1.

INTRODUCTION
1.1 Pharmaceutical Industry in Bangladesh
Following the Drug (Control) Ordinance of 1982, some of the local pharmaceutical companies improved range and quality of their products considerably. The national companies account for more than 65% of the pharmaceutical business in Bangladesh. However, among the top 20 companies of Bangladesh 6 are multinationals. Almost all the life saving imported products and new innovative molecules are channeled into and marketed in Bangladesh through these companies. Multinational and large national companies generally follow current good manufacturing practices (cGMP) including rigorous quality control of their products. The Drug Act of 1940 and its rules formed the basis of the country's drug legislation. Unani, ayurvedic, homeopathic and biochemic medicines were exempted from control under the legislation. The pharmaceutical industry was dominated by the foreign companies at that time. Even in the allopathic market there were extemporaneous preparations dispensed from retail pharmacies.

The pharmaceutical industry, however, like all other sectors in Bangladesh, was much neglected during Pakistan regime. Most multinational companies had their production facilities in West Pakistan. With the emergence of Bangladesh in 1971, the country inherited a poor base of pharmaceutical industry. For several years after liberation, the government could not increase budgetary allocations for the health sector. Millions of people had little access to essential life saving medicines. With the promulgation of the Drug (Control) Ordinance of 1982 many medicinal products considered harmful, useless or unnecessary got removed from the market allowing availability of essential drugs to increase at all levels of the healthcare system. Increased competition helped maintain prices of selected essential drugs at the minimum and affordable level. In 1981, there were 166 licensed pharmaceutical manufacturers in the country, but local production was dominated by eight multinational companies (MNCs) which manufactured about 75% of the products. There were 25 medium sized local companies which manufactured 15% of the

products and the remaining 10% were produced by other 133 small local companies. All these companies were mainly engaged in formulation out of imported raw materials involving an expenditure of Tk 600 million in foreign exchange. In spite of having 166 local pharmaceutical production units, the country had to spend nearly Tk 300 million on importing finished medicinal products. A positive impact of the Drug (Control) Ordinance of 1982 was that the limited available foreign currency was exclusively utilised for import of pharmaceutical raw materials and finished drugs, which are not produced in the country. The value of locally produced medicines rose from Tk 1.1 billion in 1981 to Tk 16.9 billion in 1999. At present, 95% of the total demand of medicinal products is met by local production. Local companies (LCs) increased their share from 25% to 70% on total annual production between 1981 and 2000. In 2000, there were 210 licensed allopathic drug-manufacturing units in the country, out of which only 173 were on active production; others were either closed down on their own or suspended by the licensing authority for drugs due to non compliance to GMP or drug laws. They manufactured about 5,600 brands of medicines in different dosage forms. There were, however, 1,495 wholesale drug license holders and about 37,700 retail drug license holders in Bangladesh. Anti-infective is the largest therapeutic class of locally produced medicinal products, distantly followed by antacids and anti-ulcerants. Other significant therapeutic classes include non-steroidal anti-

inflammatory drug (NSAID), vitamins, central nervous system (CNS) and respiratory products. A most remarkable progress the local industry has made in recent time is the phenomenal increase in the local production of basic chemicals. There are now 13 drug manufacturing units, which also manufacture certain basic materials. These include Paracetamol, Ampicillin Trihydrate, Amoxycillin Trihydrate, Diclofenac Sodium, Aluminium Hydroxide Dried Gel, Dextrose Monohydrate, Hard Gelatin capsule shell, Chloroquine Phosphate, Propranolol Hydrochloride, Benzoyl Metronidazole,

Sodium Stibogluconate (Stibatin) and Pyrantel Pamoate. However, most of these are confined to the last stage of synthesis. There are three public sector drug manufacturing units. Two of them are the Dhaka and Bogra units of Essential Drug Company Ltd. (EDCL), which is functioning as a public limited company under the Ministry of Health and Family Welfare. EDCL produced medicines worth Tk 964 million in 2000. There are separate vaccines and large volume IV fluids production units under the Institute of Public Health (IPH). The productions of both EDCL and IPH are mostly used in government hospitals and institutions. In 2000, there were 261 unani, 161 ayurvedic, 76 homeopathic and biochemic licensed manufacturing units. They produced medicines worth Tk 1.2 billion in 2000. One of the major positive impacts of Drug (Control) Ordinance is the rapid development of local manufacturing capability. Almost all types of possible dosage forms include tablets, capsules, oral and external liquids (solutions, suspensions, emulsions), ointments, creams, injections (small volume ampoules/dryfill vials/suspensions and large volume IV fluids), and aerosol inhalers are now produced in the country. In recent years, the country has achieved self-sufficiency in large volume parenterals, some quantities of which are also exported to other countries. The development of local manufacturing capability helped contain dependence on the import of pharmaceutical products (raw material and finished product) around pre1982 level. Under the Drug (Control) Ordinance government fixes the maximum retail prices (MRP) of 117 essential drug chemical substances. Drugs other than these essential ones are priced through a system of indicative prices. This rule applies on the locally manufactured products only. For imported finished products, a fixed percentage of markup is applied on the C&F price to arrive at the MRP, regardless of whether they are within the list of essential 117 molecules or not. It is interesting to note that, even with withdrawal of price control from many products, prices have not shot up; healthy competition has been keeping the prices within affordable levels.

