TTABLEABLE OFOF C CONTENTSONTENTS

1.0 Company Overview..................................................................................................52.0 Problem Statement...................................................................................................53.0 Objective of the Study..............................................................................................64.0 Methodology..............................................................................................................65.0 Limitation of Study..................................................................................................76.0 Financial Analysis.....................................................................................................8Balance Sheet Analysis...................................................................................................8Pro Forma Statements.................................................................................................13Plug Variables...............................................................................................................15Scenario Analysis..........................................................................................................157.Beta.............................................................................................................................178.Expected Return of SPL using CAPM....................................................................189.Dividend Declaration, Firm Specific News and Market News..............................19

10. STOCK Valuation..................................................................................................2211. Conclusion...............................................................................................................23

4.01 Company OverviewSquare Pharmaceuticals is a renowned Pharmaceutical Company of our country. It is

currently the leading corporation in its field of expertise. Square Pharmaceuticals began

its operations in the year 1958 as a Partnership Firm. It converted into a Private Limited

Company in 1964.

The company became Public & became listed in the DSE in the year 1991, since then

there was no looking back. The supremacy of Square is such that the closest competitor

Beximco Pharmaceuticals is not even close in comparison to the market share; the latter

has only about half the market share.

Square Pharmaceuticals Limited has extended its range of services towards the highway

of global market. The company pioneered exports of medicines from Bangladesh in the

year 1987 and has been exporting antibiotics and other pharmaceutical products since

then. This extension in business and services has increased the credibility of Square

Pharmaceuticals Limited ten folds.

6.0 Financial Statement Analysis Square Pharmaceuticals Ltd.

There are many financial analysis techniques which can measure the financial position of

a company. In this section few of these techniques are discussed in an attempt to outline

the financial health of Square Pharmaceuticals Ltd.

4.1 Balance Sheet Analysis

Table: Balance Sheet analysis based on Book Value and Market Value

Book Value - 2007

Asset Amount Liabilities Amount

Current Asset 4,411,836,436 Current Liabilities 3,500,845,103

Non current Asset   Non-Current liabilities 785,241,612

Tangible asset 8,291,290,984

Share holder's equity

(8942400 shares) 8,417,040,705

Intangible asset  

   

Total Asset 12,703,127,420 Total Liabilities 12,703,127,420

Market value - 2007

Asset Amount Liabilities Amount

Current Asset 4,411,836,436 Current Liabilities 3,500,845,103

Non current Asset  

Non-Current

liabilities 785,241,612

Tangible asset 15,291,290,984

Share holder's equity

(8942400 shares) 36,753,264,000

Intangible asset 21,336,223,295    

       

Total Asset 41,039,350,715 Total Liabilities 41,039,350,715

The above table shows the balance sheet as it was presented in the annual report 2007 of

Square Pharmaceuticals Ltd. According to this balance sheet the book value of SPL

shares for the day December 31, 2007 should be Tk.941.25. But in reality the actual

market price on that day was much higher than that, Tk. 4110. It is good news for a

company because the market value is much higher than the book value. That good news

also gives a sign that the company has goodwill in the market which can be considered as

intangible asset of the company.

Figure 1: Comparison between Book Value and Market Value of SPL stock

Assumptions of balance sheet based on Market Value:

1. The company has other subsidiaries and uses same fixed assets such as furniture

and fixture, motor vehicles etc in both companies. But two companies follows two

different depreciation method which makes the value of those assets lower than

actual market value.

2. The balance sheet does not incorporate any intangible assets, like goodwill.

Square Pharmaceuticals Ltd is a renowned and well established company and

expanded its business in international market. It has gained much reputation in

both the market.

3. As shareholders of SPL are highly satisfied about their performance and there is

significant differences between book value and market value of share. So there is

strong confidence in shareholders mind about the efficient performance of SPL

make high intangible asset.

4. The equity of the company has been severely understated. The company

calculates its equity from 1991 when SPL was first listed with the Dhaka Stock

Exchange. But according to the time value of money theory the value of money

has increased a lot over these years.

