Company Analysis

Company Analysis
Square Pharmaceuticals Ltd.
Objectives :
This report is prepared to achieve some objectives. This areCalculate ratios of Square Pharmaceutical Ltd. and analyze their financial situation. Take in Square Pharmaceutical Ltd consideration and analyze that companies three years ratio analysis and analyze them.
To have a look at investment portfolio, analysis of financial statements, risk analysis, SWOT analysis, valuation of SQUARE PHARMACEUTICALS LTD.
Developing & analyzing Common Size Income Statement Determine ROA and ROE using DuPont system and analyze them. Determine the financial weakness and strength of the company. Determine whether investment in this company is profitable or not. If yes then Why.
Methodology :
The study mainly focuses on company analysis based on
SQUARE
PHARMACEUTICALS LTD.
Types of Data:
The report is mainly based on two types of dataPrimary data Secondary data
Collection of Data:
Primary Sources of Data: Interview and discussion with the officials and clients Secondary Sources of Data: Published documents and reports Different books and journals Annual Reports of the company (2007, 2008, 2009) Printed record of the company
Company Analysis
Benefits of The Study :
This study may provide substantial benefits to the managers of any organization, economists of any country, academician, business students, regulatory bodies, decision makers, financial analysts and much other person having concern on insurance and financial markets and institutions.
Limitation :
Every organization has their own secrecy that is not revealed to others. While collecting data interviewing the employees, they did not disclose much information for the sake of the confidentiality of the organization.
Another problem is that creates a lot of confusions regarding verification of data. The clients were too busy to provide me much time for interview.
Company Analysis
Report Body
Company Analysis
Industry Analysis
With a USD 600mn industry and an average annual growth rate of 12%, the Bangladeshi Pharmaceutical industry is the biggest (in volume) amongst all the LDCs. Primarily a generics industry producing about 8,000 different brands which meet 97% of the domestic demand. Local companies enjoy 86% market share. Of the 245 registered pharmaceuticals, the top ten players account for 65% market share. According to the WTO TRIPS agreement, LDCs are exempted from Patent Protection until 2016 allowing legal reverse engineering and sale of patented products. This provides a unique opportunity for Bangladesh over India and China, who are under the patent regime. Bangladesh has made significant progress in the export market. Between 2003 and 2006 pharmaceutical exports increased to about 61 countries from 51 and quadrupled in value from USD 7.9mn to USD 36.5mn. Since many companies have acquired international certifications like USFDA, UKMHRA and TGA, Bangladesh can penetrate into regulated and unregulated markets.
Background of Square Pharmaceuticals Ltd.

In the Bangladeshi pharmaceutical industry we have focused on Square Pharmaceuticals in our report. Square pharmaceuticals ltd. maintains a vast array of partnerships with virtually every major company chain and most independent properties both domestically and internationally. The company was founded in 1958 by Samson H. Chowdhury along with three of his friends as a private firm. It went public in 1991 and is currently listed on the Dhaka Stock Exchange. Square Pharmaceuticals Ltd., the flagship company, is holding the strong leadership position in the pharmaceutical industry of Bangladesh since 1985 and it has been continuously in the 1st position among all national and multinational companies since 1985. Square Pharmaceuticals Ltd. is now on its way to becoming a high performance global player.
Company Analysis
Square Pharmaceuticals Limited is an organization with equal emphasis on Leadership, Technology, Quality and Passion. Square Pharmaceuticals Ltd. is the leading branded generic pharmaceutical manufacturer in Bangladesh producing quality essential and other ethical drugs and medicines. It was established in 1958 and has been continuously in the 1st position among all national and multinational companies since 1985. And now SQUARE Pharmaceuticals is set on becoming a high performance global player in the field. SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has been continuously in the 1st position among all national and multinational companies since 1985. It was established in 1958 and converted into a public limited company in 1991. The sales turnover of SPL was more than Taka 7.5 Billion (US$ 107.91 million) with about 16.92% market share (April 2006 March 2007) having a growth rate of about 23.17%.
Company Analysis
Corporate History:
Company Analysis
MILESTONES/Chronology since Inception:

1958: Debut of Square Pharma as a Partnership Firm. 1964: Converted into a Private Limited Company. 1974: Technical Collaboration with Janssen Pharmaceutica, Belgium, a subsidiary of Johnson and Johnson International, USA. 1982: Licensing Agreement signed with F. Hoffmann-La Roche Ltd., Switzerland. 1985: Achieved first position in the Pharmaceutical Market of Bangladesh among all national and multinational companies. 1987: Pioneer in pharmaceutical export from Bangladesh. 1991: Converted in to a Public Limited Company. 1994: Initial Public Offering of Square Pharmaceutical Shares. 1995: Chemical Division of Square Pharmaceuticals Ltd. starts production of pharmaceutical bulk products (API). 1997: Won the National Export trophy for exporting pharmaceuticals. 1998: Agro-chemicals & Veterinary Products Division of Square Pharma starts its operation. 2001: US FDA/UK MCA standard new Pharmaceutical factory goes into operation built under the supervision of Bovis Lend Lease, UK. 2004: Signing of agreement with ROVIPHARM, Vietnam to manufacture and market Square products under license in Vietnam. 2004: Secured the top position for the best published accounts and report for 2003 in the manufacturing category for transparency and excellence in corporate reporting. 2005: New State-of- the-Art Square Cephlosporins Ltd. goes into operation; built under the supervision of TELSTAR S.A. of Spain as per US FDA/ UK MHRA requirements. 2007: Square Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA approval. 2008: New SVPO (Small Volume Parenteral and Ophthalmic) plant starts operation in Dhaka Unit.
Company Analysis
Organogram:
The Board has approved an Organogram with modern features ensuring clear lines of delegation of authority and reporting for accountability for effective decision making evaluation of performance on merit for both rewarding and disciplinary action. The Organogram of Square Pharmaceuticals Ltd. is as follows:
Company Analysis
Company analysis
Porters 5-Forces Model:
The 5 forces approach can be used in initial diagnosis and as an aid to strategy development. Its main value is as a thought provoking aid to help arrive at a shared understanding of the threats and opportunities facing the firm. Whilst it is a powerful and simple tool for analysis, it doesn't look in great detail about the choices or the ease or difficulty in following a particular course of action. Over the past few decades, the pharmaceutical industry has been struck by many challenges. There have also been opportunities such as: revolutionary developments in information technology and the emergence of market institutions. The pharmaceutical industry includes all companies that develop drugs to consumers. Now we will analyze how Michael Porters five external environmental forces affect the profitability of a pharmaceutical industry as a whole.
Figure: Porters Five Forces Model for Industry Analysis.
Company Analysis Threat of New Entrants:
Threat of new entrants in the pharmaceuticals industry is very low because of the high cost of R&D and patent limitations required to enter the industry. Even though, the economies of scale for production may not be very significant, other barriers to entry are high. To develop new drugs is a very costly and timely process that requires a lot of research and development. Along with high R&D costs, the heavy regulation of the pharmaceutical industry is another barrier to entry. All drugs and chemicals used need to be approved and when the drugs are not approved, the time and money used to develop them is lost by the firm. The standards are very strict. The established firms have large budgets to spend on marketing to uphold their brand, just another cost necessary for a new entrant.
Industry Rivalry: The pharmaceuticals industry is a highly competitive and aggressive market. With strict govt. regulations, high costs with research and highly competitive products in the market place, companies are left frantically trying to release the next best miracle product to stay ahead. Advantages are gained by first mover advantage (patents).
Bargaining Power of Suppliers: It is essential to identify the suppliers for the pharmaceuticals industry. The suppliers could be wide variety of the providers such as the raw materials and intermediates, the manufacturing and production plants, the overseas head offices who supply finished products, the local co-marketing partners who supply products or third party suppliers anywhere along the supply chain. Also labor can be considered as a supplier to industry. All suppliers provide different levels of threat. It is not easy for the pharmaceuticals industry to change suppliers even when they threaten to withhold supply. Labor can also be the significant supplier because labor holds immense power when enquiring for more compensation or reducing quality by working fewer hours. In the pharmaceuticals industry, each supplier holds a certain level of power to be a threat, but it is not too high. The threat from suppliers in the pharmaceuticals industry is not considered significantly bigger than that in other industries as long as there is no
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Company Analysis
considerable threat from the raw material suppliers. Thus, supplier power is low in the pharmaceuticals industry.
Bargaining Power of Buyers: Major consumers in pharmaceuticals industry include doctors, patients, hospitals, drug stores and pharmacists. There are several significant indicators of the threat of buyers in the pharmaceutical industry; they include the number of buyers, product differentiation, and product significance of a buyers final cost. Buyers do not pose a big threat to pharmaceuticals industry, because firms spend most of their research and development on new patent drugs. Since the industry has many buyers, and given that competition normally occurs among consumers, (e.g. competition among hospitals and drug stores); the power of the buyers in terms of the number of buyers in the industry is relatively small. Although big retail stores possess some bargaining power in the industry, they do not pose a big threat in the pharmaceuticals industry as they do to the other industries.
Threat of Substitutes: Threat of substitutes is low (with patents) and medium (after patent expiry). Overall, the pharmaceutical industry shows an upward trend in its core markets. The industry remains highly valued has a favorable market position with strong financial make-up and strong earnings growth. Its future potential demand trend is positive and despite increased competition the industry still shows a continuing upward growth momentum.
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Company Analysis
SWOT analysis:
The following SWOT analysis captures the main strengths and weaknesses within the company, and describes the opportunities and threats of the company.
Strengths:
Highly experienced Senior Executives some of whom has local and International significant pharmaceutical literature. Good reputation with high image. Efficient, skilled, experienced and dedicated staff members Large customer Base and product development capabilities and outstanding Professional services. Resources are available in Bangladesh Square pharmaceutical Ltd is able to make benchmarking medicines Increasing presence in the market Regulatory performance is strong and positive Employee mobility is lower than that of its rival.
Weakness:
Non-availability of high technology Everything is not organized. Time consuming decision making process Incorrect method for collecting resources and inventory management Lack of asset management and debt. Minimum profit in comparison with others.
Opportunities:
Government Support Banking and information technology Credit line with well known foreign bank can gear up its foreign exchange business. Entering in new arena product helps to grow customers' confidence. Opportunity to take market share away from rivals by offering new Innovative product or services. Opportunity to enter into the global market.
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Company Analysis
Threats:
Hiking price of raw materials: More and more factories, especially small ones, are Facing closure due to price hike of raw materials. As we are just entered in the market it will be a great threat for us. Inadequate Power supply: The industry sources also blamed lack of adequate power Supply for making the industry more vulnerable. We have to face the same problem Here and for this many industries are shutting down now days. Mergers and Acquisition Frequent Currency Devaluation Competitors are much in pharmaceutical industries. Competitors are offering innovative new product and services regularly. Matching them is really hard.
Compliance with Accounting Principles:

The financial statement, prepared in accordance with the International Accounting Standards (IAS) as adopted by The Institute of Chartered Accountants of Bangladesh (ICAB) as Bangladesh Accounting Standards (BAS), give a true and fair view of the state of affairs of the company and its subsidiaries and of the results of its operations and its cash flow and comply with the Companies Act 1994, the Securities and Exchange Rules 1987 and other applicable laws and regulations. The elements of financial statements have been measured on "Historical Cost" convention in a going concern concept and on accrual basis in accordance with generally accepted accounting principle (GAAP) and practice in Bangladesh in compliance with the Companies Act 1994, the Securities and Exchange Rules 1987, listing regulations of Dhaka Stock Exchange Ltd. (DSE) & Chittagong Stock Exchange Ltd. (CSE) and International Accounting Standards (IAS) as adopted by The Institute of Chartered Accountants of Bangladesh (ICAB), as Bangladesh Accounting Standard (BAS).
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Company Analysis
Specific accounting policies were selected and applied by the company's management for significant transactions and events that have a material effect within the framework of BAS-1 ''Presentation of Financial Statements'' in preparation and presentation financial statements. The previous years' figures were presented according to the same accounting principles. Compared to the previous year, there were no significant changes in the accounting and valuation principles affecting the financial position and performance of the company. However, changes made to the presentation are explained in the note for each respective item. Accounting and valuation methods are disclosed for reasons of clarity. The company classified the expenses using the function of expenses method as per BAS-1.
Application of Bangladesh Accounting Standards (BAS): The following BASs are applicable for the financial statements for the year under review: BAS - 1 Presentation of Financial Statements BAS - 2 Inventories BAS - 7 Cash Flow Statements BAS - 8 Accounting Policies, Changes in Accounting Estimates and Errors BAS - 10 Events after the Balance Sheet Date BAS - 12 Income Taxes BAS - 14 Segment Reporting BAS - 16 Properties, Plant and Equipment BAS - 17 Leases BAS - 18 Revenue BAS - 19 Employee Benefits BAS - 21 the effects of Changes in Foreign Exchange Rates BAS - 23 Borrowing Costs BAS - 24 Related Party Disclosures BAS - 26 Accounting and Reporting by Retirement Benefit Plans BAS - 27 Consolidated Financial Statements and Accounting for Investment in Subsidiary BAS - 28 Accounting for Investment in Associates BAS - 33 Earnings per Share BAS - 37 Provisions, Contingent Liabilities and Contingent Assets BAS - 38 Intangible Assets
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Company Analysis
What Does Discounted Cash Flow - DCF Mean

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.
Calculated as:
Essentially, it's about how to create shareholder value, which is what makes companies thrive. It shows executives and corporate finance practitioners how to value companies using the discounted cash flow (DCF) approach and apply that information to make wiser business and investment decisions, such as corporate portfolio strategy, acquisitions, or performance management.
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Company Analysis
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Company Analysis
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Company Analysis
Computation of Financial Ratios:

We divided the financial ratios into five the major categories that will help us understand the important economic characteristics of SQUARE PHARMACEUTICALS LTD. We focus on describing the various ratios and computing them using the financial data of that company. The five categories are: 1. Common size statement 2. Internal liquidity (solvency) 3. Operating performance a) Operating efficiency b) Operating profitability 4. Risk Analysis a) Business risk b) Financial risk
1. Common size statement:

Common size statements normalize balance sheet and income statement items to allow easier comparison of different size firms. A common size balance sheet accounts as a percentage of total assets. A common size income statement expresses all income statement items as a percentage of sales. Common size ratios are useful to quickly compare two different size firms and to examine trends over time within a single firm. Common size statements also give an analyst insight into the structure of a firms financial statement that is, the proportion of assets that are liquid, the proportion of liabilities that are shortterm obligations, or the percentage of sales consumed by production costs.
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Company Analysis
For SQUARE PHARMACEUTICALS LTD, the common size statement shows
2. Evaluating Internal Liquidity:

Internal liquidity (solvency) ratios indicate the ability of the firm to meet future short-term financial obligation. They compare near- term financial obligation, such as accounts payable or notes payable, to current assets or cash flows that will be available to meet these obligations.
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Company Analysis
Current ratio:
Clearly the best-known liquidity measure is the current assets, which examines the relationship between current assets and current liability as follows:
Current Ratio = Current Assets / Current Liabilities
Year 2008-2009 2007-2008 2006-2007
Calculations CR 3843513/2640869 1.45 4411836/3500845 1.26 368251/2555566 1.44
Interpretation:
These current ratios experienced a decline of 2007-08 and consistent with the 2008-09 and 2006-07 .As always it is important to compare these values with similar figures for the firms industry and the aggregate market. If the ratios differ from the industry results, it is necessary to determine what might explain it.
Quick ratio:
Some observers believe that current asset not gauges the ability of the firm to meet current obligation because inventories and some other assets included in current assets might not be very liquid. As an alternative, they prefer the quick ratio, which relates current liabilities to only relatively liquid current assets as follows:
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Company Analysis
Quick Ratio = {Cash and Cash Equivalents +Marketable Securities + Account Receivables}/Current Liabilities
Years 2008-2009 2007-2008 2006-2007
Calculations 791,269,742/2,640,868,554 585,791,340/3,500,845,103 482,969,816/2,555,566,286
Quick Ratio 0.30 0.17 0.19
Interpretation:
These quick ratios for square pharmaceuticals Ltd. were small, but were fairly constant except 2008-2009. This indicates that now the company has an ability to meet up the quick debt and liquid cash in hand.
Cash ratio:
The most conservative liquidity ratio is the cash ratio, which relates the firms cash and short term marketable securities to its current liabilities as follows:
Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
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Company Analysis
Years 2008-2009 2007-2008 2006-2007
Calculations
Cash Ratio
313,707,740/2,640,868,554 0.12 225,545,694/3,500,845,103 0.06 160,105,179/2,555,566,286 0.06
Interpretation:
The cash ratios of 2008-09 was better than the previous two years but quite low and it would be cause for concern except that such cash ratios are typical for a fast-growing firm with larger inventories being financed by accounts payable to its suppliers. In addition, The Company has strong lines of credit available on short notice at various banks. Still, as an investor, it would to conform how the company can justify such a low ratio and how it is able to accomplish this.
Receivables Turnover:
In addition to examining total liquid assets relative to near-term liabilities, it is useful to analyze the quality (liquidity) of the accounts receivables. One way to do this is to calculate how often the companys turnover, which implies an average collection period. The faster these accounts are paid, the sooner the company gets the funds that can be used to pay off its own current liabilities. Receivables turnover is computed as follows:
Receivable Turnover = Net Annual Sales/Average Receivables
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Company Analysis
We compute the average receivables figure form the beginning receivables figure plus the ending value divided by two.
For 2008-2009
= 11,366,597,928/ {(477,562,002+360,245,646)/2} = 11,366,597,928/418,903,824 = 27.13 times
For 2007-2008
= 9,565,715,902/ {(360,245,646+322,864,637)/2} = 9,565,715,902/ 341,5551,41.5 = 28.00 times
For 2006-2007
= 8,711,034,758/ {(322,864,637+288,732,137)/2} = 8,711,034,758/305,798,387 = 28.47 times
Given these annual receivables turnover figures, an average collection period is as follows:
Average Receivable Collection Period = 365/Average Receivable Turnover
For 2008-2009 = 365/27.13 = 13.45 days
For 2007-2008 = 365/28.00 = 13.04 days
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Company Analysis
For 2006-2007 = 365/28.47 = 12.82 days
Interpretation:
These results indicate that square pharmaceutical was collected its accounts receivables in about 13 days on average and collection period has increased slightly over the recent years. To determine whether these receivables collection numbers are good or bad, it is essential that they be related to the companys credit policy and to comparable collection figures for other companies in the industry.
Inventory Turnover:
Other current assets that should be examined in terms of its liquidity are inventory based upon the companys inventory turnover and implied processing time. Inventory turnover can be calculated relative to sales or cost of goods sold. The preferred turnover ratio is relative to cost of goods sold because it does not include the profit implied in sales.
Inventory Turnover = Cost of Goods Sold/ Average Inventory
For square pharmaceutical Ltd. The inventory turnover ratios as follows:
For 2008-2009 = 5,672,565,973/ {(2,098,755,231+2,026,736,322)/2} = 5,672,565,973/2,062,745,777 = 2.75 times
For 2007-2008 = 4,856,061,933/ {(2,026,736,322+1,544,191,798)/2} = 4,856,061,933/1,785,464,060
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Company Analysis
= 2.72 times
For 2006-2007 = 4,268,447,662/ {(154,191,798+1,342,364,478)/2} = 4,268,447,662/1,443,278,138 = 2.96 times
Given the turnover values, we compute the average processing time as follows:
Average Inventory Processing Period = 365/ Average Annual Turnover
For 2008-2009 = 365/ 2.75 = 133 days
For 2007-2008 = 365/2.72 = 134 days
For 2006-2007 = 365/2.96 = 123 days
Interpretation:
Inventory turnover of square pharmaceuticals in 2008-09 and 2007-2008 was almost same. This seems like a good turnover figure but it is essential to examine this figure relative to an industry norm and/or the companys prime competition. An abnormally high inventory turnover that could mean inadequate inventory that could lead to outages, backorders, and slow delivery to customers .On the other hand low inventory turnover value and processing time indicate that capital is being tied up in inventory and could signal obsolete inventory.
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Company Analysis
Cash Conversion Cycle:

A very useful measure of overall internal liquidity is the cash conversion cycle, which combines information from receivables turnover, the inventory turnover, and accounts payable turnover.
Payable Turnover Ratio = Cost of Goods Sold/ Average Trade Payable
For 2008-2009 = 5,672,565,973/ {(124,222,699+100,953,258)/2} = 5,672,565,973/112,587,978.5 = 50.38 times
For 2007-2008 = 4,856,061,933/ {(100,953,258+60,601,743)/2} = 4,856,061,933/80,777,500.5 = 60.12 times
For 2006-2007 = 4,268,447,662/ {(60,601,743+79,390,166)/2} = 4,268,447,662/69,995,954.5 = 60.98 times
Payable Payment Period= 365/ Payable Turnover
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Company Analysis
For 2008-2009 = 365/50.38 = 7 days
For 2007-2008 = 365/60.12 = 6 days
For 2006-2007 = 365/60.98 = 6 days
Cash Conversion Cycle = Receivable Days + Inventory Processing Days - Payable Payment Period
Therefore, the cash conversion cycle for Square Pharmaceuticals equals:
Year 2008-2009 2007-2008 2006-2007
Receivable Days 13 13 32
Inventory Processing days 133 134 123
Payable Payment Period (days) 7 6 6
Cash Conversion Cycle (days) 139 141 129
Interpretation:
Square Pharmaceuticals Ltd. has experienced stable receivables days in 2008-09 and 2007-08 but in 2006-07 it differs (32-13)=19 days. Inventory processing days were almost same in 2008-09 and 2007-08 but in 2006-07 it differs (134-123) =21 days and the payable payment period were almost same in three fiscal years. Overall the result has been a small decrease in 2008-2009 compared to 2007-08 in its cash conversion cycle but it differs quietly in 2006-07 fiscal as (139-129) =10 days.
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Company Analysis
Evaluating operating Performance:

The ratios that indicate how well the management is operating the business can be divided into two subcategories: 1) Operating efficiency ratios 2) Operating profitability ratios.
1) Operating Efficiency Ratios:

Operating efficiency ratios examine how the management uses its assets and capital, measured in terms of the tk. of sales generated by various assets or capital categories. These are
Total Asset Turnover:

The total assets turnover ratios indicate the effectiveness of the firms use of its total assets base (net assets equal gross assets minus depreciation on fixed assets). It is compute as follows:
Total Asset Turnover = Net Sales/Average Total Assets
For 2008-2009 = 9,820,796,568/ {(13,251,242,856+2,703,127,420)/2} = 9,820,796,568/7,977,185,135 = 1.23 times
For 2007-2008 = 8,257,843,739/ {(12,703,127,420+10,486,940,004)/2} = 8,257,843,739/11,595,033,710 = 0.71 times
For 2006-2007 = 7,500,811,349/ {(10,486,940,004+9,298,987,312)/2} = 7,500,811,349/9,892,963,656 = 0.75 times
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Company Analysis
Interpretation:
Square Pharmaceuticals Ltd. has experienced a quite good total assets turnover in 2008-09 which is 1.23 times compared to other two fiscal years. So we can say that the effectiveness the firms uses the total assets increase (1.230.71) =0.52 times than the previous fiscal year.
Net Fixed Asset Turnover:

The net fixed assets turnover ratio reflects the firms utilization of fixed assets. It is computed as follows:
Net Fixed Asset Turnover = Net Sales/Average Net Fixed Assets
Calculation of fixed assets- 2008-2009:
For 2008-2009 = 9,820,796,568/ {(4,088,432,171+4,899,679,832)/2}

= 2.19 times
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Company Analysis
For 2007-2008 = 8, 257, 843, 739 / {(4,088,432,171+3,531,003,509)/2}

= 2.17 times
For 2006-2007 = 7,500,811,349/ {(2,273,761,161+3,531,003,509)/2}

= 2.58 times
Interpretation:
Square Pharmaceuticals Ltd. Net fixed assets turnover ratios, which indicate a decline trend in 2007-2008 and in 2008-2009 compared to the 20062007 fiscal. An abnormally low turnover implies capital tied up in excessive fixed
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Company Analysis
assets, which an abnormally high turnover ratio can indicate a lack of productive capacity to meet sales demand or it might imply the use of old, fully depreciated equipment that may be obsolete.
Equity Turnover:
In addition to specific assets turnover ratios, it is useful to examine the turnover for alternative capital components. An important one, equity turnover, is computed as follows:
Equity Turnover = Net Sales/Average Equity
For 2008-2009 = 9,820,796,568/ {(9,949,397,634+8,417,040,705)/2} = 9,820,796,568/9,183,219,170 = 1.06 times
For 2007-2008 = 8,257,843,739/ {(8,417,040,705+7,333,257,612)/2} = 8,257,843,739 / 7,875,149,159 = 1.04 times
For 2006-2007 = 7,500,811,349/ {(7,333,257,612+6,402,014,772)/2} = 7,500,811,349 / 3,986,736,192 = 1.88 times
Interpretation:
Square Pharmaceuticals Ltd has experienced a small decline in this ratio during the past several years. In our later analysis of sustainable growth, we
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Company Analysis
examine the variables that affect the equity turnover ratio to understand what caused any changes. Following an analysis of companys record of operating efficiency based upon its ability to generate sales from its assets and capital, the next step is to examine its profitability in relation to sales and capital.
2) Operating profitability ratios:

The ratios in this category indicate two facets of profitability: The rate of profit on sales (profit margin) The percentage return on capital employed.
Gross Profit Margin:

Gross profit equals net sales minus the cost of goods sold. The gross profit margin is computed as:
Gross Profit Margin = Gross Profit/Net Sales
For 2008-2009 = 4,148,230,595/9,820,796,568 = 42.23% For 2007-2008 = 3,401,781,806/8,257,843,739 = 41.19% For 2006-2007 = 3,232,363,687/ 7,500,811,349 = 43.09%
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Company Analysis
Interpretation:
This ratio indicates the basic cost structure of the firm. An analysis of this ratio over time relative a comparable industry figure shows the companys cost price position. Square Pharmaceuticals Ltd has experienced quite stability in this margin during the last several years. As always, it is important to compare these margin and any change with the industry and strong competitor. Notably, this margin can be impacted by a change in the companys product mix toward higher or lower profit margin items.
Operating Profit Margin:

Operating profit is gross profit minus sales, general, and administrative (SG&A) expenses. The operating profit margin is computed as:
Operating Profit Margin = Operating Profit/Net Sales
For 2008-2009 = 2,368,437,227/9,820,796,568 = 24.11%
For 2007-2008 = 1,709,305,818/8,257,843,739 = 20.70%
For 2006-2007 = 1,825,752,239/7,500,811,349 = 24.34%
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Company Analysis
Interpretation:
The variability of the operating profit margin over time is a prime indicator of the business risk. Square Pharmaceuticals Ltd has experienced a constant operating profit Margin in 2008-09 and 2006-07 but in 2007-08 it has decreased about 4.00%. It is clearly shows that the companys ability to control its SG&S expense as it has experienced strong sales growth.
Net Profit Margin:

This margin relates net income to sales. In the case of Square Pharmaceuticals Ltd, this is the same as operating income after taxes because the company does not have any significant non operating adjustments. The net income used is earnings after taxes but before dividends on preferred and common stock. This margin is computed as follows:
Net Profit Margin = Net Income /Net Sales
For 2008-2009 = 1,890,052,929/9,820,796,568 = 19.25%
For 2007-2008 = 1,381,863,093/8,257,843,739 = 16.73%
For 2006-2007 =1,303,242,840/7,500,811,349 = 17.37%
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Company Analysis
Interpretation:
Square Pharmaceuticals Ltd has experienced an increasing trend in net profit margin. In 2008-09 fiscal year net profit margin is very high than the previous fiscal year. This analysis has computed based on sales and earnings from continuing operation because our analysis seeks to derive insights about future expectation.
Return on Owners Equity:

The return on owners equity (ROE) ratio extremely important to owner of the enterprise( the common stockholder) because it indicates the rate of return that management has on the capital provided by the owner after accounting for payments to all other capital suppliers.
Return on Owners Equity = Net income/Average Total Equity
For 2008-2009 = 1,890,052,929/ {(8,417,040,705+ 9,949,397,634)/2} = 20.58%
For 2007-2008 = 1,381,863,093/ {(7,333,257,612+8,417,040,705)/2} = 17.55%
For 2006-2007 =1,303,242,840/ {(6,402,014,772+7,333,257,612)/2} = 18.98%
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Company Analysis
Interpretation:
From the calculation we can see that Square Pharmaceuticals Ltd has experienced an increase of 3.03% in 2008-09 compared to the 2007-08 fiscal year. And decrease 1.43% in 2007-08 compared to 2006-07 fiscal year.
Risk analysis:
Risk analysis examines the uncertainty of income flows for the total firm and for the individual sources of capital (that is debt, preferred stock, and common stock). This involves examining the major factors that cause a firms income flow to vary. More volatile income flows mean greater risk (uncertainty) facing the investor. The total risk of the firm has two internal components: a) Business risk b) Financial risk
a) Business risk:
Business risk is the uncertainty of income caused by the firms industry. In turn, this uncertainty is due to the firms variability of sales caused by its products, customers, and the way it produces its product. Specifically, a firms operating earnings vary over time because its sales and production costs vary. Business risk generally measured by the variability of the firms operating income over time. In turn, the earnings variability measures by the standard deviation of the historical operating earnings series. The standard deviation of operating earnings divided by the average operating earnings is the coefficient of variation (CV) of operating earnings: Business Risk = f (Coefficient of variation of operating earnings) Standard deviation of operating earnings (OE)
= --------------------------------------------------------------------------------------
Mean operating leverage
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Company Analysis
Square Pharmaceuticals: Risk Analysis
Business Risk Analysis: Business risk related to the inability of the firm to hold its competitive position and maintain stability and growth in earnings. Here earning variability is low that is less risky but sales variability is high that is highly risk.
Standard deviation of EBIT/ sales CV