Physical distribution of pharmaceuticals in Bangladesh has evolved in a unique way. Unlike other countries Bangladesh pharmaceutical industry is more retail oriented and bulk of distribution is done by the companies themselves. Pharmaceutical companies distribute their products from their own warehouses located in different parts of the country, as no professional distribution house is available. Wholesalers play a limited role in this regard since companies supply goods to both retailers and wholesalers. Export of pharmaceutical products is still in an infant stage, although a number of private pharmaceutical companies have already entered the export market with their basic materials and finished products. They export their products to Vietnam, Singapore, Myanmar, Bhutan, Nepal, Sri Lanka, Pakistan, Yemen, Oman, Thailand, and some countries of Central Asia and Africa. The primary responsibility for drug quality control lies with the

manufacturers. However, the government's drug testing laboratories (DTL) and the Directorate of Drug Administration (DDA) have the monitoring and supervising role. There are two government drug testing laboratories. DTL at Dhaka is in the Institute of Public Health and the regional DTL at Chittagong is under DDA. Drug administration is responsible for registration of drugs for marketing in Bangladeshand for inspection of premises and licensing. With its present set up and inadequate strength, DDA often finds it difficult to carry out its very large volume of assigned work. The national drug policy and the regulatory control policies are yet to achieve best results for a healthy growth of the pharmaceutical industry. Because of the limited capacity of the government's drug testing laboratories, the quality of products manufactured locally cannot be uniformly ensured. Restrictions on patent rights discourage foreign investors to come up actively in the pharmaceutical market in Bangladesh. Introduction of new research molecules is difficult due to slow registration process and restrictions on patent protection. Although the fixed mark-up system of pricing helped keep the prices of pharmaceutical products low, this made it difficult to cover costs of marketing and distribution. The fixed mark-up system also discourages some companies to invest for cGMP and assurance of high

quality

production.

Some

important

therapeutic

classes

of

the

pharmaceutical market (antacids and oral vitamins) are only open to the local companies even after 20 years of the drug ordinance. This policy is discriminatory and also contrary to the announced investment policy of the government. The annual per capita drug consumption in Bangladesh is one of the lowest in the world. However, the industry has been a key contributor to the Bangladesh economy since independence. With the development of healthcare infrastructure and increase of health awareness and the purchasing capacity of people, this industry is expected to grow at a higher rate in future. Healthy growth is likely to encourage the pharmaceutical companies to introduce newer drugs and newer research products, while at the same time maintaining a healthy competitiveness in respect of the most essential drugs. In Bangladesh Pharmaceutical sector is one of the most developed hi tech sector which is contributing in the country's economy. After the promulgation of Drug Control Ordinance - 1982, the development of this sector was accelerated. The professional knowledge, thoughts and innovative ideas of the pharmacists working in this sector are the key factors for these developments. Due to recent development of this sector we are exporting medicines to global market including European market. This sector is also providing 95% of the total medicine requirement of the local market. Leading Pharmaceutical Companies are expanding their business with the aim to expand export market. Recently few new industries have been established with hi tech equipments and professionals which will enhance the strength of this sector.

1.2 Objectives of the Study

The specific objectives of this study are as follows:
To examine the existing financial system of pharmaceutical companies in Bangladesh.

To understand the solvency of Square and Beximco Pharmaceuticals Ltd. To evaluate the Asset Utilization conditions of Square and Beximco Pharmaceuticals Ltd. To know the profitability of Square and Beximco Pharmaceuticals Ltd.

1.3 Methodology
This is exclusively an observatory research. Thus observation and study of historical records, financial statement and company /industry brochure have been taken as major bases for research.

1.4 Sources of data

This report has been prepared on the basis of secondary information. The Books, Periodicals, Journals, Annual Report of Square and Beximco Pharmaceuticals Ltd, Economic Trends, Published articles and manual sore other printed materials as well as records related with the topic are the source for the conceptual Part of the report. For this Purpose, the The Annual Reports of Square and Beximco (2009-2010) have proved to be great help.

1.5 Scope of Study

This report was conducted in Bangladesh area. Because it is assumed that perspective of customer satisfaction of Dhaka city will represent the other people of the country and thus will cover the targeted population. It is also guide to establish a link between the theoretical and practical situation of the total economy.

1.6 Limitations of Study

During this report certain problems were faced as pointed below. These problems may impact the quality of the work. Difficulty to collect data because of the excessive nature of confidentiality maintained by the officials of those pharmaceuticals companies. There were too much precious works available. Pharmaceuticals dont organize public relation program frequently. Unavailability of relevant data and information. Lack of adequate time to complete the report successfully.

1.7 Conclusion
1.7.1 Benchmark Analysis Analysis of firms in a same industry is called as Benchmark analysis. Even for industry analysis the benchmark may have limited usefulness if the whole industries major firms in that industry are performing poorly. 1.7.2 Relative Measurement A primary advantage of ratio is that they can be used to compare the risk sand return relationships of firms of different sizes. It also provides a profit of a firm, its economic characteristics and competitive strategies. Activity analysis evaluates revenue and output generated by the firms assets. Liquidity analysis measures the adequacy of a firms cash Long-term debt examines the firms capital structure.

2. THEORITICAL FRAMEWORK
2.1 Industry Analysis
Industry analysis is an important part of business planning. This analysis often looks at the external factors that will affect the companys operations. Investment practitioners perform industry analysis because they believe it

helps them isolate investment opportunities that have favorable return-risk characteristics. We likewise have recommended it as part of our Three-step, top-down plan for valuing individual companies and selecting stocks for inclusion in our portfolio. What exactly do we learn from an industry analysis? Can we spot trends in industries that make them good investments? Are there unique patterns in the rates of return and risk measures over time in different industries? In this section, we survey the results of studies that addressed these questions. In the research we describe, investigators asked the following set of questions designed to pinpoint the benefits and limitation of industry analysis: Is there a difference between the returns for alternative industries during specific time periods? Will an industry that performs well in one period continue to perform well in the future? That is, can we use past relationships between the market and an individual industry to predict future trends for the industry? Is the performance of firms within an industry consistent over time? Is there a difference in the risk for alternative industries? Does the risk for individual industries vary or does it remain relatively constant over time? Several studies also considered questions related to risk:

2.1.1 Industry Performance Over Time: In another group of investigations, researchers questioned whether individual industries that perform well in one time period would continue to perform well in subsequent time periods or at least outperform the

aggregate market in the latter time period. In this case, investigators found almost no association in individual industry performance year to year or over sequential rising or falling markets. These time series studies imply that past performance alone does not help project future industry performance. The results do not however, negate the usefulness of industry analysis. They simply confirm that variables that affect industry performance change over time and each year it is necessary to project the future performance for individual industries on the basis of future estimates of these relevant variables.

