Valuation of Square Pharmaceutical Ltd

S Q U A R E P H A R M A C E U T I C A L L T D .

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INTRODUCTION

Objectives

Methodology

Benefits of the study

Limitation

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Firm Valuation Square Pharmaceuticals Ltd.

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This report is prepared to achieve some objectives. This are-

Calculate ratios of Square Pharmaceutical Ltd. and analyze their financial situation.

Take in Square Pharmaceutical Ltd consideration and analyze that companies’ three year’s 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.

The study mainly focuses on Firm Valuation based on SQUARE PHARMACEUTICALS LTD.

Types of Data: The report is mainly based on two types of data- Primary data Secondary data

Collection of Data:

Primary Sources of Data: Interview and discussion with the officials and clients

Objectives :

Methodology :


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Secondary Sources of Data: Published documents and reports Different books and journals Annual Reports of the company (2008, 2009, 2010) Printed record of the company

Here, we have used top to bottom approach for valuation. The report started with the

economy analysis of Bangladesh for previous three years, then the pharmaceutical industry

analysis and after that detailed on the Firm Valuation based on “SQUARE

PHARMACEUTICALS LTD”.

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.

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.

Benefits of The Study :

Limitation :


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REPORT BODY

Economy Analysis

Industry Analysis

Background of Square

Pharmaceuticals Ltd.

Company Analysis


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Economy Analysis

Growth in the manufacturing sector moderated to 7.2 percent in the FY08 from 9.7 percent in the FY07. Output in the electricity, gas, and water supply sectors increased by 6.8 percent compared with 2.1 percent in the FY07. Output in the construction sector grew by 5.7 percent compared with 7.0 percent, the fall being mainly attributable to the higher price of construction materials during that period. Service sectors’ growth rate declined from 6.9 percent in the FY07 to 6.7 percent in the FY08.

In Bangladesh stock markets are performing strongly in spite of downturns in stock markets of many advanced and developing countries because of global recession. For example in 2001 the numbers of enlisted stocks were 249. In 2005 these increased marginally to 286. Currently, this increased to 431. Similarly, in 2001 market capitalization was only 2.5 percent of GDP, which increased to 6.2 percent in 2005 and 17.1 percent at the end of 2009.

The performance of the capital market during the 2008 showed somewhat downward trend. During this period the Dhaka Stock Exchange (DSE) general index declined by 7.4 percent compared to 2007. And market capitalization increased by 40.5 percent. At the end of May 2009 general index decreased by 18.8 percent compared to the same period in the previous year. During this time market capital was increased by 7.7 percent. In May 2009 the volume of share trade was in the amount of Taka 103.13 billion, which was Taka 69.96 billion in May 2008.

The recent volatility in the capital market reflects some response to global trends, higher earnings expectations by investors, and market sensitivity to the actions of some merchant banks and large investors. To protect against excessive volatility, the Securities and Exchange Commission (SEC) has strengthened its supervision and issued licenses to some commercial banks to undertake merchant banking operations. To deepen the stock market, new system of alternative valuation through the “Book Building” rules have been introduced to encourage new companies with strong fundamental to enter the stock market.

On the other hand due to the advent of recession in the west prices of our major export items, such as RMG products, sea foods, leather and leather products diminished. As a result our balance of trade gap widened. However, the increased remittances from our wage-earners had enabled the country to sustain a positive balance of payment without extra support from IMF and others. Amidst these variances, our industrial growth continued at satisfactory level despite fall in FDI. The GDP growth rate during fiscal year 2008-09 has been estimated to fall to 5.9% from earlier year's actual of 6.71%.The projection for 2009-10 however shows a further fall to 5.5%. The economy is however expected to grow from subsequent year with recovery taking effect in the west by 2010-11.


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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, LDC’s 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. The pharmaceutical sector attained a growth of 6.91% during the year 2008 as against 15.80% during the previous year. The national pharma market growth and that of the company during the past few years are given below:

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2006 2007 2008 2009 2010

Company’s Growth Rate

National Market Growth Rate


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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

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%.


