1.

0 INTRODUCTION

A ratio analysis is a quantitative analysis of information contained in a company’s financial

statements. Ratio analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability and solvency.

When investors and analysts talk about fundamental or quantitative analysis, they are usually
referring to ratio analysis. Ratio analysis involves evaluating the performance and financial
health of a company by using data from the current and historical financial statements. The data
retrieved from the statements is used to - compare a company's performance over time to assess
whether the company is improving or deteriorating; compare a company's financial standing with
the industry average; or compare a company to one or more other companies operating in its
sector to see how the company stacks up.

IMPORTANCE OF FINANCIAL RATIO ANALYSIS

1. It helps to analyze the probable casual relation among different items after analyzing
and scrutinizing the past result.
2. The ratios that are derived after analyzing and scrutinizing the past result, helps the
management to prepare budgets, to formulate policy, and to prepare the future plan of
action and thus helps as a guide to harmonize among different items for preparing
budgets.
3. It helps to take time dimension into an account by trend analysis, i.e., whether the
firm is improving or deteriorating over a number of years, that can easily be studied
by the trend analysis. So, comparison can be made without difficulty by the analyst
and to see whether the said ratio is high or low in comparison with the Standard or
Normal ratio.
4. It throws light on the degree of efficiency of the management and utilization of the
assets and that is why it is called surveyor of efficiency.
5. It helps to make an inter-firm comparison either between the different departments of
a firm or between two firms employed in the identical types of business or between

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 the same firm of two different dates. Thus, the comparative analysis can be possible
between the industry average ratio and the ratio of each business unit.
6. Short-term liquidity position, i.e., whether the firm is able to maintain its short-term
maturing obligations or not, that can be easily known by applying liquidity ratios. At
the same time, long-term solvency position can also be measured by the application
of leverage or profitability ratios. Thus, the ratio helps an invaluable aid to the users
of Financial Statements.

1.1 ORIGIN OF THE REPORT

Our course instructor Quazi Sagota Samina has authorized us the report as the partial fulfillment
of “Financial Analysis & Control” course requirements. We are assigned to make a report on
“Ratio Analysis of Particular Companies of Particular Industry” and complete a study that covers
all important factors. 

1.2 OBJECTIVE OF THE REPORT

To describe and analyze the performance of three particular companies and so on:

 To present an overview of Liquidity Ratios.

 To present an overview of Activity Ratios.
 To present an overview of Profitability.
 To present an overview of Long Term Debt and Solvency Ratios.

1.3 SCOPE & METHODOLOGY

At first, we got the report design and structure from our academic supervisor and moved for the
next steps. To prepare this report we had to collect data from secondary sources.

Secondary Data:

 Annual reports of the three particular companies from their websites.

 Several kinds of academic test books.
 Different publications regarding ratio analysis.

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  Through web browsing.

1.4 LIMITATIONS OF THE STUDY

This report has some limitations. The report is given as an assignment of a course that makes it
narrow prospect. The limitations acquainted with this report are as the following:

 Collecting information from secondary sources.

 Time of shortage.
 Sometimes actual data is missing.
 As a course assignment it gives a narrow prospect.

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2.0 COMPANY OVERVIEW

2.1 SQUARE PHARMACEUTICALS LIMITED

SQUARE today symbolizes a name, a state of mind. But its journey to the growth and prosperity
has been no bed of roses. From the inception in 1958, it has today burgeoned into one of the top
line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship company, is
holding the strong leadership position in the pharmaceutical industry of Bangladesh since 1985
and is now on its way to becoming a high performance global player.

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, converted into a public limited company in 1991 and listed with
stock exchanges in 1995. The turnover of Square Pharma was Taka 30.28 Billion (US$ 385.22
million) with about 18.64% market share having a growth rate of about 25.36% (April 2014–
March 2015).

MISSION

Their Mission is to produce and provide quality & innovative healthcare relief for people,
maintain stringently ethical standard in business operation also ensuring benefit to the
shareholders, stakeholders and the society at large.