2.1.2 Function Industry analysis involves reviewing information on current economic market conditions. Industries studied can include retail, fast food, manufacturing, various repair services and construction. The type and number of business industries analyzed depends on the local economic market. Markets with large groups of consumers or several demographic groups often have more business industries than smaller economic markets. Free market economies are built on the concept of supply and demand. Markets with high consumer demand often have more companies in particular industries.

2.1.3 Types Business owners can conduct an industry analysis in one of two ways: quantitative or qualitative. Quantitative analysis uses mathematical pieces of an industrys forecasting techniques to analyze specific

information. Decision trees, game theory or other forecasting methods are commonly used in the industry analysis. Qualitative analysis involves business owners reviewing industry information and making personal judgments or inferences from the information. Business owners with

particular experience or expertise in an industry often use qualitative analysis as they are already familiar with that particular industry.

2.1.4 Purpose Industry analysis is important because it allows business owners to estimate how much profit they can generate from business operations. Business owners rarely enter industries at the plateau stage or those which have begun an economic decline. Industries under these conditions do not usually generate enough profits for new business ventures. Business owners also assess the number of competitors currently selling consumer goods or services in their industry. High levels of competition often create lower than desired profits.

2.1.5 Benefits Conducting a very detailed and intense industry analysis can provide business owners with specific knowledge regarding the economic marketplace. Business owners may discover a market niche not currently being met by other companies. Business owners can also conduct consumer surveys to learn about new goods or services that could have high demand in the marketplace. This information can provide new business owners with a significant benefit over existing companies in a business.

2.1.6 Warning Industry analysis does not guarantee success in the business environment. Business owners can misinterpret information or make incorrect judgments on the best way to pursue profits with a new business venture. Spending too much time on industry analysis can also subject the business owner to paralysis of analysis. This theory states that individuals who collect too

much information may be unable to make a business decision. Additionally, more time is spent doing the analysis phase than making a decision.

2.1.7 Performance of the Companies within an Industry: Other studies were designed to determine whether there is consistency in the performance of companies within an industry if all the firms within an industry performed consistently during a specified time period, investors would not need company analysis. In such a case, industry analysis alone would be enough because once you selected a profitable industry you would know that all the stocks in that industry would do well. These studies typically have found wide dispersion in the performance among companies in most industries. Studies have also shown evidence of an industry effect in specific industries, such as oil or autos, but most stocks showed a small industry effect that has been declining over time. Implication of Dispersion within Industries Some observers have contended that industry analysis is useless because all films in an industry do not move together. Obviously, consistent firm performance in an industry would be ideal because you would not need to do company analysis. For industries that have a strong, consistent industry influence, such as oil, gold, steel, autos, and railroads, you can reduce the extent of your company analysis after your industry analysis. Most analysts do not expect such a strong industry influence, which means that a thorough company analysis is still necessary. Even for industries that do not have a strong industry influence, industry analysis is valuable because it is much easier to select a superior company from a good industry than to find a good company in a poor industry. By selecting the best stocks within a strong industry, you avoid the risk that your analysis and selection of a good company will be offset by poor industry

performance.

2.1.8 Differences in Industry Risk: Although a number of studies have focused on industry rates of return, few studies have examined industry risk measures. The studies on industry risk investigated two questions: (1) Does risk differ among industries during a given time period? (2) Are industry risk measures stable over time? The study results regarding the dispersion of risk found a wide range of risk among different industries at a point in time, and the differences in industry risk typically widened during rising and falling markets. The results on the analysis of risk stability were positivean analysis of the risk measures for individual industries over time indicated that they were reasonably stable over time. These findings indicate that although risk measures for different industries showed substantial dispersion during a period of time, individual industries risk measures are stable over time. This means that the analysis of industry risk is necessary, but this analysis of risk is useful when you attempt to estimate the future risk for an industry.

2.1.9 Summary on Industry Analysis The conclusions of the studies dealing with industry analysis are: During any time period, the return for different industries very within a wide range, which means that industry analysis, is an important part of the investment process. The rates of return for individual industries vary over time, so we cannot simply extrapolate past industry performance into the future. The rates of return of firms within industries also vary, so analysis of

individual companies in an industry is necessary follow-up to industry analysis. During any time period, different industries risk levels vary within wide ranges, so we must examine and estimate the risk factors for alternative industries. Risk measures for different industries remain fairly constant over time, so the historical risk analysis is useful when estimating future risk.

2.2 Company Analysis This section groups various analysis components for discussion. Firm Competitive Strategies continues the Porter discussion of an industrys competitive environment. The basic SWOT analysis is intended to articulate a firms strengths, weaknesses, opportunities, and threats. These two analyses should provide a complete understanding of a firms overall strategic approach. Given this background, we review the fundamental valuation models. In the rest of this chapter, we discuss estimating intrinsic value using the two valuation approaches: (I) the present value of cash flows, and (2) relative valuation ratio techniques. Following this, we discuss the significance of site visits to companies, how to prepare for an interview with management, and suggestions on when an investor should consider selling an asset. This is followed by a discussion of unique considerations regarding evaluation of international companies and their stock. The final section of the chapter discusses the unique features of true growth companies and presents and demonstrates several models that can be used to value growth companies.