5. Table 1: Ratio analysis of SPL

Short-term Solvency

Ratio

2008-

2007  

2007-

2006  

2006-

2005  

2005-

2004  

2004-

2003

Current

ratio1.26   1.44   1.78   1.66   1.61

Quick ratio 0.68   0.84   1.19   1.08   0.98

Cash ratio 0.059   0.055   0.140   0.196   0.042

  Long-term Solvency

Total Debt 33.74%   30.07%   31.15%   29.58%   21.90%

Times

interest

earned

(TIE)

6.58   8.64   12.51   15.92   12.13

Cash

Coverage6.6   8.6   12.5   15.9   12.1

  Asset Management

Inventory

Turnover2.40   2.76   2.63   2.76   3.54

DSO (Days

Sales

outstanding)

13.75   13.53   14.87   15.75   14.99

Total Asset

turnover0.75   0.83   0.76   0.78   0.93

  Profitability Performance

Profit

Margin14.45%   14.96%   16.45%   20.26%   17.69%

Return on

Asset10.88%   12.43%   12.54%   15.88%   16.50%

Return on

Equity16.42%   17.77%   18.21%   22.55%   21.13%

  Market-value Measures

EPS 154.53   218.61   234.67   290.71   269.46

PE ratio

(Price

Earning)

26.60   11.19   9.70   12.96   8.43

Book Value

per

share

941.25   1230.08   1288.65   1289.07   1275.04

Market

Book Ratio4.37

 1.99

 1.77

 2.92

 1.78

       

Interpretation of Ratio:

From the trend it can be concluded that Square’s current assets are increasing and current

liabilities are decreasing. So, its liquidity position is relatively stronger compare to others.

It has got an inconsistent quick ratio which means that difference between assets and

inventories and also liabilities frequently fluctuates. SPL’s inventory turnover ratio is also

inconsistent. So it means that company management is not able to manage its inventory

efficiently all the time. Its receivable turnover ratio is increasing. It means that

company’s management has dealt proficiency with its collection policies. The fixed asset

turnover ratio is decreasing. It means that company does not use its fixed assets

efficiently and intensively. The total asset turnover ratio of SPL is stable. It means that

company is generating sufficient volume of business given its total investment. Its total

interest turn ratio is increasing. It means that company is not able to meet its annual

interest cost. The profit margin on sales is increasing. It means that company has low cost

of debt and also operating expenses are going down signifying the company’s

efficiency.ROA is increasing. It means that company’s high BEP plus low interest cost

resulting from its low use of debt. Its ROE has increased more than ROA. It means that

company’s greater use of equity.

Financial strength and weaknesses of SPL:

In this section the strengths and weaknesses for the companies have been summarized.

Square Pharmaceuticals Ltd.

Strengths:

Liquidity position is relatively stronger compare to others.

Company management has proven efficiency in managing its inventory.

Company’s management has dealt proficiency with its collection policies

Company is generating sufficient volume of business given its total investment

Operating expenses are going down signifying the company’s efficiency.

Weaknesses:

Company does not use its fixed assets efficiently and intensively.

Company is not able to meet its annual interest cost.

7. Financial Planning and Growth

Financial planning formulates the method by which financial goals of a company are to

be achieved which has two dimensions: a time frame and a level of aggregation. To

identify which factors positively contribute to the growth of the stock price of Square

Pharmaceuticals Ltd. (SPL), we have analyzed the trend of different variables from the

five year financial statement and detected the growth or reduction of every item. After

that we have selected few components which show a growing trend and positively

contribute to the growth of SPL.

Growth Rate

To predict the performance of any firm in the future, it is very important to understand

the growth of that company. The following table shows the company’s, growth over the

last seven year (2004 - 2008).

