Ratio Analysis of Square Pharmaceuticals Ltd

BRIEF HISTORY
Square Pharmaceuticals Ltd. is a renowned company in Bangladesh. It is a flagship company in the pharmaceutical industry which has reached this mountain of success by fighting many potential competitors like BEXIMCO Pharma, INCEPTA, ACME, RENETA, OPSONIN, SK+F, SANOFI-AVENTIS etc. It initially started as a Partnership in 1958. It was incorporated as a Private Ltd. Company in 1964 and converted into Public Limited Company in 1991. Its initial public offering started in Dhaka and Chittagong stock exchange simultaneously in 1995. Their mission is to produce and provide quality & innovative healthcare relief for people, maintain stringently ethical standard in business operation also ensuring benefit to the shareholders, stakeholders and the society at large. RATIO ANALYSIS Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: 1. Liquidity ratios 2. Asset management ratios 3. Debt management ratios 4. Profitability ratios 5. Market value ratios LIQUIDITY RATIOS Liquidity ratios are the first ones to come in the picture. These ratios actually show the relationship of a firms cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are: 1. Current ratio 2. Quick/ Acid Test ratio. 1. Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current

liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses (principally wages). Current Ratio=Current Assets/Current Liabilities Following table shows the Current ratios of Square Pharmaceuticals in different years: Year Current ratio 2005-06 1.78 times 2004-05 1.66 times 2003-04 1.62 times

Analysis of this ratio speaks in a same language as current ratio. In 2003-04, the quick ratio was .98 times which increased very silently just like current ratio and resulted as 1.19 times in 2005-06. Both of these ratios portray the idea that square has so far an almost constant liquidity position which is good at some point, but at the same token it can be said that they have not been able to improve them-selves. Standing at this point, we can make an assumption that may be their profit margin was not so high that they can make some investments paying off the liabilities that could result in an increase in assets and decrease in liabilities to make the liquidity position far better. This assumption can only be proved as we go on analyzing their financial statement and calculate the profitability ratios. FINANCIAL LEVERAGE (DEBT) RATIOS Debt to Equity ratio: The ratio of total debt to total shareholders equity is a debt ratio, that tells us about how much the creditors provide of financing for each $1 being provided by shareholders. Debt ratio = Total Debt / Shareholders equity Following table shows the Debt ratios of Square Pharmaceuticals in different years: Year Debt ratio 2005-06 1.47 2004-05 1.61 2003-04

Debt to Asset ratio: The ratio of total debt to total assets, generally called the debt ratio, measures the percentage of funds provided by the creditors.

Debt ratio = Total Debt / Total Assets Following table shows the Debt ratios of Square Pharmaceuticals in different years: Year Debt ratio 2005-06 31% 2004-05 46% 2003-04 37%

Calculating the debt ratio, we came to see that this company is not that highly leveraged one. In 2003-04, it was 37%, in 2004-05, it suddenly went up to 46%, and than again in 2005-06, it climbed down to 31%. A little bit of fluctuation is seen here in debt management, which is actually nothing but their strategic move. The reason behind such fluctuation is better understandable form the balance sheet. In 2004-05, the company has issued long-term loan, which happens to be BTD 389,193,080 that is way too high than the previous years loan, which is BDT 36,544,158 that actually increased the total debt thus resulting in a high debt ratio. Again, in the following year they paid off the loans and have not made any huge financing from outside which decreased. COVERAGE RATIO Times-Interest-Earned (TIE) ratio: This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest cost. TIE ratio = EBIT / Interest Charges Following table shows the times-interest-earned (TIE) ratios of Square Pharmaceuticals in different years: Year TIE ratio 2005-06 11.30 times 2004-05 14.92 times 2003-04 11.12 times

We can see from this ratio analysis that, this company has covered their interest expenses 11 times in 2003-04, 15 times in 2004-05 and 11 times in 2005-06. It means they have performed pretty much same in 2003-04 and 2005-06 but has taken a different look in 2004-05. As in 2004-05 they issued a little high number of long-term loans and does not have good liquidity position, their EBIT became high thus making TIE a little high as well. ACTIVITY RATIOS Receivables Turnover Ratio: This Receivables Turnover Ratio provides insight into the quality of the firms receivables and how successful the firm is in its collections.

Receivable Turnover = Annual Net Credit Sales/Receivables Following table shows the Receivables Turnover(RT) ratios of Square Pharmaceuticals in different years: Year RT ratio 2005-06 12.45 2004-05 31.24 2003-04

NB: The Raito is calculateds basing on Total Annual sales. Average Collection Period: Average Collection Period(days) = Days in the year/Receivable Turnover Year RTD 2005-06 11.68 2004-05 29.32 2003-04

Inventory Turnover Ratio: To help determine how effectively the firm is managing inventory and also to gain an indication of the liquidity of inventory this ratio is calculated. Inventory Turnover Ratio(IT) = Costs of Goods sold/Inventory