2.2.1 Firms Competitive Strategies In describing competition within industries, we identified five competitive forces that could affect the competitive structure and profit potential of an industry. They are: (1) current rivalry, (2) threat of new entrants, (3) potential substitutes, (4) bargaining power of suppliers, and (5) bargaining power of buyers. After you have determined the competitive Structure of an industry, you should attempt to identify the specific competitive strategy employed by each firm and evaluate these strategies in terms of the overall competitive structure of the industry. A companys competitive strategy can either be defensive or offensive. A defensive competitive strategy involves positioning the firm so that its capabilities provide the best means to deflect the effect of the competitive forces in the industry. Examples may include investing in fixed assets and

technology to lower production costs or creating a strong brand image, with instated advertising expenditures. An offensive competitive strategy is one in which the firm attempts to use its strengths to affect the competitive forces in the industry. As an investor, one must understand the alternative competitive strategies available, determine each firms strategy, judge whether the firms strategy is reasonable for its industry, and, finally, evaluate bow successful the firm is in implementing its strategy. In the following sections, we discuss analyzing firms completive position and strategy. The analyst must decide whether the firms management is correctly positioning the firm to take advantage of industry and economic conditions. The analysts opinion about managements decisions should ultimately be reflected in and be the basis for the analysts estimates of the firms growth of cash flow and earnings. Porter suggests two major competitive strategies: low-cost leadership and differentiation. These two competitive strategies dictate bow a firm has decided to cope with the five competitive conditions that define an industrys environment. The strategies available and the ways of implementing them differ within each industry. Low-Cost Strategy The firm that pursues the low-cost strategy is determined to become the low-cost producer and, hence, the cost leader in its industry. Cost advantages vary by industry and might include economies of scale, proprietary technology, or preferential access to raw materials. In order to benefit from cost leadership, the firm must command prices near the industry average, which means that it must differentiate itself about as well as other firms. If the firm discounts price too much, it could erode the superior rates of return available because of its low cost. Differentiation Strategy With the differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

Again, the possibilities for differentiation vary widely by industry. A company can attempt to differentiate itself based on its distribution system (selling in stores, by mail order, or door-to-door) or some unique marketing approach. A firm employing the differentiation strategy will enjoy aboveaverage rates of return only if the price premium attributable to its differentiation exceeds the extra cost of being unique.

2.2.2. Focusing a Strategy Whichever strategy it selects, a firm must determine where it will focus this strategy. Specifically, a firm must select segments in the industry and tailor its strategy to serve these specific groups. For example, a low-cost strategy would typically exploit cost advantages for certain segments of the industry, such as being the low-cost producer for the expensive segment of the market. Similarly, a differentiation focus would target the special needs of buyers in specific segments. Next, you must determine which strategy the firm is pursuing and its success. Also, can the strategy be sustained? Further, you should evaluate a firms competitive strategy over time, because strategies need to changes an industry evolves; different strategies work during different phases of an industrys life cycle. For example, differentiation strategies may work for firms in an industry daring the growth stages. When the industry is in the mature stage, firms may try to lower their costs. Through the analysis process, the analyst identifies what the company does well, what it doesnt do well, and where the firm is unable to the five competitive forces. Some call this process developing a companys story? This evaluation enables the analyst to determine the outlook and risks facing the firm. In summary understanding the industrys competitive forces and the firms strategy for dealing with them is the key to deriving an accurate estimate

of the firms long-run cash flows and risks of doing business.

2.2.3 SWOT Analysis: SWOT analysis involves an examination of a firms strengths, weaknesses, opportunities, and threats. It should help you evaluate a firms strategies to exploit its competitive advantages or defend against its weaknesses. Strengths and weaknesses involve identifying the firms internal abilities or lack thereof. Opportunities and threats include external situations, such as competitive forces, discovery and development of new technologies, government regulations, and domestic and international economic trends. The strengths of a company give the firm a comparative advantage in the marketplace. Perceived strengths can include good customer service, highquality products, strong brand image, customer loyalty, innovative R&D, market leadership, or strong financial resources. To remain strengths; they must continue to be developed, maintained & and defended through prudent capital investment policies. Weaknesses result when competitors have potentially exploitable

advantages over the firm. Once weaknesses are identified, the firm can select strategic to mitigate or correct the weaknesses. For example, a firm that is only a domestic producer in a globa1 market can make investments that will allow it to export or produce its product overseas Another example would be a firm with poor financial resources that would form joint ventures with financially stronger firms. Opportunities, or environmental factors that favor the firm can include a growing market for the firms products (domestic and international), shrinking competition, favorable exchange rate shifts, a financial community that has confidence in the outlook for the industry or firm, or identification of a new market or product segment.

Threats are, environmental factors that can hinder the arm in achieving its goals. Examples would include a slowing domestic economy (or sluggish overseas economies for exporters), additional government regulation, an increase in industry competition, threats of entry, buyers or suppliers. seeking to increase their bargaining power, or new technology that can obsolete the industries product By recognizing and understanding opportunities and threats, an investor can make informed decisions about how the firm can exploit opportunities and mitigate threats.

3.0 RATIOS AND FORMULAS IN FINANCIAL ANALYIS

Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories:

liquidity ratios measure a firm's ability to meet its current obligations. profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business.

leverage ratios measure the degree of protection of suppliers of longterm funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time.

efficiency,

activity

or

turnover

ratios

provide

information

about

management's ability to control expenses and to earn a return on the resources committed to the business. A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand.

3.1 Liquidity Ratios

3.1.1 Working Capital Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due. Formula Current Assets - Current Liabilities

3.1.2 Acid Test or Quick Ratio A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity. Formula Cash + Marketable Securities + Accounts Receivable Current Liabilities

3.1.3 Current Ratio Provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's current assets generally consist of cash, marketable securities, accounts receivable, and inventories. Current liabilities include accounts payable, current maturities of long-term debt, accrued income taxes, and other accrued expenses that are due within one year. In general, businesses prefer to have at least one dollar of current assets for every dollar of current liabilities. However, the normal current ratio fluctuates from industry to industry. A current ratio

significantly higher than the industry average could indicate the existence of redundant assets. Conversely, a current ratio significantly lower than the industry average could indicate a lack of liquidity. Formula Current Assets Current Liabilities

3.1.4 Cash Ratio Indicates a conservative view of liquidity such as when a company has pledged its receivables and its inventory, or the analyst suspects severe liquidity problems with inventory and receivables. Formula Cash Equivalents + Marketable Securities Current Liabilities

3.2 Profitability Ratios

3.2.1 Net Profit Margin (Return on Sales) A measure of net income dollars generated by each dollar of sales. Formula Net Income * Net Sales

* Refinements to the net income figure can make it more accurate than this ratio computation. They could include removal of equity earnings from investments, "other income" and "other expense" items as well as minority share of earnings and nonrecuring items.