Table 2: Growth rates and their geometric mean

Growth Rates

(%) 2008-2007 2007-2006 2006-2005 2005-2004 GEOMEAN

Sales 10.10% 23% 14.21% 13% 0.1439

Fixed Asset 21.85% 29.18 13% 20.82% 0.6445

Operating Cost 20.30% 42.98% 17.89% 23.24% 0.2454

Current Asset 20% -9% 24% 61% 0.3521 

Retained

Earning 22.48% 24.06% 35.66% 68.07% 0.2265

Non-current

Liability 32.30% -5.98% 63.47% 965% 0.5864

Current Liability 36.98% 13.04% 15.93% 55.91% 0.2560

Dividend -20% 12.01% 32% 20% 0.1918

EPS 9 -89 -18 28 0.2520

The growth rates that have been shown in the chart, we can find that geometric mean of

sales growth is 14.39 %. As the world economy is experiencing the recession and the

impact of recession is also started affecting our economy, so it will be a highly optimistic

choice if we expect that the company will grow at the rate of 14%. On the other hand, the

other growth rates that have been calculated also give us the indication that we can not

consider them as company growth rate given GDP growth of Bangladesh is 5.45% and

world economy is in recession. Let’s see what the other variables that we can consider as

growth rate for the company.

Variables GDP

Sustainable growth

Rate Br

Growth 5.45% 9% 7%

If the Square pharmaceuticals Ltd. maintains constant retention ratio and the return is also

expected to be constant in future then the company can expect to grow at 7% growth rate.

Though the rate is higher than GDP growth but considering the future opportunity to have

higher return and the sustainable growth rate we are taking the growth rate in between

these two. At the same time, keeping a constant retention ratio will give an indication to

the share holders that the company does not have any liquidity problem and company is

efficient enough in investment decision. Because at the present situation of world

economy and our economy, while new investment is risky SPL is not retaining profit

unnecessarily rather distributing to shareholders. It will increase shareholders confidence

regarding the company and thus will increase the share price.

Pro Forma Statements

According to the Growth Rate section of this case, a single growth rate (7%) has been

selected at the overall growth rate for SPL. Assuming a constant growth rate, the table

below shows the pro forma income statement for coming 5 years.

Table : Pro Forma income statement for the next 5 years

  2012 2011 2010 2009 2008

  (Growth Rate = 7%)

Sales 11,582,053,028 10,824,348,624 10,116,213,668 9,454,405,297 8,835,892,801

COGS 6,810,878,069 6,365,306,606 5,948,884,679 5,559,705,307 5,195,986,268

Gross Profit 4,771,174,959 4,459,042,018 4,167,328,989 3,894,699,990 3,639,906,532

Operating Expenses 2,373,785,126 2,218,490,772 2,073,355,862 1,937,715,759 1,810,949,307

Operations

2,397,389,833 2,240,551,246 2,093,973,127 1,956,984,231 1,828,957,225Profit/(Loss)

Other Income 848,022,755 792,544,631 740,695,916 692,239,174 646,952,499

Other Cost 624,556,471 583,697,636 545,511,810 509,824,121 476,471,141

Depreciation 495,241,508 462,842,531 432,563,113 404,264,592 377,817,375

EBIT 2,125,614,609 1,986,555,709 1,856,594,121 1,735,134,692 1,621,621,208

Tax 202,324,592 189,088,404 176,718,134 165,157,135 154,352,463

Net Income 1,923,290,017 1,797,467,305 1,679,875,986 1,569,977,557 1,467,268,745

Dividend 673,151,506 629,113,557 587,956,595 549,492,145 513,544,061

Addition to Retained

Earnings 1,250,138,511 1,168,353,749 1,091,919,391 1,020,485,412 953,724,684

Table : Pro Forma balance sheet for the next 5 years

  2012 2011 2010 2009 2008

  (Growth Rate = 7%)

Current Assets 5,519,485,955 5,358,724,228 5,202,644,882 5,051,111,536 4,720,664,987

Fixed Assets 10,372,928,552 10,070,804,420 9,777,480,019 9,492,699,048 8,871,681,353

Total Assets 15,892,414,507 15,429,528,648 14,980,124,901 14,543,810,583 13,592,346,339

Current

Liabilities 4,379,778,275 4,252,211,918 4,128,361,085 4,008,117,558 3,745,904,260

Non-current

Liabilities 785,241,612 785,241,612 785,241,612 785,241,612 785,241,612

Total Liabilities 5,165,019,887 5,037,453,530 4,913,602,697 4,793,359,170 4,531,145,872

Common Stock 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000

Reserves 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437

Retained

Earnings

8,236,983,236 7,145,063,845 6,124,578,433 5,170,853,749 4,279,522,268

brought forward

Retained

Earnings 1,168,353,749 1,091,919,391 1,020,485,412 953,724,684 891,331,481

Total Equity 13,542,855,422 12,374,501,673 11,282,582,282 10,262,096,870 9,308,372,186

Total

Liabilities and

Equity 18,707,875,309 17,411,955,203 16,196,184,979 15,055,456,040 13,839,518,058

Excess Fund 2,815,460,802 1,982,426,555 1,216,060,078 511,645,457 247,171,719

The above table shows the pro forma balance sheets for the coming 5 years. There are

some assumptions are made in preparing the pro forma income statement and balance

sheet.