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Company analysis

Porter’s 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 Porter’s five external environmental forces affect

the profitability of a pharmaceutical industry as a whole.

Figure: Porter’s Five Forces Model for Industry Analysis.


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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 considerable threat from the raw material

suppliers. Thus, supplier power is low in the pharmaceuticals industry.


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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 buyer’s 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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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.

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.


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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).

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.


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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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Valuation

Valuation is 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.

In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets or on liabilities. Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

Executives must not only have a theoretical understanding of value creation, but must be able to create tangible links between their strategies and value creation. This means, focusing less on recent financial performance and more on what they are doing to nurture a "healthy" company that can create value over the longer term.

Valuation Methods:

Business Valuation has become an intrinsic part of the corporate landscape. The corporate

landscape has witnessed dynamic changes in the recent years as mergers and acquisitions,

corporate restructurings, and share repurchases are happening in record numbers, both in

the United States and abroad. At the core of the dynamics of all these activities stands some

notion of valuation. The valuation methods are not only necessary for accounting purposes

but they also serve as roadmaps for the angel investors, venture capitalists and corporate

acquirers in order to know the true value of a company’s assets. Although there are

numerous individual valuation techniques, these are categorized into four standard business

valuation approaches applying standard formulas:

1. Discounted dividends: this approach expresses the value of the firm’s equity as the present value of forecasted future dividends.

2. Discounted abnormal earnings: under this approach the value of the firm’s equity is expressed as the sum of its book value and discounted forecasts of “abnormal” earnings.

3. Valuation based on price multiples: under this approach a current measure of performance or single forecast of performance is converted into a value through application of some price multiple for other presumably comparable firms.

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Market_value

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Liability_(financial_accounting)

http://en.wikipedia.org/wiki/Investment_analysis

http://en.wikipedia.org/wiki/Capital_(economics)

http://en.wikipedia.org/wiki/Merger

http://en.wikipedia.org/wiki/Takeover

http://en.wikipedia.org/wiki/Financial_reporting

http://en.wikipedia.org/w/index.php?title=Tax_liability&action=edit&redlink=1

http://en.wikipedia.org/wiki/Litigation


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4. Discounted cash flow analysis: this approach involves the production of detailed, multiple-year forecasts of cash flows. The forecasts are then discounted at the firm’s estimated cost of capital to arrive at an estimated present value.

Discounted Cash Flow – DCF:

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 (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. Calculated as:

This valuation method based on free cash flow is considered a strong tool because it

concentrates on cash generation potential of a business. This valuation method uses the

future free cash flow of the company (meeting all the liabilities) discounted by the firm's

weighted average cost of capital (the average cost of all the capital used in the business,

including debt and equity), plus a risk factor measured by beta. Since risks are not always

easy to determine precisely, Beta uses historic data to measure the sensitivity of the

company's cash flow, for example, through business cycles.

This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present. This concept of discounting future monies is commonly known as the time value of money. For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The size of the discount is based on an opportunity cost of capital and it is expressed as a percentage. Some people call this percentage a discount rate.

In finance theory, the amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. Classic economic theory maintains that people are rational and averse to risk. They, therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words, the more risky the investment, the more return investors want from that investment.

http://en.wikipedia.org/wiki/Opportunity_cost_of_capital




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For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows.

Here,

Cost of equity, Ke = Rf + B ( Rm - Rf ) = 0.12 Cost of debt = 0.105

Interest rate on bond = 15% Debt % of Capital = 25% Equity % of Capital = 75% WACC = 0.11625

2005 2006 2007 2008 2009

Company Growth 13.08% 14.30% 22.94% 9.81% 18.83%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%


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Price Earnings Multiple Valuation:

The price-earnings ratio (P/E) is simply the price of a company's share of common stock in the public market divided by its earnings per share. By multiplying this P/E multiple by the net income, the value for the business could be determined. This valuation method provides a benchmark business valuation as the non-listed companies wishing to use this method; a comparable quoted company/sector should be used. Financial experts believe that business valuations using any method should not be too high or too low because that could be costly, resulting in either overpayment or lost opportunities. The firms that face important investment, acquisition, or growth decisions, particularly in a rapidly changing competitive environment, effective management requires an understanding of value creation and a command over valuation analysis. Valuation using multiples involves the following steps:

Selecting a measure of performance or value as the basis for multiple calculations. Here we have taken earnings per share (EPS) of Square Pharmaceuticals.