3.2.2 Return on Assets Measures the company's ability to utilize its assets to create profits. Formula Net Income * (Beginning + Ending Total Assets) / 2

3.2.3 Operating Income Margin A measure of the operating income generated by each dollar of sales. Formula Operating Income Net Sales 3.2.4 Return on Investment Measures the income earned on the invested capital. Formula Net Income * Long-term Liabilities + Equity 3.2.5 Return on Equity Measures the income earned on the shareholder's investment in the business. Formula Net Income * Equity 3.2.6 Du Pont Return on Assets A combination of financial ratios in a series to evaluate investment return.

The benefit of the method is that it provides an understanding of how the company generates its return. Formula Net Income * Sales Assets x x Sales Assets Equity 3.2.7 Gross Profit Margin Indicates the relationship between net sales revenue and the cost of goods sold. This ratio should be compared with industry data as it may indicate insufficient volume and excessive purchasing or labor costs. Formula Gross Profit Net Sales

3.3 Financial Leverage Ratios

3.3.1 Total Debts to Assets Provides information about the company's ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors. Formula Total Liabilities Total Assets 3.3.2 Capitalization Ratio Indicates long-term debt usage. Formula Long-Term Debt Long-Term Debt + Owners' Equity

3.3.3 Debt to Equity Indicates how well creditors are protected in case of the company's insolvency. Formula Total Debt Total Equity

3.3.4 Interest Coverage Ratio (Times Interest Earned) Indicates a company's capacity to meet interest payments. Uses EBIT (Earnings Before Interest and Taxes) Formula EBIT Interest Expense

3.3.5 Long-term Debt to Net Working Capital Provides insight into the ability to pay long term debt from current assets after paying current liabilities. Formula Long-term Debt Current Assets - Current Liabilities

3.4 Efficiency Ratios

3.4.1 Cash Turnover Measures how effective a company is utilizing its cash. Formula Net Sales Cash

3.4.2 Sales to Working Capital (Net Working Capital Turnover) Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company's working capital is working too hard. Formula Net Sales Average Working Capital

3.4.3 Total Asset Turnover Measures the activity of the assets and the ability of the business to generate sales through the use of the assets. Formula Net Sales Average Total Assets

3.4.4 Fixed Asset Turnover Measures the capacity utilization and the quality of fixed assets. Formula Net Sales Net Fixed Assets

3.4.5 Days' Sales in Receivables Indicates the average time in days, that receivables are outstanding (DSO). It helps determine if a change in receivables is due to a change in sales, or to another factor such as a change in selling terms. An analyst might

compare the days' sales in receivables with the company's credit terms as an indication of how efficiently the company manages its receivables. Formula Gross Receivables Annual Net Sales / 365

3.4.6 Accounts Receivable Turnover Indicates the liquidity of the company's receivables. Formula Net Sales Average Gross Receivables

3.4.7 Accounts Receivable Turnover in Days Indicates the liquidity of the company's receivables in days. Formula Average Gross Receivables Annual Net Sales / 365

3.4.8 Days' Sales in Inventory Indicates the length of time that it will take to use up the inventory through sales. Formula Ending Inventory Cost of Goods Sold / 365

3.4.9 Inventory Turnover Indicates the liquidity of the inventory. Formula Cost of Goods Sold Average Inventory

3.4.10 Inventory Turnover in Days Indicates the liquidity of the inventory in days. Formula Average Inventory Cost of Goods Sold / 365

3.4.11 Operating Cycle Indicates the time between the acquisition of inventory and the realization of cash from sales of inventory. For most companies the operating cycle is less than one year, but in some industries it is longer. Formula Accounts Receivable Turnover in Days + Inventory Turnover in Day

3.4.12 Days' Payables Outstanding Indicates how the firm handles obligations of its suppliers. Formula Ending Accounts Payable Purchases / 365

3.4.13 Payables Turnover Indicates the liquidity of the firm's payables. Formula Purchases Average Accounts Payable

3.4.14 Payables Turnover in Days Indicates the liquidity of the firm's payables in days. Formula Average Accounts Payable Purchases / 365

3.5 Additional Ratios

3.5.1 Altman Z-Score The Z-score model is a quantitative model developed in 1968 by Edward Altman to predict bankruptcy (financial distress) of a business, using a blend of the traditional financial ratios and a statistical method known as multiple discriminated analysis. The Z-score is known to be about 90% accurate in forecasting business failure one year into the future and about 80% accurate in forecasting it two years into the future. Formula Z = 1.2 +1.4 +0.6 +0.999 +3.3 x (Working Capital / Total Assets) x (Retained Earnings / Total Assets) x (Market Value of Equity / Book Value of Debt) x (Sales / Total Assets) x (EBIT / Total Assets) Z-score Probability of Failure less than 1.8 Very High greater than 1.81 but less than 2.99 Not Sure greater than 3.0 Unlikely

3.5.2 Bad-Debt to Accounts Receivable Ratio Bad-debt to Accounts Receivable ratio measures expected uncollectibility on credit sales. An increase in bad debts is a negative sign, since it indicates greater realization risk in accounts receivable and possible future write-offs. Formula Bad Debts Accounts Receivable

3.5.3 Bad-Debt to Sales Ratio Bad-debt ratios measure expected uncollectibility on credit sales. An increase in bad debts is a negative sign, since it indicates greater realization risk in accounts receivable and possible future write-offs. Formula