Initially all assets, including fixed assets, accounts payable vary directly with

sales.

Long term debt and common stock won’t vary with sales as management decision

is to keep a constant long term debt and common stock.

As the company decided to maintain a constant retention rate, the company will

pay dividend every year at the same rate.

The balance sheets indicate the company has excess fund, which can be financed

distributed to payoff long term debt and reduce the obligations of interest

expenses.

Plug Variables

The pro forma statements from the above section indicate the firm will have excess fund

if it will grow at 7% rate. The company can decrease its long term debts by the extra

fund, thus will decrease the debt equity ratio. As the company decided to maintain a

constant retention rate, it ends up with extra fund at the end of the year. In the current

recession of economy, it will be risky to do any new investment. So, the company can

payoff its debt which will give an encouraging signal to the shareholders. The table

below lists the change is capital structure of the company.

Table : Expected change in capital structure of Square Pharmaceuticals Ltd.

  2012 2011 2010 2009 2008 2007

Initial Debt/Equity

Ratio 33.53% 32.56% 31.61% 30.69% 28.68% 26.80%

Revised Debt/Equity

Ratio 19% 20% 21% 22% 24% 26.80%

The above table shows that the debt/equity ratio of the company’s capital structure will

go down from the current 26.80% to 19%.

Scenario Analysis

In this case study, the growth rate of 7% has been selected as the constant growth rate

and the pro forma statement has been generated based on this growth rate. For scenario

analysis, both optimistic and pessimistic scenarios are being considered.

Table : Scenario analysis for both optimistic and pessimistic situations

  Optimistic Normal Pessimistic

Growth Rate 12.00% 10.00% 7.00% 5.00% 3.00%

Income

Statement        

Sales

9,248,784,9

88

9,083,628,1

13

8,835,892,8

01

8,670,735,9

26

8,505,579,0

51

COGS

5,438,789,3

65

5,341,668,1

26

5,195,986,2

68

5,098,865,0

30

5,001,743,7

91

Gross Profit

3,809,995,6

23

3,741,959,9

87

3,639,906,5

32

3,571,870,8

96

3,503,835,2

60

Operating 1,895,573,1 1,861,723,5 1,810,949,3 1,777,099,7 1,743,250,2

Expenses 07 87 07 87 68

Operations

Profit/(Loss)