Estimating price multiples for comparable firms using the measure of performance or value. We have taken some company’s EPS belong to pharmaceutical industry.

Applying the comparable firm multiple to the performance or value measure of the firm being analyzed. Industry's P/E Multiplier = 18.75 Square Pharmaceutical’s EPS = 156.56 Share Price = (156.56*18.75) = tk.2935.5


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Discounted dividends:

The Dividend Discount Model is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. It is used to evaluate stocks based on the net present value of the future dividends.

Dividend discount model is a tool that produces a number based on the data provided. The equation can be written as

Where P0 is the current stock price, D1 is the expected dividend, r is the required rate of

return, and g is the expected growth rate in perpetuity.

From the first equation, one might notice that in the long run, the growth rate cannot exceed the cost of equity; r − g cannot be negative, r > g. In the short run if g > r, then usually a two stage DDM is used:

Here, Dividend per Share = 40 Cost of Equity = 12% Return on Owner's Equity (ROE) = 17.55% Retention Rate, b = (1-.4) = .60 g = b X ROE = (.60 X .1755) = 0.1053 = 10.53% Share Price = 40(1+.1053)/ (.12-.1053) = tk.3007.6

http://en.wikipedia.org/wiki/Net_present_value

http://en.wikipedia.org/wiki/Dividends

http://en.wikipedia.org/wiki/Cost_of_equity


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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 firm’s financial statement –

that is, the proportion of assets that are liquid, the proportion of liabilities that are short-

term obligations, or the percentage of sales consumed by production costs.

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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For SQUARE PHARMACEUTICALS LTD, the common size statement shows:

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


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Interpretation:

These current ratios experienced a decline of 2008-09 and consistent with the 2009-10

and 2007-08 .As always it is important to compare these values with similar figures for the

firm’s 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:

Interpretation:

These quick ratios for square pharmaceuticals Ltd. were small, but were fairly

constant except 2009-2010. This indicates that now the company has an ability to meet up

the quick debt and liquid cash in hand.

Year Calculations CR

2009-2010 3843513/2640869 1.45

2008-2009 4411836/3500845 1.26

2007-2008 368251/2555566 1.44

Quick Ratio = {Cash and Cash Equivalents +Marketable Securities + Account

Receivables}/Current Liabilities

Years Calculations Quick Ratio

2009-2010 791,269,742/2,640,868,554 0.30

2008-2009 585,791,340/3,500,845,103 0.17

2007-2008 482,969,816/2,555,566,286 0.19


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Cash ratio:

The most conservative liquidity ratio is the cash ratio, which relates the firm’s cash

and short term marketable securities to its current liabilities as follows:

Interpretation:

The cash ratios of 2009-10 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 company’s 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:

Years Calculations Cash Ratio

2009-2010 313,707,740/2,640,868,554 0.12

2008-2009 225,545,694/3,500,845,103 0.06

2007-2008 160,105,179/2,555,566,286 0.06

Cash Ratio = (Cash + Marketable Securities)/Current

Liabilities

Receivable Turnover = Net Annual Sales/Average

Receivables


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We compute the average receivables figure form the beginning receivables figure plus

the ending value divided by two.

For 2009-2010 = 11,366,597,928/ {(477,562,002+360,245,646)/2}

= 11,366,597,928/418,903,824

= 27.13 times

For 2008-2009 = 9,565,715,902/ {(360,245,646+322,864,637)/2}

= 9,565,715,902/ 341,5551,41.5

= 28.00 times

For 2007-2008 = 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:

For 2009-2010 = 365/27.13 = 13.45 days

For 2008-2009 = 365/28.00 = 13.04 days

For 2007-2008 = 365/28.47 = 12.82 days

Average Receivable Collection Period = 365/Average

Receivable Turnover


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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 company’s 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 company’s 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.