Bad Debts Sales 3.5.4 Book Value per Common Share Book value per common share is the net assets available to common stockholders divided by the shares outstanding, where net assets represent stockholders' equity less preferred stock. Book value per share tells what each share is worth per the books based on historical cost. Formula (Total Stockholders' Equity - Liquidation Value of Preferred Stocks - Preferred Dividends in Arrears) Common Shares Outstanding 3.5.5 Common Size Analysis In vertical analysis of financial statements, an item is used as a base value and all other accounts in the financial statement are compared to this base value. On the balance sheet, total assets equal 100% and each asset is stated as a percentage of total assets. Similarly, total liabilities and stockholder's equity are assigned 100%, with a given liability or equity account stated as a percentage of total liabilities and stockholder's equity. On the income statement, 100% is assigned to net sales, with all revenue and expense accounts then related to it. 3.5.6 Cost of Credit The cost of credit is the cost of not taking credit terms extended for a business transaction. Credit terms usually express the amount of the cash discount, the date of its expiration, and the due date. A typical credit term is 2 / 10, net / 30. If payment is made within 10 days, a 2 percent cash discount is allowed: otherwise, the entire amount is due in 30 days. The cost of not taking the cash discount can be substantial. Formula % Discount 360 x 100 - % Discount Credit Period - Discount Period

3.5.7 Current-Liability Ratios Current-liability ratios indicate the degree to which current debt payments will be required within the year. Understanding a company's liability is critical, since if it is unable to meet current debt, a liquidity crisis looms. The following ratios are compared to industry norms. Formulas Current to Non-current = Current Liabilities Non-current Liabilities Current to Total = Current Liabilities Total Liabilities

3.5.8 Rule of 72 A rule of thumb method used to calculate the number of years it takes to double an investment. Formula 72 Rate of Return

4. CASE ANALYSIS SQUARE AND BEXIMCO Comparative Financial Perspective

4.1 Fixed Assets:

At Square Pharmaceuticals, all property, plant and equipment is initially accounted for at cost and depreciated over their expected useful life in accordance with property, plant and equipment. The cost of acquisition of an asset comprises its purchase price and any directly attribute cost of bringing the asset to its working condition for its intended use inclusive of inward freight, duties and non-refundable taxes. In respect of major projects involving construction, related pre-operational expenses form part of the value of asset capitalized. Expenses capitalized also include applicable borrowing cost. The assets and liability of the subsidiary-Beg Rubber industries Ltd, has been measured at the fair value as at the date of acquisition. On retirement of otherwise disposal of fixed asserts, the cost and accumulated depreciation are eliminated and any gain of loss on such disposal is reflected in the income statement, which is determined with reference to the net book value the assets and the net sales proceeds.

At Beximco Pharma, all property, plant and equipment is initially recorded at cost and depreciated over their expected useful life. The cost of acquisition of an asset comprises its purchase price and any directly attribute cost of bringing the asset to its working condition for its intended use inclusive of inward freight, duties and non-refundable taxes. In respect of major projects involving construction, related pre-operational expenses form part of the value of asset capitalized. Expenses capitalized also 5

include applicable borrowing cost. Expenditure incurred after the assets have been put in to operation, such as repairs & maintenance, is normally charged off as revenue expenditure in the period in which is it incurred. In situation, where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed assets, the expenditure is capitalized as an additional cost of the assets. Software are generally charged off as revenue expenditure. Fixed assets include cost of assets (including exchange loss) acquire under financial lease. On retirement of otherwise disposal of fixed asserts, the cost and accumulated depreciation are eliminated and any gain of loss on such disposal is reflected in the income statement, which is determined with reference to the net book value the assets and the net sales proceeds.

4.2 Depreciation

No depreciation is charged on freehold land or on capital work-in-progress. Depreciation is charged on all fixed assets on a reducing balance method for square pharmaceuticals ltd. Depreciation for full years has been charged on additions irrespective of date when the related assets are put into use and no depreciation has been charged on assets disposed off during the year. The rates at which asserts are depreciated per annum, depending on the nature and estimated useful life of assets are given below:

Factory Building and other Construction Plant & Machinery Laboratory & office Equipment Furniture & Fixture Motor Vehicle Electrical Installation

10% 15% 10% 10% 20% 15%

Books and Periodicals

30%

No depreciation is charged on land. In respect of all other fixed assets, depreciation is provided to amortize the cost of the assets after commissioning, over their expected useful economic lives. Depreciation is computed using the reducing balance method. Full years depreciation is charged on additions and no depreciation is provided on retirement, irrespective of data of addition of retirement respectively. The annual depreciation rates applicable to the principal categories of assets are: Building and Other Construction Plant and Machinery Furniture & Fixtures Transport & Vehicle Office Equipment 5% to 10% 7.5% to 15% 10% 20% 10% to 50%

4.3 Cash in Hand

This comprises cash in hand and cash at bank which are available for use by the company.

This comprises cash in hand and at banks.

4.4 Inventories

Inventories are stated at the lower of cost or net realizable value in compliance to the requirements. Stock of raw materials, packing materials and finished goods are valued at the lower of cost and estimated net realizable value. Work-in-proceed are valued at material cost while other stocks are valued at cost. The cost is determined on weighted average cost basis. Net realizable value is based on estimated selling price less any further costs anticipated to be incurred to make the sale. Any obsolete stock or abnormal losses are recognizing as expenses.

Inventories are carried at the lower of cost and net realizable value. Cost is determined on weighted average cost basis. The cost of inventories comprises of expenditure incurred in the normal course of bringing the inventories to their present location and condition. Net resizable value is based on estimated selling price less any further costs expected to be incurred to make the sale.

4.5 Income Tax

The holding company is enjoying tax holiday for seven years in respect of its AgroVet unit with effect from December 1998. The company is also enjoying tax holiday for five years of its Dhaka unit with effect from April, 2002. Provision for income tax has been made @ 30% on net profit of taxable unit for the year after adjustment of 10% rebate for declaration of Dividend above 20%

Provision is made for taxable temporary differences for the prior years and will be adjusted in due course of time as and when required.

