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RATIO ANALYSIS INTERPRETATION DU PONT The DuPont system for financial analysis is a means to fairly quickly and easily

assess where the business strengths and weaknesses potentially lie and thus where management time may optimally be spent. It is neither the only nor the most thorough, but it is a fairly straight-forward and systematic means to drill back into the financial numbers to determine the source or lack thereof for financial performance. The DuPont Analysis is important determines what is driving a company's ROE; Profit margin shows the operating efficiency, asset turnover shows the asset use efficiency, and leverage factor shows how much leverage is being used. The method goes beyond profit margin to understand how efficiently a company's assets generate sales or cash and how well a company uses debt to produce incremental returns. INTERPRETATION

DU Pont 2011 Tax burden Interest Burden Interest Burden Operating Profit Margin Asset Turnover Ratio Leverage Ratio Net Profit/Pretax Profit Pretax Profit/EBIT Including other income EBIT/Sales Sales/Total assets Assets/Equity 0.67 1.15 0.91 0.17 2.41 1.00 2010 0.67 1.09 0.92 0.18 2.46 1.00

Tax Burden In the case of GSK the tax burden caused by governments tax codes and policies has been constant. The tax burden on the company was .67 in 2010 and has remained the same in 2011. Therefore there has been no impact of tax on the overall profitability of the company.

Interest Burden The interest burden ratio of the company has risen from 1.09 in 2010 to 1.15 in 2011(without considering other income). The firms profitability will be greater when there are no interest payments to the debt holders. We can see that the interest paid by the company has risen but there has also been a rise in the overall profitability. A higher interest burden ratio means better financial leverage. Therefore GSK has marginally improved its ROE because of an increase in its interest burden ratio. When we calculate interest burden ratio including other income we find that the ratio has fallen from .92 in 2010 to .91 in 2011. This depicts that when other income is considered the position of GSK in terms of interest burden ratio falls showing a dip in its financial leverage.

Operating Profit Margin The Operating profit margin ratio is one of the most important bifurcations of the DuPont analysis. It depicts the operating efficiency of the organization. The profit margin ratio has fallen negligibly from .18 in 2010 to .17 in 2011 which shows a slight reduction in the operating efficiency of GSK.

Asset Turnover Ratio This ratio indicates the efficiency of the firm to use its assets in a way that it measures the annual sales with respect to the assets. As compared to 2010 the ratio has dipped from 2.46 to 2.41 in 2011. This shows a slight reduction in the efficiency on the part of GSK to use the assets in the best possible manner.

Leverage Ratio The last ratio in the DuPont analysis is the leverage ratio which helps in identifying the ability of an organization to source its assets with its equity. In the case of GSK the ratio is constant at 1 for the year 2010 and 2011.

Leverage Ratio
Leverage Interest Coverage EBIT/Interest Expense 2011 138.60 2010 161.22

A high coverage ratio indicates that the likelihood of bankruptcy is low because annual earnings are significantly greater than the interest obligations. In the case of GSK the interest coverage ratio is high for both years. Though the ratio has reduced from 161.22 in 2010 to 138.6 in 2011 it is still reasonably high which shows that the company is in sound financial health.

Asset Utilization The asset utilization ratio depicts the use of assets by the company to generate sales and shows a clear picture of how the assets are being used by the organization
Asset utilization Fixed Assets Turnover Fixed Assets Turnover Inventory Turnover Days Receivables Sales/Fixed Assets (excluding cwip) Cogs/Inventory Avg Receivables/Annual sales*365 7.43 13.76 4.25 13.11 7.60 11.67 4.33 7.82

Fixed Assets Turnover Ratio The ratio depicts how efficiently the fixed assets of an organization are used to generate sales. There is a slight fall in the ratio from 7.60 in 2010 to 7.43 in 2011 which signifies that GSK has not been able to use its fixed assets as efficiently as it was doing in 2010 to generate sales. It can however be noted that when we exclude the capital work in progress the fixed assets ratio increases from 11.67 in 2010 to 13.76 in 2011 which depicts a clear picture that GSK is efficiently using its fixed assets and is also on the verge of setting up new business ventures because of their capital investments in assets.

Inventory Turnover Ratio

LIQUIDITY RATIO The Liquidity ratios show the short term position of a company and the financial strength to meet its short term liabilities
Liquidity Current Ratio Quick Ratio Cash Ratio CA/CL QA/CL Cash/CL 3.89 1.75 1.60 4.55 2.13 2.03