VISION

They view business as a means to the material and social wellbeing of the investors, employees
and the society at large, leading to accretion of wealth through financial and moral gains as a part
of the process of the human civilization.

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2.2 BEXIMCO PHARMACEUTICALS LTD

Beximco Pharmaceuticals Ltd (Beximco Pharma) is an

emerging generic drug player committed to providing
access to affordable medicines. Company’s state-of-the-art manufacturing facilities have been
accredited by the regulatory authorities of USA, Australia, European Union, Canada, and Brazil,
among others, and it currently focuses on building presence in many emerging and developed
markets around the world.

Beximco Pharma is consistently building upon its portfolio and currently producing more than
500 products encompassing broad therapeutic categories and the Company has created strong
differentiation by offering a range of high-tech, specialized products which are difficult to
imitate.

MISSION

They are committed to enhancing human health and well-being by providing contemporary and
affordable medicines, manufactured in full compliance with global quality standards. They
continually strive to improve their core capabilities to address the unmet medical needs of the
patients and to deliver outstanding results for their shareholders.

VISION

They want to be one of the most trusted, admired and successful pharmaceutical companies in
the region with a focus on strengthening research and development capabilities, creating
partnerships and building presence across the globe.

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2.3 BEACON PHARMACEUTICALS LIMITED

Beacon Pharmaceuticals Limited is the number

one oncology company and one of the leading
and fastest growing pharmaceutical companies
of Bangladesh. The Company started its
operation in 2006. Now Beacon is one of the
top oncology pharmaceutical companies of
Bangladesh.

Manufacturing plant of Beacon has the finest infrastructure & facilities developed and
engineered by European consultants to conform world class standards like US FDA, UK MHRA,
TGA Australia and WHO GMP. Beacon has dedicated facilities to manufacture lifesaving
oncology, Biotech and Hi-Tech & conventional general products. The company manufactures
more than 200 world class generic drugs and even successfully introduced a number global first
generic drug.

After meeting the local demand, Beacon exports its medicines to many countries of Asia, Africa,
Europe and Latin America.

MISSION

To improve the quality of human life by providing innovative pharmaceutical products

developed through continuous research and development ensuring stakeholders’ satisfaction.

VISION

To be regarded and recognized as one of the most value-driven pharmaceuticals companies in

Bangladesh.

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3.0 RATIO ANALYSIS OF BEACON PHARMA, SQUARE PHARMA AND BEXIMCO
PHARMA

3.1 ACTIVITY RATIOS

Activity ratios measure how well companies utilize their assets to generate income. Activity
ratios often look at the time it takes companies to collect cash from customer or the time it takes
companies to convert inventory into cash—in other words, make sales. These ratios are used by
management to help improve the company as well as outside investors and creditors looking at
the operations of profitability of the company.

3.1.1 INVENTORY TURNOVER RATIO

The inventory turnover ratio measures the number of times on average the inventory was sold
during the period. In other words, it measures how many times a company sold its total average
inventory dollar amount during the year. Inventory turnover measures how fast a company is
selling inventory and is generally compared against industry averages. A low turnover implies
weak sales and, therefore, excess inventory. A high ratio implies either strong sales and/or large
discounts.

Inventory Turnover Ratio = Cost of Goods Sold / Inventory (Times)

Inventory Turnover Ratios for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 1.09 0.87 0.84 0.66 0.45

Square
6.72 7.81 5.46 4.19 3.56

Beximco 2.40 3.90 2.45 2.34 2.01

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 Inventory Turnover for Beacon, Square And Beximco (2012-
2016)
9
7.81
8
7 6.72
6 5.46
5
Times

4.19 3.9
4 3.56
3 2.34 2.45 2.4
2.01
2 1.09
0.45 0.66 0.84 0.87
1
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 1: Inventory Turnover for Beacon, Square and Beximco (2012-2016)

Low inventory turnover ratio is a signal of inefficiency, since inventory usually has a rate of
return of zero. It also implies either poor sales or excess inventory. High inventory turnover ratio
implies either strong sales or ineffective buying (the company buys too often in small quantities;
therefore, the buying price is higher). A high inventory turnover ratio can also indicate better
liquidity.