Current has been provided on the estimated taxable profit for the year under review @ 30%, being the tax rate applicable for publicly traded company. It also includes adjustments for earlier years short/excess provision. The company has adopted deferred tax in compliance with the provisions of Bangladesh Accounting Standard (BAS) 12 Income Taxes. The company policy of recognition of deferred tax assets/liabilities is based on temporary differences (Taxable of deductible) between the carrying amount (Book value) of assets and liabilities for financial reporting purpose and its tax base, and accordingly, deferred tax income/expenses has been considered to determine net profit after tax and earnings per share (EPS).

4.6 Revenue Recognition

Local sales of both locally manufactured and imported Pharmaceuticals Drugs and Medicines, Agro Vet products and pesticide products are recognized at the time of delivery from depot. Exports of Pharmaceuticals Drugs and medicines are recognized at the time of delivery from factory go down. Local sales of basic chemical products are recognized at the time of delivery from factory go down. Dividend income has been accounted for on receipt basis.

4.7 Foreign Currency Transactions

Foreign currencies are translated into taka at the exchange rates ruling on the date of transactions in accordance with the effects of changes in foreign exchange rates. Bank deposit in foreign currency for retention quota account has been translated in to taka at the year end at the rate of exchange ruling on that date and gain (loss) have been accounted for as other income in the income statement.

The financial records of the company are maintained and the financial statements are stated in Bangladesh Taka. Foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction date. Other monetary assets and liabilities, if any, denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at the data. Exchange differences are charged off as revenue expect exchange loss relating to obligation under lease which has been capitalized to relevant fixed assets being procured under the said obligation, as a requirement of the Companies Act 1994.

4.8 Share Premium

The balance in share premium account shall be utilized in accordance with provisions of the companied Act 1994 and as directed by the Securities and Exchange Commission in this respect.

The section 57 of the Companies Act 1994 provides that the share premium account may be applied by the company: a) In paying up unissued of the company to be issued to members of the company as fully paid bonus shares; b) In writing off the preliminary expenses of the company; c) In writing off the expenses of or the commission paid or discount allowed on any issue of shares or debenture if the company; and d) In providing for the premium payable on the redemption of any redeemable preference shares or of any debenture of the company.

4.9 Earnings Per Share

Earning per share is calculated in accordance with the Bangladesh Accounting Standard (BAS) 33 Earnings per share.

This has been calculated by dividing the basic earnings by the weighted average number of ordinary shares outstanding during the year.

4.10 Borrowing Cost

The company capitalizes borrowing cost for new projects such at interest on term loan and other related fees/charge for the period till to commencement of commercial operation and charges the cost to revenue account as financial expression after commencement of the commercial operation.

Borrowing costs relating to projects already in commercial operating are charged as expenses for the year under review. In respect of projects that have not yet commenced commercial production, borrowing costs are debited to capital work in progress.

5. FINDINGS
SQUARE AND BEXIMCO - Relative Measurement 5.1 Liquidity Ratios
Liquidity of Square and Beximco in terms of net working Capital to Total assets Current Ratio and Quick Ratio for the financial years 2009 and 2010 has been developing as under. 5.1.1 Current Ratio: Current ratio has been computed by dividing current liabilities into current assets. This gives one an idea about the ability of meet current debts. The current ratio of Square 1.50 to 1.53 and for Beximco 1.45 to 1.40 times during the study period 2009 to 2010.

Current Ratio of Square and Beximco

1.55 1.5 Percentage 1.45 1.4 1.35 1.3 2009 Year 2010 Square Beximco

The average being 1.52 times. As compared to the standard norm of 2 (two) times current ratio of Square and Beximco found to be more or less satisfactory during the period.

5.1.2 Quick Ratio Quick ratio has been computed by dividing current liabilities into quick assists i.e. current assists minus inventory and prepaid expenses. This is a more severe test of the liquidity since it concentrates strictly on the liquid assets.

Acid test Ratio of Square and Beximco

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009 Year 2010

Percentage

Square Beximco

The graph shows that quick ratio of Square within 1.19 to 0.41 times the average being 0.8 the study period. Quick ratio of Beximco varied from 0.63 to 0.72. As compared the standard norm of one time wick ratio Square and Beximco have been or less satisfactory during the period.

5.2 Asset Utilization Ratios

Asset Utilization ratio are known as activity ratio includes inventory turn over, Days Receivable Ratio Fixed Asset Turnover, days receivable Ratio Fixed Assets Turnover and working Capital Turnover. These ratios measure the efficiency of the use of assets. These ratios in the context Square and Beximco for the period 2005 to 2009 are analyzed as follows. 5.2.1 Receivable turnover: Receivable turnover has been computed by dividing sales into receivables. This gives one an idea about the ability of a firm to meet its current debts. The graph shows that receivable turnover of Square 23.17 to 24.54 times the average being 23.85.

Receivable turnover Ratio of Square and Beximco

30 25 Percentage 20 15 10 5 0 2009 Year 2010 Square Beximco

Other hand the receivable turnover of Beximco 4.00 to 4.26 times the average being 4.13. As compared the receivables turnover the Square is good and Beximco is poor.

5.2.2 Average collection period: Average collection period turnover has been computed by dividing Account receivable into Average daily credit sales.

Average collection period ratio of Squar and Beximco

100 80 Days 60 40 20 0 2009 Year 2010 Square Beximco

The chart shows that Square 15 days to 14 days and Beximco 89 days to 84 days. As compared the Collection Square is good and Beximco is poor.

5.2.3 Inventory turnover ratio: Inventory turnover has been calculated by dividing sales by inventory. This measure the extent of generating Takes cost of goods hold per- Taka of inventory some authors for the profitable industries and this may also be considered so for the selected industries. The graph shows inventory turnover of Square varied from 5.41 to 5.27 times the average being 5.37 times during study period.

Inventory turnover Ratio of Square and Beximco

6 5 Percentage 4 3 2 1 0 2009 Year 2010 Square Beximco

Inventory turnover of Beximco varied from 1.71 to 1.97 times the average being 1.84 times during study period. As compared to the Square and Beximco, inventory turnover of Square is poor and Beximco is good.

