016 to 2018. There is a decrease in tax payments
because of the decrease in net income before tax. Most importantly, net profit of GSK has largely
decreased from 2015 to 2018. Trend shows a decrease from 2015 to 2016 and then gradual
improvement in 2017 and 2018 (Harvey 2014).
Comment on Business from Investors’ Perspective
Increase in gross profit margin of GSK means increase in sales and effective
managements of materials and labors. Net profit ratio trend also shows that this ratio of GSK is
improving in the current years and it is a positive sign; and it implies effective management of
direct and indirect costs for increasing profit. Increase in profitability always attracts the
investors. However, GSK has poor liquidity position in the recent years. As per the movements
in current and quick ratio, GSK does not have adequate current and quick assets for paying off
the current business obligations. This is a key negative aspect for investing in GSK. This affects
the company’s ability to pay the short-term loans (Penman 2013).
Inventory turnover of GSK has been stable over the last four years and the result of AZN
shows that this is the average industry standard for GSK. One positive aspect is that accounts
receivable turnover has improved in 2018 that depicts the enhanced efficiency of GSK in
extending credit and collecting the dues from the debtors. However, recent trend in debt to equity
ratio of GSK shows the use of huge debt capital by the company to raise the required capital for
business. This increases the payment of interest which can be seen from the increase in interest
coverage ratio in current years. However, this also indicates the need for more capital of GSK to

12PRINCIPLES OF FINANCE
fund any expansion plan or investment in research and development activities (Garrett and James
III 2013).
Decrease in dividend payout ratio in 2018 implies that GSK has distributed less portion
of net profit to the shareholders. Since the current dividend payout ratio is 97%, this is an
attractive percentage for the shareholders as the company has distributed almost the whole profit
to the shareholders. On the other hand, there has been increase in the EPS of GSK in the recent
years; and increase in EPS indicates higher earnings of GSK along with strong financial position.
This means GSK is reliable for investments (Carraher and Van Auken 2013).
Conclusion and Recommendation to Enhance Financial Performance in Future
The above discussion helps in concluding the fact that GSK is on the way to improve its
financial performance and position over the last two to three years; and this is because GSK has
registered enhanced performance in the areas of profitability, activity, liquidity and market
performance. The presence of high amount of debt may be a concern, but it is normal for the
large companies like GSK to push the debt components to higher percentage without getting into
financial dilemma. High dividend payout ratio and increase in EPS makes GSK suitable for the
investors to invest in. Following are certain recommendations to improve the financial
performance of GSK in future:
1. GSK must ensure quick repayment of its current liabilities with the aim to improve the
liquidity ratios. Short-term overhead expenses like marketing, labor, rents and others
need to be cut back. Another way is to switch short-term debts to long-terms debts for
improving short-term liquidity position. Unproductive assets need to be removed and
GSK needs to negotiate for longer payment terms.

13PRINCIPLES OF FINANCE
2. GSK needs to put more focus on using equity capital for raising the required capital for
different business purposes. This will leads to decrease in debts along with the interest
payments that affect profitability largely. In addition, GSK can also adopt the strategy of
debt restructuring that will decrease interest expenses and monthly payments.
Limitation of Analysis and Any Reservation
Since this whole analysis is based on the outcome of ratio analysis and trend analysis, the
limitations of these techniques affect the analysis. Ratio analysis does not take into consideration
the changes in price level due to inflation. Since the ratios are calculated based on historical
costs, this analysis overlooks the alterations in the level of price between the periods. The same
is applicable for the ratio analysis of GSK as this analysis has done by ignoring the changes in
price level due to inflation. After that, one major disadvantage of the horizontal trend analysis is
that that undertakes the aggregation of the expressed information of financial reports that may
have changed over the time and this can lead to the development of variances to move at the time
to compare the account balances across periods. Therefore, this same limitation is also applicable
in case of the trend analysis of GSK (Edwards Schwab and Shevlin 2015).
Conclusion
The above analysis indicates towards the fact that GSK has registered improved financial
performance in the present years of 2016, 2017 and 2018. The company has performed well in
terms of profitability, activity and market. Though the liquidity position of GSK is not effective,
it is on the way towards increasing. However, GSK has high amount of debts in their capital
structure that makes the business risky, but this may be out of the capital requirements for any
expansion project or other. Comparison with AZN shows that AZN has performed well in certain
aspects as compared to GSK; and GSK has performed well in the other aspects. Therefore, on the

