Академический Документы
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Mazedur Rahman
Abstract
The main purpose of the project work is to understand and analysis of the financial performance
of the selected pharmaceutical company. To analyze the financial performance the relevant ratios
have been calculated and analyzed in details. A competitor also chose to compare the performance.
Five year financial statement of the company has been taken into account.
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1.0 Introduction
Valeant International is a Canadian multinational medicine and medical device manufacturer. The
company owns many world class franchises throughout the globe. The company has huge number
of employs worldwide, they all have the common aim of improving the life of people by the
Valeant pharmaceuticals products. Valeant developed a wide range of products like generic and
branded generic pharmaceutical which they marketed directly or indirectly in more than 100
countries. The company believes in the innovation and new products development. (Valeant.com,
2017)
In 2016 Valeant’s two executives transferred shareholder money into their personal account. In
addition, the price of the drugs increased and the company became the main point of anger for
lawmakers. Last year the investigation against the company started about the pricing issue and the
distribution of the drugs. Due to the scandal in the company the financial statement had been
affected. (Egan, 2017)
Pfizer
Pfizer is an American pharmaceuticals company based in New York. The company was
incorporated in 1942, this company has its own research in Groton. Pfizer has many worldwide
operations. The company is very innovative and creative in its manufacturing of medicine.
(Editorial, 2017)
The financial performance analysis is the key indicator for a company to realize the condition of
the business and performance of the business. For analyzing financial performance of a company
different categories of ratios are used such as profitability ratios, liquidity ratios, efficiency ratios,
and financial stability as well investment ratios. The ratios are very useful and meaningful for the
users. The financial performance is very comprehensive if the ratios are calculated interpreted and
analyzed in efficient way. These can also help fo decision making process. For interpreting the
financial performance of Valeant Pharmaceuticals International Inco the ratios are as below.
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2.1 Profitability ratios
Profitability ratios mean the performance of the company in terms of sales and expenses.
Gross profit margin = (Gross profit/sales) ×100
Valeant
Years
Calculation Ratios
The gross profit margin in Valeant looks good. Lowest profit was in 2013 may be this year the
company sold more units with low selling price per unit or the cost of sales increased due to the
inflation in the market. Highest gross profit margin was in 2015 for the five years period, may be
this year the company charge high price per unit or the cost of sales were lower. On the other hand,
the company may sold a large amount of units with higher price than the cost of production or
sales. When the cost of sales is higher in proportion to the sale revenue then the gross profit will
be low.
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Net profit margin = (Net profit/Sales) × 100
Valeant Pfizer
Years
Calculation Ratios Calculation Ratios
The worst net profit margin for Valeant was in 2016 with the negative figure. In this year the
company had to pay a huge amount of interest expenses. In addition, there was a new cost which
was goodwill impairment of the company, may be this cost charged due to the scandal of money
transferring by the CEO and increased the price of the medicine. Second lowest net profit margin
was in 2013 with negative figure, in this year the company made loss due to the huge amount of
expenses, also may be due to the operating inefficiency of controlling the cost. On the other hand,
the competitor Pfizer net profit margin is better than Valeant. In Pfizer may be the company
successful control the cost.
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2.2 Liquidity ratios – These ratios measure the ability of a company to pay the short term
liability. Generally higher is better but vary from industry to industry.
Current ratio = Current asset/Current liabilities
Valeant
Years
Calculation Ratios
Rule of thumb for current ratio is 2:1. For every single year the liquidity ratios of Valeant were
below the average. Worst current ratio was 1:1 in 2015, sometime if company has more cash, less
inventory and receivable then this level of current ratio is acceptable, but in Valeant inventory and
receivable both were higher. However, the account payable for the company was lower may be
the company paid the suppliers earlier which may lead to the low cash and low level of credit
supplier’s account.
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Quick ratio = (Current asset – Inventory)/ current liabilities
Valeant Pfizer
Years
Calculation Ratios Calculation Ratios
This ratio measures the ability of short term payment with the more liquid current asset. Generally
1:1 is good. In Valeant the low quick ratio was in 2015, it was below 1:1 may be this year the
company paid suppliers in due date to take the advantage of settlement discount or may be the
company had more cash amount than the other component of the current assets. Moreover, the
company may be efficiently control its liability compare to the current asset. On the other, Pfizer
is better in term of quick ratio for five years period compare to Valeant. Lowest quick ratio for
Pfizer was in 2016, may be this year the company cut down few current asset for example
inventory, receivable for being the efficient. Or they paid the suppliers immediately or the
company’s cash purchase increased.
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2.3 Financial stability ratios: The best way of measuring the financial fitness for a company. The
ratios also indicate how much risk the company possess.