1,914,422,5

16

1,880,236,4

00

1,828,957,2

25

1,794,771,1

09

1,760,584,9

93

Other Income 677,183,924 665,091,354 646,952,499 634,859,929 622,767,359

Other Cost 498,736,148 489,830,145 476,471,141 467,565,139 458,659,136

Depreciation 395,472,393 388,410,386 377,817,375 370,755,369 363,693,362

EBIT

1,697,397,9

00

1,667,087,2

23

1,621,621,2

08

1,591,310,5

31

1,560,999,8

54

Tax 161,565,195 158,680,102 154,352,463 151,467,370 148,582,277

Net Income

1,535,832,7

05

1,508,407,1

21

1,467,268,7

45

1,439,843,1

61

1,412,417,5

77

Dividend 537,541,447 527,942,492 513,544,061 503,945,106 494,346,152

Retained

Earnings 998,291,258 980,464,629 953,724,684 935,898,055 918,071,425

Balance Sheet          

Current Assets

4,941,256,8

08

4,853,020,0

80

4,720,664,9

87

4,632,428,2

58

4,544,191,5

29

Fixed Assets

9,286,245,9

02

9,120,420,0

82

8,871,681,3

53

8,705,855,5

33

8,540,029,7

14

Total Assets

14,227,502,

710

13,973,440,

162

13,592,346,

339

13,338,283,

791

13,084,221,

243

Current

Liabilities

3,920,946,5

15

3,850,929,6

13

3,745,904,2

60

3,675,887,3

58

3,605,870,4

56

Non-current

Liabilities 879,470,605 863,765,773 840,208,525 824,503,693 808,798,860

Total

Liabilities

4,800,417,1

21

4,714,695,3

87

4,586,112,7

85

4,500,391,0

51

4,414,669,3

16

Common

Stock

2,929,705,0

00

2,929,705,0

00

2,929,705,0

00

2,929,705,0

00

2,929,705,0

00

Reserves

1,207,813,4

37

1,207,813,4

37

1,207,813,4

37

1,207,813,4

37

1,207,813,4

37

Retained

Earnings 998,291,259 980,464,629 953,724,685 935,898,055 918,071,425

Total Equity

5,135,809,6

96

5,117,983,0

66

5,091,243,1

22

5,073,416,4

92

5,055,589,8

62

Total

Liabilities and

Equity

9,936,226,8

17

9,832,678,4

53

9,677,355,9

07

9,573,807,5

43

9,470,259,1

79

External Fund

Needed

4,291,275,8

94

4,140,761,7

09

3,914,990,4

33

3,764,476,2

48

3,613,962,0

64

New

Debt/Equity

Ratio 30% 29.48% 28.68% 28.14% 27.61%

In the above scenario analysis, we have taken the 7% growth rate in normal situation. If

we want to be optimistic enough to predict that the economy will have a high growth and

the company will also able to grow at 10% to 12%. On the other hand, the situation can

also be worse enough to have a growth lower than the normal and the company may face

a growth of 5% or even 3%. In that case the good news for the company is that if the

company will have to grow at 5% then company doesn’t have to face any loss as the rate

is much closer to GDP growth rate. After analyzing the scenario of different situation we

can say that the projected growth rate is appropriate for the company which will help the

company to operate in the market even if the situation is worse. It gives a positive

indication towards the company and increases the shareholders confidence to invest in the

company’s share.

11. Conclusion

After analyzing all the ratios, we have found out the following information about Square

Pharmaceuticals Ltd:

In the liquidity ratios we can see that both current ratio and quick ratio are below the

benchmark and for the last five years the both the ratios have been deteriorated. This

reveals that the company is not holding the short-term solvency. Huge inventories have

been piled up in last year that consumed cash. Most alarming is cash ratio which has

drastically gone down since 2004 but slightly improved in 2007. The firm should be

concerned to promote cash sales, may be, by means of cash discount.

In asset management ratios we can see inventory turnover ratio, DSO and total asset

turnover slightly deteriorated in 2007. However the all the ratios are better than Beximco

Pharmaceuticals Ltd. Also the DSO of Square pharmaceuticals indicates that it collects

the sales faster than Beximco Pharmaceuticals Ltd.

Debt management ratios give a clear idea about long term solvency of Square

Pharmaceuticals Ltd. The debt ratio increased slightly in 2007. TIE and Cash coverage

ratio are better than Beximco Pharmaceuticals Ltd.

Profit margin Ratio, ROA and ROE of Square pharmaceuticals Ltd has deteriorated

compared to the previous years. Although the decrease rate is not so high still it is a

problem for Square and they need to try to improve these ratios.

Both P/E and M/B ratios have improved to demonstrate that investors have more trust in

the firm. There must be some good news not reflected in the accounting ratios. For

example, in an inflationary economy inventories being piled up might indicate profit

potentials of the next year as the cost of production of the next year would go down

compared to industry due to cost savings in inventories.

From the total analysis, we can summarize that for the last year 2007, even though

Square Pharmaceuticals Ltd. deteriorated in all the ratios, but still holding the better

position compared to Beximco Pharmaceuticals Ltd (the best alternative forgone) and

this has been reflected through the increment in share price and in P/E and M/B ratios.

The firm gained the trust of the investors. Square Pharmaceuticals Ltd might have a good

news that is not reflected in other ratios but investors know.

Therefore we can come to the conclusion that Square Pharmaceutical Ltd is a better

company to invest on.