For square pharmaceutical Ltd. The inventory turnover ratios as follows:

For 2009-2010 = 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 2008-2009 = 4,856,061,933/ {(2,026,736,322+1,544,191,798)/2}

= 4,856,061,933/1,785,464,060

= 2.72 times

For 2007-2008 = 4,268,447,662/ {(154,191,798+1,342,364,478)/2}

= 4,268,447,662/1,443,278,138

= 2.96 times

Inventory Turnover = Cost of Goods Sold/ Average Inventory


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Given the turnover values, we compute the average processing time as follows:

For 2009-2010 = 365/ 2.75 = 133 days

For 2008-2009 = 365/2.72 = 134 days

For 2007-2008 = 365/2.96 = 123 days

Interpretation:

Inventory turnover of square pharmaceuticals in 2009-10 and 2008-2009 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 company’s prime competition. An abnormally high inventory

turnover that could mean inadequate inventory that could lead to outages, backorders, and

slow delivery to customer’s .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.

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.

For 2009-2010 = 5,672,565,973/ {(124,222,699+100,953,258)/2}

= 5,672,565,973/112,587,978.5

= 50.38 times

Average Inventory Processing Period = 365/ Average Annual Turnover

Payable Turnover Ratio = Cost of Goods Sold/ Average Trade Payable


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For 2008-2009 = 4,856,061,933/ {(100,953,258+60,601,743)/2}

= 4,856,061,933/80,777,500.5

= 60.12 times

For 2007-2008 = 4,268,447,662/ {(60,601,743+79,390,166)/2}

= 4,268,447,662/69,995,954.5

= 60.98 times

For 2009-2010 = 365/50.38 = 7 days

For 2008-2009 = 365/60.12 = 6 days

For 2007-2008 = 365/60.98 = 6 days

Therefore, the cash conversion cycle for Square Pharmaceuticals equals:

Year Receivable Days Inventory Processing days

Payable Payment Period (days)

Cash Conversion Cycle (days)

2009-2010 13 133 7 139

2008-2009 13 134 6 141

2007-2008 32 123 6 129

Payable Payment Period= 365/ Payable Turnover

Cash Conversion Cycle = Receivable Days + Inventory Processing Days - Payable

Payment Period


29

Interpretation:

Square Pharmaceuticals Ltd. has experienced stable receivables days in 2009-10 and

2008-09 but in 2007-08 it differs (32-13)=19 days. Inventory processing days were almost

same in 2009-10 and 2008-09 but in 2007-08 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 2009-2010 compared to 2008-09 in its cash conversion cycle but it differs

quietly in 2007-08 fiscal as (139-129) =10 days.

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 firm’s use of its total

assets base (net assets equal gross assets minus depreciation on fixed assets). It is compute

as follows:

For 2009-2010 = 9,820,796,568/ {(13,251,242,856+2,703,127,420)/2}

= 9,820,796,568/7,977,185,135 = 1.23 times

Total Asset Turnover = Net Sales/Average Total Assets


30

For 2008-2009 = 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 2007-2008 = 7,500,811,349/ {(10,486,940,004+9,298,987,312)/2}

= 7,500,811,349/9,892,963,656 = 0.75 times

Interpretation:

Square Pharmaceuticals Ltd. has experienced a quite good total assets turnover in

2009-10 which is 1.23 times compared to other two fiscal years. So we can say that the

effectiveness the firm’s uses the total assets increase (1.23-0.71) =0.52 times than the

previous fiscal year.

Net Fixed Asset Turnover:

The net fixed assets turnover ratio reflects the firm’s utilization of fixed assets. It is

computed as follows:

For 2009-2010 = 9,820,796,568/ {(4,088,432,171+4,899,679,832)/2}

= 2.19 times

For 2008-2009 = 8, 257, 843, 739 / {(4,088,432,171+3,531,003,509)/2} = 2.17 times

For 2007-2008 = 7,500,811,349/ {(2,273,761,161+3,531,003,509)/2}

= 2.58 times

Net Fixed Asset Turnover = Net Sales/Average Net Fixed Assets


31

Interpretation:

Square Pharmaceuticals Ltd. Net fixed assets turnover ratios, which indicate a decline

trend in 2008-2009 and in 2009-2010 compared to the 2007-2008 fiscal. An abnormally low

turnover implies capital tied up in excessive fixed 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:

For 2009-2010 = 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 2008-2009 = 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 2007-2008 = 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 examine the variables that

affect the equity turnover ratio to understand what caused any changes.