= ------------------------------------------------------
Mean of EBIT/ sales
Earning variability SD of EBIT 460.47 SD of Sales
Sales Variability 633.23
Mean of EBIT 2046.18 CV 0.23
Mean of Sales 4706.48 CV 0.13
Financial Risk: The uncertainty of future incomes due to the companys financing. Debt to total capital ratio: 2007 Long term debt 492,569,379 7,333,257,612 Total capital 6.72% 2008
602,584,615 8,417,040,705
2009
449,757,608 9,949,397,634
7.16%
4.52%
Debt to total Capital: Debt to total capital ratio decrease up to year 2008 after that it decreases.
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Company Analysis
Time interest earned ratio:
A coverage ratio computed by dividing earnings before interest and tax (EBIT) by interest charges; measures the ability of the firm to meet its annual interest payment. From year 2006 to 2008 the ratio decreases.
Financial Leverage % change in EPS % change in EBIT
2007 .117866639 .155389823
2008 .060312885 .068124977
2009 .367694592 .385613505
The Decomposition of ROE (DuPont System):
DuPont analysis (also known as the DuPont identity, DuPont Model or the DuPont method) is an expression which breaks ROE (Return on Equity) into five parts. The name comes from the DuPont Corporation that started using this formula in the 1920s.
One of the more useful measures of the financial performance of a company is the DuPont Equation. To understand the factors affecting a firms ROE including its trend and its performance relative to competitors, analysts often decompose ROE into a product of a series of ratios. This model allows the stock analyst, as well as the investor, to examine the profitability of a company using information from both the income statement as well as the balance sheet.
ROE = Net Income / Common Equity

= (Net profit pretax profits) (Pretax profits EBIT) (EBIT Sales) (Sales Assets) (Assets Equity) = Tax burden Interest burden Margin on sales Asset Turnover Equity Multiplier or Financial Leverage
Calculation of DuPont system in 2008-2009:
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Company Analysis
Tax burden:
The ratio of net income after tax to pretax profit is the tax burden ratio. Its value reflects both the government tax and the policies pursued by the firm in trying to minimize its tax burden. It is calculated as follows: Tax burden = Net profit pretax profits For 2008-09 = 1,890,052,929/2,511,259,217
= 0.75
Interest burden:
The ratio of pretax profits to EBIT is the interest burden. The companys pretax profits will be greatest when there is no interest payment to be made to debt holders. It is calculated as follows:
Interest burden = Pretax profits EBIT For 2008-09 = 2,511,259,218/2,368,437,227 =1.06
Margin on sales:
This margin means the firms operating margin or return on sales. Profit margin shows operating per tk. of sales. It is calculated as follows: Margin = EBIT Sales For 2008-09 =2,368,437,227/ 9,820,796,568 = 0.24
Assets Turnover:
The ratios of sales to total assets, is known as total asset turnover (ATO). It indicates the efficiency of firms use of assets in the sense that it measures the annual sales generated by each tk. of assets. It is calculated as follows:
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Company Analysis
Assets Turnover = Sales Assets For 2008-09 = 9,820,796,568/ 13,251,242,856 = 0.74 times
Equity Multiplier or Financial Leverage:

The ratio of assets to equity is a measure of firms degree of financial leverage. This financial leverage is also referred to as the equity multiplier whereby the two ratios margin on sales and total assets turnover equal return on total assets (ROTA) and ROTA times the financial leverage multiplier equals ROE. It is calculated as follows: Equity Multiplier or Financial Leverage = Assets Equity For 2008-09 = 13,251,242,856/ 9,949,397,634 =1.33
The operating financial results of the Company for the year 2008-2009 as compared to previous year are summarized here under:
It may be observed that the Gross Turnover increased by 18.51% during the year as against 9.81% in the previous year. The growth in gross profit had positive impact on net profit. The Earning per Share of Tk. 156.56 is based on increased outstanding 12,072,240 shares of Tk. 100 each. However, if the original
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Company Analysis
issued capital at the time of IPO is considered, the EPS would stand at Tk. 945.03 in 2008-2009 as against Tk. 690.93 in 2007-2008.
Calculation of DuPont system in 2007-2008:

Tax burden:
Tax burden = Net profit pretax profits For 2007-08 = 1,381,863,093/1,868,634,190 = 0.74
Interest burden:
Interest burden = Pretax profits EBIT For 2007-08 =1,868,634,190/1,709,305,818 =1.09
Margin on sales:
Margin = EBIT Sales For 2007-08 =1,709,305,818/ 8,257,843,739 = 0.21
Assets Turnover:
Assets Turnover = Sales Assets For 2007-08 = 8,257,843,739/ 12,703,127,420 = 0.65 times
Equity Multiplier or Financial Leverage:
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Company Analysis
Equity Multiplier or Financial Leverage = Assets Equity For 2007-08 = 12,703,127,420/ 8,417,040,705 =1.51
The operating financial results of the Company for the year 2007-2008 as compared to previous year are summarized here under:
It may be observed that the Gross Turnover increased by 9.81% during the year under review over the previous year of 22.94% and the Gross Profit increased by 5.24% during the current year as against 26.04% in the previous year. The slower growth in gross profit was due to higher rate of increase in cost of raw materials, packing materials & factory overhead with negative impact on gross profit. Cost of power and laboratory consumables increased at over 30% which increased overhead. Operating & financial expenses also increased. Net profit margin slightly declined over previous year due to increase in interest and administrative expenses, and provision for corporate taxes and deferred taxes. The Earning per Share of Tk. 154.23 is based on increased outstanding 8,942,400 shares of Tk. 100 ach. However, if the original issued capital for cash at the time
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Company Analysis
of IPO is considered, the EPS would stand at Tk. 690.93 in 2007-2008 as against Tk. 651.62 in 2006-2007.
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Company Analysis
Chapter 3
Conclusion
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Company Analysis
Findings:
Square Pharmaceuticals Limited (SPL) is leading the Pharmaceuticals sector from the very beginning. DPL grow as pharmaceutical industry matured and yet today it is one of the fastest growing sectors of the country with a growth rate close to 15%. The positives that differentiate are the market leader; it controls approximately 20% of the market share.
Second, the company is about to enter the European market by next year.
Third it has a large and diversified portfolio of investment and businesses that gives it very sustainable earnings. Strong brand image, a large distribution network, large product portfolio and creative marketing make us optimistic about the future potential of the company.
The pharmaceuticals market is an Oligopoly in nature despite the presence of more than 250 companies. The top 15 players control around 73% of the market share.
Though the sector is reaching maturity as indicated by the stable sales growth for last few years. However, new opportunities of export are opening up and 3 year CAGR of revenue was 15%.
Their DDM model gives us a fair value of BDT4925 for December 2009 whereas their PE based relative valuation technique gives us BDT3971 for the same period.
On the other hand when they value SPL by using the sum of the parts, we arrive at a value of BDT6332 for December 2009. Considering the assumption and market perception they back the DDM approach and their bet is that SPL stock will reach a price of 4 ,925 by December 2009.
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Company Analysis
Conclusion
This report has two identical parts. In the first part we have calculated three years ratio Of Square pharma annual report of financial year 2007-2009. We have calculated their ratios and shown DuPont analysis. Analyzing companies performance compare to the square pharmaceutical company also measured in this part of the report. In the liquidity ratio we can see that both current ratio and quick ratio improved over time marginally. The situation was almost stable. Inventory turnover, Total Asset Turnover, Fixed Asset Turnover all had been relatively stable throughout the three years. Average Collection period is also very good. The only problem here is the Average collection period which is way high. However, such a situation is actually pretty much normal for big companies. Here Debt ratio has improved over time and TIE has remained pretty much stable. Apart from Gross Profit Ratio, most of the Profitability ratios have actually decreased in 2005-06. Although the decrease rate is very minimal still it is a problem for Square and they need to try to improve these ratios. Both P/E ratio and M/B ratio declined in the year 2005-06. But this happened mostly not because of the companys failure but for the fact that the whole market was not so friendly for investment in that year.
From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been doing pretty good throughout the years. It is true that last year there return did decline but it is still pretty much satisfactory. Therefore, we can conclude that Square Pharmaceuticals Ltd. is a good enough company to invest on.
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Company Analysis
Recommendations
After completing our study, we found some problems that should be kept in control. Recommendations are suggested on the basis of problems.
Following troubles found in analysis:
Management should emphasis to reduce the differences between Average collection Period and average payment period. It will result liquidity of the company. Management should try to boost up its quick and current rations & the earnings per share. Company should reduce its dependency on debt because it is very risky. Management can increase their profit before tax if they if they can cut the financial cost and use less debt capital.
Continue to seek intellectual property rights protection in developing nations. Protecting the pharmaceutical property rights will eliminate copy-cat drugs and lost profits in those countries. Given the increase in life expectancy, continue to pursue research in pharmaceutical products, which enhance the quality of life for the aging population. Global awareness of pharmaceutical benefits will produce opportunities for the pharmaceutical industry to expand.
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Company Analysis
References
Dewan Mostafizur Rahman Lecturer Department of Finance Faculty of Business Studies University of Dhaka
Square Pharmaceuticals Limited Square Centre, 48, Mohakhali C/A, Dhaka 1212
http://www.squarepharma.com.bd/ http://www.yahoo.com/ http://www.google.com/ http://en.wikipedia.org/wiki/ http://www.banglapedia.org/
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Background of Square Pharmaceuticals Ltd.

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MILESTONES/Chronology since Inception:

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Figure: Porters Five Forces Model for Industry Analysis.