14PRINCIPLES OF FINANCE
basis of the whole discussion, it can be said that GSK is preferable for investments given the
improving financial performance in different aspects like profitability, liquidity and others.
However, the company is required to take into consideration the provided recommendations for
improving its performance in near future.

15PRINCIPLES OF FINANCE
Section B
Problem 2
FV n = PV × (1 + r) n
= $4600 × (1+9%) 3
= $4600 × (1+0.09) 3
= $4600 × (1.09) 3
= $4600 × 1.30
= $5957

16PRINCIPLES OF FINANCE
References
Astrazeneca.com. 2020. AstraZeneca Annual Report and Form 20-F Information 2018. [online]
Available at: https://www.astrazeneca.com/content/dam/az/Investor_Relations/annual-report-
2018/PDF/AstraZeneca_AR_2018.pdf [Accessed 10 Jan. 2020].
Balarabe, M., Abdullah, K. and Nawawi, M., 2015. Long-term trend and seasonal variability of
horizontal visibility in Nigerian troposphere. Atmosphere, 6(10), pp.1462-1486.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by
small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Dahmen, P. and Rodríguez, E., 2014. Financial Literacy and the Success of Small Businesses:
An Observation from a Small Business Development Center. Numeracy: Advancing Education
in Quantitative Literacy, 7(1).
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.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review, 91(3), pp.859-881.
Garrett, S. and James III, R.N., 2013. Financial ratios and perceived household financial
satisfaction. Journal of Financial Therapy, 4(1), p.4.
Gsk.com. 2020. Annual Report 2015. [online] Available at:
https://www.gsk.com/media/4697/gsk-annual-report-2015.pdf [Accessed 10 Jan. 2020].

17PRINCIPLES OF FINANCE
Gsk.com. 2020. Annual Report 2016. [online] Available at:
https://www.gsk.com/media/3609/annual-report-2016.pdf [Accessed 10 Jan. 2020].
Gsk.com. 2020. Annual Report 2017. [online] Available at:
https://www.gsk.com/media/4751/annual-report.pdf [Accessed 10 Jan. 2020].
Gsk.com. 2020. Annual Report 2018. [online] Available at:
https://www.gsk.com/media/5349/annual-report-2018.pdf [Accessed 10 Jan. 2020].
Gsk.com. 2020. About us | GSK . [online] Available at: https://www.gsk.com/en-gb/about-us/
[Accessed 10 Jan. 2020].
Harvey, A., 2014. Trend analysis. Wiley StatsRef: Statistics Reference Online, pp.1-21.
Innocent, E.C., Mary, O.I. and Matthew, O.M., 2013. Financial ratio analysis as a determinant of
profitability in Nigerian pharmaceutical industry. International journal of business and
management, 8(8), p.107.
Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit
risk. Review of Accounting Studies, 18(3), pp.783-823.
Penman, S.H., 2013. Financial statement analysis and security valuation. McGraw-Hill.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.