Following an analysis of company’s 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.

Equity Turnover = Net Sales/Average Equity


32

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:

For 2009-2010 = 4,148,230,595/9,820,796,568

= 42.23%

For 2008-2009 = 3,401,781,806/8,257,843,739

= 41.19%

For 2007-2008 = 3,232,363,687/ 7,500,811,349

= 43.09%

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 company’s 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 company’s

product mix toward higher or lower profit margin items.

Gross Profit Margin = Gross Profit/Net Sales


33

Operating Profit Margin:

Operating profit is gross profit minus sales, general, and administrative (SG&A)

expenses. The operating profit margin is computed as:

For 2009-2010 = 2,368,437,227/9,820,796,568

= 24.11%

For 2008-2009 = 1,709,305,818/8,257,843,739

= 20.70%

For 2007-2008 = 1,825,752,239/7,500,811,349

= 24.34%

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 2009-10 and 2007-08 but in 2008-09 it has decreased about 4.00%. It is clearly

shows that the company’s 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:

Operating Profit Margin = Operating Profit/Net Sales


34

For 2009-2010 = 1,890,052,929/9,820,796,568

= 19.25%

For 2008-2009 = 1,381,863,093/8,257,843,739

= 16.73%

For 2007-2008 =1,303,242,840/7,500,811,349

= 17.37%

Interpretation:

Square Pharmaceuticals Ltd has experienced an increasing trend in net profit margin.

In 2009-10 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 Owner’s 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.

Net Profit Margin = Net Income /Net Sales

Return on Owner’s Equity = Net income/Average Total Equity


35

For 2009-2010 = 1,890,052,929/ {(8,417,040,705+ 9,949,397,634)/2}

= 20.58%

For 2008-2009 = 1,381,863,093/ {(7,333,257,612+8,417,040,705)/2}

= 17.55%

For 2007-2008 =1,303,242,840/ {(6,402,014,772+7,333,257,612)/2}

= 18.98%

Interpretation:

From the calculation we can see that Square Pharmaceuticals Ltd has experienced an

increase of 3.03% in 2009-10 compared to the 2008-09 fiscal year. And decrease 1.43% in

2008-09 compared to 2007-08 fiscal year.

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


36

Financial Risk:

The uncertainty of future incomes due to the company’s financing. Debt to total capital ratio:

2008 2009 2010

Long term debt 492,569,379 602,584,615 449,757,608 Total capital 7,333,257,612 8,417,040,705 9,949,397,634 6.72% 7.16% 4.52%

Debt to total Capital: Debt to total capital ratio decrease up to year 2008 after that it decreases. 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 2008 2009 2010

% change in EPS .117866639 .060312885 .367694592

% change in EBIT .155389823 .068124977 .385613505

Earning variability

Sales Variability

SD of EBIT 460.47

SD of Sales 633.23

Mean of EBIT 2046.18

Mean of Sales 4706.48

CV 0.23

CV 0.13


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The Decomposition of ROE (DuPont System):

One of the more useful measures of the financial performance of a company is the DuPont Equation. To understand the factors affecting a firm’s 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.

The DuPont Equation

There are two forms of the DuPont equation; the first examines return on assets, while the second examines return on equity. The model relies on expanding, or extending, a well-known financial ratio using simple mathematical techniques.