Gearing ratio = (Long term debt/Equity) ×100
Valeant Pfizer
Years
Calculation Ratios Calculation Ratios
Valeant gearing ratio is much more than the general standard, generally gearing more than 50%
means the company is risky but Valeant gearing ratio very high than the standard. Long term debt
of the company was more for all years. In the gearing was the worst due to the high level of debt
compare to the equity of the business, may be this year the company expand by taking the loan or
invest in research and development. This year the company looks very risky. But Pfizer gearing
ratios were below 50% except 2016. For both companies the high gearing was in 2016 may be this
year all the companies in this sector invest more or fail to raise money through equity sources.
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Interest coverage ratio = Profit before interest and tax/Interest expenses
Valeant
Years
Calculation Ratios
Generally high interest cover is better. In Valeant the interest cover is very low with few negative
figure. The worst interest cover was in 2013 with the negative figure, in this year the company had
to pay different types of expenses which led the profit before interest and tax into negative figure.
In 2016 the ratio of interest cover also lower due to the high expenses. Especially, these two years
the company did not have the ability to cover the interest as a results shareholders dissatisfaction
will increase.
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2.4 Efficiency ratios: The ratio calculate the ability of the organization to utilize the resources.
Receivable collection periods = (Receivable/ Sales) ×365 days
Valeant Pfizer
Years
Calculation Ratios Calculation Ratios
The lower receivable days is the indication of good performance. Higher receivable days were in
2013, in this year the company may sold more on credit than cash sales which increased the level
of receivable as a results of more days in receivable. The higher the receivable days the more risk
for the company for bad debt expenses. In Pfizer the higher receivable days were in 2012 may be
due high level of credit sales. But if the receivable days for the both companies are taken into
account Pfizer’s receivable days are better than Valeant.
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Inventory turnover days = (Inventory/Cost of sales) ×365 days
Valeant
Years
Calculation Ratios
The highest inventory days were in 2015, may be this year the company purchased more than they
sold to the customers or taking long time to convert the raw material to finished goods. This high
inventory days also means the excessive level of expenses. Lower inventory days were recorded
in 2012 which was 21 days, the company may sale more than stored or purchase, also other reasons
can be the company was good at the managing inventory. The low inventory level means good
example of the efficient management system.
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2.5 Investment ratios: These ratios are indications of investment in the company. Basically
higher the results of the more lucrative the company for investment.
ROCE = (Profit before interest and tax/Capital employed) ×100
Valeant
Years
Calculation Ratios
558×100 1% 2016
39920
1531×100 3% 2015
43652
2044.7×100 9% 2014
23622
The Return on Capital Employed for Valeant was very low for the period of five years. Among
them the worst one was in the year of 2013, may be due more expenses which made loss for the
company. This is very severe for condition for the company because low ROCE means nobody
will show interest for the investment. Even in people who already invested may withdraw the
money. Also negative ROCE means company did not have the ability to generate profit or wealth
for the shareholders. In 2012 the ROCE was lower than 1.
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EPS = Net income/No of shares
Valeant Pfizer
Years
Calculation Ratios Calculation Ratios
EPS is another important ratio for the investors. The EPS of a company represents the profitability
of the company compare to the number of share. The worst EPS for Valeant was in 2016 because
this year the profitability of the company affected by the low level of sales and pricing issue,
CEO’s activity of money transferring to personal accounts. Also there were huge amount of
expenses than any other years which caused the negative profit before interest and tax. On the
other hand, Pfizer EPS was not good in 2016 may be this year the ability of the industry to generate
profit compare to the capital employed was very bad. But in term of ROCE Pfizer was better than
Valeant.
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3.0 Limitation of ratio analysis
The ratios are very useful tools for analyzing the financial performance of a company. But they
have limitation which are as below.
The ratios are calculated on the historical financial information of the company because financial
statement prepared by depending on the past information.
Sometimes the management of the company adjusts the accounts. Comparison between two
companies are tough because both of the companies are not following the same procedure to
prepare the financial statement.
Only the financial statement of the company is publicly available, the management other
information is not available to the general public due to this by depending on the ratios analysis
and past information it is really not a smart way to take the decision, which may affect in future.
4.0 Conclusion
In conclusion, from the interpretation of the financial statement of Valeant for latest last five years
and comparison the results with Pfizer, it came to my attention the company’s overall performance
is very hopeless. First of all, if the gearing of Valeant is considered from the above calculation, the
stability of the company is in very dangerous level due to the extremely high level of gearing ratio
and the low, negative interest coverage ratios. Secondly, the company is no more profitable, few
years with the negative net profit margin. Thirdly, the investment ratios are not attractive for the
prospective investors.
The company is operating the business with high gearing, low interest cover, negative profitability
ratios, low and negative investment ratios, in term of all these ratios it will be tough for the
company to run the business, if immediate action is not taken Valeant may not go further.
Finally, raising the finance will be quiet difficult through any sources of finance as well as the
survival of the company.
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Reference
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