5.2.4 Fixed asset turnover ratio: This turnover has been calculated by dividing net fixed assets into sales. This is a measure of indicating the extent of generation sales volume in terms of net fixed assets. One author considered 5 times fixed assets turnover as the reasonable more for the profitable firms for judging the of Capital assets and this may also be considered so for the Square indicated that fixed assets turnover 1.32 to 1.34 times the average being 1.33 times during the study period. Fixed assets turnover of Beximco 0.39 to 0.45 times the average being 0.42 times during the study period.

Fixed Assets turnover Ratio of Square and Beximco

1.6 1.4 1.2 Percentage 1 0.8 0.6 0.4 0.2 0 2009 Year 2010 Square Beximco

As compared with standard norm, fixed assets turnover of Square and Beximco has been satisfactory during study period.

5.2.5 Total asset turnover ratio: Net working to total assets has been computed by during net working capital by total tangible assets and the quotient has been expressed in percentage.

Total Assets turnover Ratio of Square and Beximco

1 Percentage 0.8 0.6 0.4 0.2 0 2009 Year 2010 Square Beximco

The graph shows that Net working Capital to total assets of Square had been 0.78 to- 0.76 the average being 0.77 during the period. For the Beximco, it was 0.20 to 0.30. The average was 0.29 during the period.

5.3 Profitability Ratios

Profitability refer to the earning capacity of an enterprise where net profits, either before of after taxes are expressed in relation to sales, equity capital, net worth, total assets etc. in this sense, profitability ratios include return or sales, return on equity, return on invested and returns on capitalization. These ratios in the context of Square and Beximco during the period under review are analyzed as follows. 5.3.1 Return on Assets Ratio: Return on asset ratio has been computed by dividing net income into total assets. This graph shows that the Square of return on assets ratio is 12.67% to 12.53% the average is 12.6%.

Return on Assets Ratio of Square and Beximco

On the other
14 12 10 8 6 4 2 0 2009 Year 2010

hand, on
Square Beximco

return of is to the is

Percentage

assets

Beximco 3.80% 4.47% average 4.13%. As

compared

the two companies the return on asset ratio shows the Square is good and Beximco is poor.

5.3.2 Return on equity ratio: This return has been found out by dividing net profit after tax by equity and then multiplying the quotient hundred. In the graph the return on equity of Square is pointed out and varied within 22.55 % to 18.21% the average being 20.38% during the study period. And Beximco varied within 6.81% to 7.71%

Return on Equity Ratio of Square and Beximco

25 Percentage 20 15 10 5 0 2009 Year 2010 Square Beximco

As compared to the standard norm the return on equity of Square is satisfactory and Beximco is more or less satisfactory.

5.4 Debt Utilization Ratio

5.4.1 Debt to total asset ratio: Debt to total assets has been computed by dividing total debt by total asset. This ratio indicated the greasing position of an enterprise. The graph points out that debt equity ratio of Square had varied within 29.58% to 31.15% the average being 30.36% during the study period.

Debt to total assets Ratio of Square and Beximco

50 Percentage 40 30 20 10 0 2009 Year 2010 Square Beximco

And the Beximco varied within 44.18% to 37.6% the average being 40.89%. As compared to the standard norm of Debt to total assets of Square and Beximco is more or less satisfactory.

6. CONCLUSION
SPL and BPL are long being rival to take the top two positions in pharmaceuticals industry in Bangladesh. Though other companies like OPL, ACME, RENATA, Essential Drugs etc. are always logged in fighting for top ten market positioning, these two companies never being found in third or fourth position since 1990. From the observation, it has been found that capital investment of Square and Beximco are respectively Tk. 3.53 billion and Tk. 3.36 billion and also sales turnover in 2010 was Tk. 0.03 billion and Tk. 0.12 billion. It has been found that the volume of marketing expenses always is fewer than selling expenses. And also it is notified that selling expenses volume is almost four times more than marketing expenses. It has also found that admin. expense of Square and Beximco pharmaceuticals was Tk. 0.19 billion and Tk. 0.12 billion. It has also found that the selling espense of Square and Beximco pharmaceuticals was Tk. 0.80 billion and Tk. 0.72 billion. It has also identified that the gross turnover of Square and Beximco was Tk. 7.1 billion and Tk. 3.3 billion. The worth of inventory of Square and Beximco was Tk. 1.34 billion and Tk. 1.68 billion. Square and Beximco did pay the amount of Tk. 1.36 billion and Tk. 3.9 million as taxes. It has been found that overseas market turnover of Square and Beximco pharmaceuticals was Tk. 0.11 billion and Tk. 90 million. Currently the local pharmaceutical market is worth around Tk. 7000 crore. Around 80 percent of total raw materials are imported from mainly China. Pharmaceutical exports stood at $18.69 million in the July-November period of fiscal year 2009 -10, a 15.44 percent rise from the same period a year ago, according to the Export Promotion Bureau. Finally it may be concluded that Pharmaceutical industry is now one of the highest flourished corporate businesses in Bangladesh.

7. RECOMMENDATIONS
For Domestic Market, These two companies should decrease their marketing expenses. These two companies should highlight the fact that they can produce the same or better quality at lesser price. The companys top management always should be more encouraging to the key personnel in the company so that they can able to take the best out of them. They can increase the pay scale of their employees in a sense of increasing the productivity of the company. They should not be more aggressive only on the returns of their company. As the first line market leader in Pharmaceuticals industry the companies should concentrate maximizing the wealth rather than simply profit of the company. The financial management must analyze the ROE, ROI, VAV, EPS, and P/E continuously and circulate these consistently in the capital market.

For International Market, The Developed world has been stressing on free market policies at one hand and on the other hand has instituted acts such as TRIPS, which is essentially a protectionist law. It is therefore essential for the third World to seek clarification on WTO. To maintain country specific comparative advantage specialization based on country strength and disease pattern of the country can be introduced. This will enable the countries to produce exclusive Medicines, which can be marketed to other countries. In the long run countries may also emphasize upon common branding policies to simplify procedures and standardize the medicines.

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