From the graph we can observe that, among the three companies Beacon Pharma had a poor
Inventory Turnover Ratio throughout the period. In the recent year 2016, they had a turnover of
1.09 times, means they had sales of only 1.09 times of their average inventory that year. Which
indicates, their inventories in stock were greater than their sales units. On the other hand, Square
Pharma had a higher Inventory Turnover over 5 years’ period, indicates their higher sales. In
2015 it had its highest turnover of 7.81 times, means it had sales of 7.81 times of their average
inventories. In 2016, it was 6.72 times. Beximco Pharma also did better than Beacon Pharma. It
had its highest turnover in 2015, 3.9 times.

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3.1.2 AVERAGE NUMBER OF DAYS INVENTORY IN STOCK

The average inventory period is a usage ratio that calculates the average number of days, over a
given time period, goods are held in inventory before they are sold. In other words, it shows how
long it takes a company to sell its current inventory. Conversely, it shows how long inventory
sits on the shelf and remains unsold.

In this sense, this ratio could also be considered an efficiency ratio. Average inventory period is
important because it shows how inventory turnover changes over time. This allows management
to better understand its purchasing happens and sales trends in an effort to reduce inventory
carrying costs. It also helps management understand what products are selling fast and which
products remain stagnant. This is an essential measure of a company’s efficiency converting
goods into sales.

A decreasing average inventory period typically means that product is moving at a faster rate and
an increasing average inventory period indicates it is taking longer to sell the goods.

Monitoring the amount of time goods sit in inventory is important in business management. It is
also important for financial analysts and investors to review because it demonstrates a
company’s ability to turn its inventory into cash.

It is calculated as:

Average Number of Days Inventory in Stock = (365/Inventory Turnover)

Average Number of Days Inventory in Stock for Beacon Pharma, Square Pharma and
Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 335.63 417.39 434.74 550.80 804.59

Square
54.28 46.75 66.86 87.06 102.59

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 Beximco 152.07 93.62 149.14 155.76 181.32

Average Number of Days Inventory In Stock For Beacon,

Square And Beximco (2012-2016)
900 804.59
800
700
600 550.8
500 434.74 417.39
Days

400 335.63
300
181.32 155.76 149.14 152.07
200 102.59 93.62
87.06 66.86 54.28
100 46.75
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 2: Average Number of Days Inventory in Stock for Beacon, Square and Beximco
(2012-2016)

Again we can see that Beacon Pharma had higher average number of days to turn its inventories
into sales among three companies. As, we saw previously that it had lower inventory turnover
ratios throughout the period, it is obvious to have higher days of inventory in stock. This
indicates its poor sales and efficiency. In 2016 it required 335.63 days of inventory in stock.

On the other hand, Square and Beximco Pharma had lower days of inventory in stock during 5
years’ period. Among which Square Pharma was doing better than others. In 2016, it took 54.28
days for Square Pharma to turn its inventories. And, 152.07 days for Beximco Pharma to turn its
inventories.

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3.1.3 RECEIVABLES TURNOVER RATIO

The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.
Accounts receivable turnover is an efficiency ratio or activity ratio that measures how many
times a business can turn its accounts receivable into cash during a period. In other words, the
accounts receivable turnover ratio measures how many times a business can collect its average
accounts receivable during the year. A turn refers to each time a company collects its average
receivables. This ratio shows how efficient a company is at collecting its credit sales from
customers. In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well.
Companies are more liquid the faster they can convert their receivables into cash. Since the
receivables turnover ratio measures a business’ ability to efficiently collect its receivables, it only
makes sense that a higher ratio would be more favorable. Higher ratios mean that companies are
collecting their receivables more frequently throughout the year.