18PRINCIPLES OF FINANCE
Appendix
1. Trend Analysis
Particulars
201
5
(£m)
201
6
(£m)
201
7
(£m)
201
8
(£m)
% Change
from 2015-
2016
% Change
from 2016-
2017
% Change
from 2017-
2018
Turnover
239
23
278
89
301
86
308
21 16.58% 8.24% 2.10%
Cost of Sales
-
885
3
-
929
0
-
103
42
-
102
41 4.94% 11.32% -0.98%
Gross Profit
150
70
185
99
198
44
205
80 23.42% 6.69% 3.71%
Selling, general and
administration
-
923
2
-
936
6
-
967
2
-
991
5 1.45% 3.27% 2.51%
Research and
development
-
356
0
-
362
8
-
447
6
-
389
3 1.91% 23.37% -13.03%
Royalty income 329 398 356 299 20.97% -10.55% -16.01%
Other operating
income/(expense
771
5
-
340
5
-
196
5
-
158
8 -144.13% -42.29% -19.19%
Operating profit
103
22
259
8
408
7
548
3 -74.83% 57.31% 34.16%
Finance income 104 72 65 81 -30.77% -9.72% 24.62%
Finance expense -757 -736 -734 -798 -2.77% -0.27% 8.72%
Profit on disposal of
interest in associates 843 0 94 3 -100.00% 0.00% -96.81%
Share of after tax profits of
associates and joint
ventures 14 5 13 31 -64.29% 160.00% 138.46%
Profit before taxation
105
26
193
9
352
5
480
0 -81.58% 81.79% 36.17%
Taxation
-
215
4 -877
-
135
6 -754 -59.29% 54.62% -44.40%
Profit after taxation for
the year
837
2
106
2
216
9
404
6 -87.31% 104.24% 86.54%
Profit attributable to non-
controlling interests -50 150 637 423 -400.00% 324.67% -33.59%
Profit attributable to
shareholders
842
2 912
153
2
362
3 -89.17% 67.98% 136.49%

19PRINCIPLES OF FINANCE
837
2
106
2
216
9
404
6 -87.31% 104.24% 86.54%
Basic earnings per share
(pence)
174.
3 18.8 31.4 73.7 -89.21% 67.02% 134.71%
Diluted earnings per share
(pence)
172.
3 18.6 31 72.9 -89.20% 66.67% 135.16%
2. Analysis of Ratios
GSK AZN
Particulars 2018 2017 2016 2015 2018
Sales 30821 30186 27889 23923 22090
Net Profit 4046 2169 1062 8372 2050
Gross Profit 20580 19844 18599 15070 17154
Gross Profit Margin 66.77% 65.74% 66.69% 62.99% 77.66%
Net Profit Margin 13.13% 7.19% 3.81% 35.00% 9.28%
GSK AZN
Particulars 2018 2017 2016 2015 2018
Total Current Assets 16927 15907 16711 16587 15591
Total Current Liabilities 22491 26569 19001 13417 16292
Inventories 5476 5557 5102 4716 2890
Current Ratio 0.75 0.60 0.88 1.24 0.96
Quick Ratio 0.51 0.39 0.61 0.88 0.78
GSK AZN
Particulars 2018 2017 2016 2015 2018
Cost of Sales 10241 10342 9290 8853 4936
Average Inventory 5516.5 5329.5 4909 4473.5 2962.5
Credit Sales 30821 30186 27889 23923 22090
Average Receivables 6126.5 6013 5820.5 5107.5 5291.5
Inventory Turnover 1.86 1.94 1.89 1.98 1.67
Accounts Receivable Turnover 5.03 5.02 4.79 4.68 4.17
GSK AZN
Particulars 2018 2017 2016 2015 2018

20PRINCIPLES OF FINANCE
Total Liabilities 54394 52892 54118 44568 46607
Total Equity 3672 3489 4963 8878 14044
EBIT 5483 4087 2598 10322 3387
Interest Expenses 798 734 736 757 1419
Debt to Equity 14.81 15.16 10.90 5.02 3.32
Interest Coverage 7 6 4 14 2
GSK AZN
Particulars 2018 2017 2016 2015 2018
Total Dividend 3935 3916 3897 3872 3539
Net Income 4046 2169 1062 8372 2050
Dividend Payout Ratio 97% 181% 367% 46% 173%
Earnings Per Share (EPS) 73.7 31.4 18.8 174.3 170