Return on Assets

The DuPont model begins by looking at the company's return on assets (ROA) or return on investment (ROI):

Return on Assets (ROA) = Profit Margin x Total Asset Turnover

This equation can be expanded into the following form:

ROA = (Net Income / Sales) x (Sales / Total Assets)

This equation can be further extended into a final form:

ROA = ((Sales - Total Costs) / Sales) x (Sales / (Current Assets + Non-Current Assets))

By extending the return on assets formula, we can start to see the power of this equation - and how the equation can be used to identify the strengths and weaknesses of a company. We begin with elements of total cost such as the cost of goods sold, SG&A (selling, general and administrative expenses), interest expense, and income taxes. These first measures tell us how effectively a company uses its assets to produce profits.

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

http://www.money-zine.com/Definitions/Investing-Dictionary/Return-on-Assets/

http://www.money-zine.com/Definitions/Investing-Dictionary/Return-on-Equity/

http://www.money-zine.com/Definitions/Investing-Dictionary/Cost-of-Goods-Sold/

http://www.money-zine.com/Definitions/Investing-Dictionary/Selling-General-and-Administrative-Expense/

http://www.money-zine.com/Definitions/Investing-Dictionary/Interest-Expense/

http://www.money-zine.com/Category/Tax-Shelter/


38

Current assets include cash, accounts receivables, inventories, and marketable securities. The strength of this second measure comes from its ability to predict how working capital is used to help maintain the company's operation. Finally, we have non-current assets such as buildings, land, and machinery / equipment. These elements are viewed as long-term, income producing assets.

Return on Equity

The DuPont model can also be applied to return on equity, which is a measure of the rate of return to stockholders:

Return on Equity (ROE) = Net Profit / Average Equity

This equation can be extended into the following form:

ROE = (Net Profit Margin) x (Asset Turnover) x (Asset / Equity Ratio)

This equation can be further extended into its final form:

ROE = (Net Profits / Sales) x (Sales / Average Assets) x (Average Assets / Average Equity)

Here again, the expanded DuPont Equation provides insights into a company's profit margins - which tells us how efficiently a company is operated. We also have insights into the company's use of assets via turnover. Finally, by examining the average assets and average equity, we have insights into the financial leverage of the company.

Calculation of DuPont system in 2009-2010:

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 2009-10 = 1,890,052,929/2,511,259,217

= 0.75

http://www.money-zine.com/Definitions/Investing-Dictionary/Accounts-Receivable/


39

Interest burden:

The ratio of pretax profits to EBIT is the interest burden. The company’s 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 firm’s 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 firm’s use of assets in the sense that it measures the annual sales

generated by each tk. of assets. It is calculated as follows:

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 firm’s 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


40

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

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 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.


Tax burden:


For 2007-08 = 1,381,863,093/1,868,634,190

= 0.74

Interest burden:


For 2007-08 =1,868,634,190/1,709,305,818

=1.09

Margin on sales:


For 2007-08 =1,709,305,818/ 8,257,843,739

= 0.21


41

Assets Turnover:


For 2007-08 = 8,257,843,739/ 12,703,127,420

= 0.65 times



For 2007-08 = 12,703,127,420/ 8,417,040,705

=1.51

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 of IPO is considered, the EPS would stand at Tk. 690.93 in 2007-

2008 as against Tk. 651.62 in 2006-2007.


Tax burden:


For 2007-08 = 1,303,242,840/ 1,722,906,212

= 0.756


42

Interest burden:


For 2007-08 =1,722,906,212/1,825,752,239

=.94

Margin on sales:


For 2007-08 =1,825,752,239/ 8,711,034,758

= 0.209

Assets Turnover:


For 2007-08 = 8,711,034,758 / 10,486,940,004

= 0.83 times



For 2007-08 = 10,486,940,004/ 7,333,257,612

=1.43


43


B

as

ed

on

CONCLUSION

Findings

Summary

Recommendations

References

FI

RM

VA

LU

AT

IO

N


44

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 BDT2721.088 for December 2009 whereas their PE based relative valuation technique gives us BDT2935.5 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 2721.088 by December 2009.


45

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 2007-2010. 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 2006-07. 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 2006-07. But this happened mostly not because of the company’s 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.


46

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.


47

References

Pallabi Siddiqua

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/

http://www.yahoo.com/

http://www.google.com/

http://en.wikipedia.org/wiki/

Documents

Valuation of Square Pharmaceutical Ltd