Receivables Turnover = Sales/Avg. Receivables

Receivables Turnover Ratios for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016):

Year 2016 2015 2014 2013 2012

Beacon
7.71 6.73 6.38 7.77 7.79

Square 43.61 45.19 34.81 28.63 24.67

Beximco
7.16 11.92 8.02 8.40 7.99

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 Receivables Turnover For Beacon, Square And Beximco (2012-
2016)
50 45.19 43.61
40 34.81
28.63
30 24.67
Times

20
11.92
10 7.79 7.99 7.77 8.4 6.38 8.02 6.73 7.71 7.16

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 3: Receivables Turnover for Beacon, Square and Beximco (2012-2016).

Square Pharma had higher Receivable Turnovers over the 5 years’ period. It indicates that
Square Pharma can collect its average accounts receivable more than other two companies. In
2015, Square had its highest turnover 45.19 times, means it collected its average receivables
45.19 times of its sales. The higher ratio indicates their efficiency of collecting their credit sales.

On the other hand, Beximco and Beacon Pharma had much similar turnover over the period,
though Beximco had higher over Beacon. Beximco had 11.92 times highest for them in 5 years’
time.

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3.1.4 AVERAGE NUMBER OF DAYS RECEIVABLES OUTSTANDING (DAYS SALES
OUTSTANDING)

Days sales outstanding (DSO) is a measure of the average number of days that a company takes
to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly
or annual basis and can be calculated by dividing the amount of accounts receivable during a
given period by the total value of credit sales during the same period, and multiplying the result
by the number of days in the period measured. A low DSO value means that it takes a company
fewer days to collect its accounts receivable. A high DSO number shows that a company is
selling its product to customers on credit and taking longer to collect money. So, lower is better.
DSO has traditionally been the primary responsibility of the credit management function. Days
sales outstanding is also often referred to as “days receivables” and is an element of the cash
conversion cycle.

Average Number of Days Receivables Outstanding = 365/Receivables Turnover

Average Number of Days Receivables Outstanding for Beacon Pharma, Square Pharma
and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 47.31 54.26 57.18 46.96 46.84

Square 21.57 20.26 25.36 27.04 31.22

Beximco 51.01 30.62 45.52 43.47 45.67

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 Average Number of Days Receivables Outstanding for Beacon,
Square And Beximco (2012-2016)
70
60 57.18
54.26
51.01
50 46.84 45.67 46.96 45.52 47.31
43.47
40
31.22
Days

30.62
30 27.04 25.36
20.26 21.57
20
10
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 4: Average Number of Days Receivables Outstanding for Beacon, Square and
Beximco (2012-2016).

Beacon Pharma had the highest Average Number of Days Receivables Outstanding for the time
period than the other two companies. Means, it took the company more days to collect its
accounts receivables. Which indicates, its inefficiency in credit management. Beximco has also
higher Average Number of Days Receivables Outstanding. But its DSO was much lower 30.62
days in 2015 because of their better turnover that time.

Again, Square Pharma was doing good in collecting accounts receivables. It took less days to
collect its accounts receivables than other two companies.

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3.1.5 PAYABLE TURNOVER

Accounts payable turnover is a ratio that measures the speed with which a company pays its
suppliers. If the turnover ratio declines from one period to the next, this indicates that the
company is paying its suppliers more slowly, and may be an indicator of worsening financial
condition.

The lower the ratio is better. Because it is always better for the company to keep cash in hand for
long time. If a company is paying its suppliers very quickly, it may mean that the suppliers are
demanding fast payment terms, or that the company is taking advantage of early payment
discounts.

Payable Turnover = Purchase / Avg. Accounts Payables

Payable Turnover Ratios for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016):

Year 2016 2015 2014 2013 2012

Beacon 15.23 13.19 7.71 10.16 9.34

Square 15.04 13.55 18.66 13.48 14.97

Beximco 10.45 12.10 12.11 10.95 8.09

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 Payable Turnover Ratios for Beacon, Square and Beximco (2012-
2016)
20 18.66
15.04
16 14.97 13.55 15.23
13.48 13.19
12.11 12.1
12
9.34 10.16 10.95 10.45
Times

8.09 7.71
8

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 5: Payable Turnover Ratios for Beacon, Square and Beximco (2012-2016).

If we consider Payable Turnover Ratios for the three companies, we can observe from the above
chart that Beximco Pharma had lower Payable Turnover Ratios for the whole period. Indicates
that they had supplied less payables to their creditors, which is good for the company. In 2016, it
had 10.45 times Payable Turnover Ratios, which is lower than Square Pharma (15.04 Times) and
Beacon Pharma (15.23 Times).

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3.1.6 AVG. NO. OF DAYS PAYABLE OUTSTANDING

Average number of days payable outstanding is a solvency ratio that measures the average
number of days it takes a business to pay its vendors for purchases made on credit.

Average number of days payable outstanding is the average amount of time it takes a company to
pay off credit accounts payable. Many times, when a business makes a purchase at wholesale or
for basic materials, credit arrangements are used for payment. These are simple payment
arrangements that give the buyer a certain number of days to pay for the purchase.

The average payment period is usually calculated using a year’s worth of information, but it may
also be useful evaluating on a quarterly basis or over another period of time. So, the desired
period of time may dictate which financial statements are necessary.

Average Number of Days Payable Outstanding = 365 / Payable Turnover

Average Number of Days Payable Outstanding for Beacon Pharma, Square Pharma and
Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 23.97 27.66 47.35 35.92 39.09

Square 24.26 26.94 19.56 27.07 24.38

Beximco 34.92 30.16 30.14 33.33 45.11

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 Average Number of Days Payable Outstanding For Beacon,
Square And Beximco (2012-2016)
50 47.35
45.11
39.09
40 35.92 34.92
33.33
30.14 27.66 30.16
30 27.07 26.94 23.97
24.38 24.26
Times

19.56
20

10

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 6: Average Number of Days Payable Outstanding for Beacon, Square and Beximco
(2012-2016)

Days payable outstanding is an important efficiency ratio that measures the average number of
days it takes a company to pay back suppliers and is used in a cash cycle analysis. In 2016, both
Square and Beacon had lower DPO than Beximco. Indicates, they were less capable of holding
their cash for long to utilize them. Which means, Beximco is more efficient of using its cash as
long as its competitors in the industry.

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3.2 ACTIVITY RATIOS (LONG TERM)

3.2.1 FIXED ASSET TURNOVER

The fixed asset turnover ratio is an efficiency ratio that measures a company’s return on their
investment in property, plant, and equipment by comparing net sales with fixed assets. In other
words, it calculates how efficiently a company is a producing sales with its machines and
equipment.

Investors and creditors use this formula to understand how well the company is utilizing their
equipment to generate sales. This concept is important to investors because they want to be able
to measure an approximate return on their investment. This is particularly true in the
manufacturing industry where companies have large and expensive equipment purchases.
Creditors, on the other hand, want to make sure that the company can produce enough revenues
from a new piece of equipment to pay back the loan they used to purchase it.

A high turnover indicates that assets are being utilized efficiently and large amount of sales are
generated using a small amount of assets. It could also mean that the company has sold off its
equipment and started to outsource its operations. Outsourcing would maintain the same amount
of sales and decrease the investment in equipment at the same time.

A low turnover, on the other hand, indicates that the company isn’t using its assets to their fullest
extent. This could be due to a variety of factors. For example, they might be producing products
that no one wants to buy. Also, they might have overestimated the demand for their product and
overinvested in machines to produce the products. It might also be low because of manufacturing
problems like a bottleneck in the value chain that held up production during the year and resulted
in fewer than anticipated sales.

Fixed Assets Turnover = Net Sales/Total Fixed Assets

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Fixed Assets Turnover Ratio for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 1.02 0.94 0.69 0.45 0.36

Square 1.68 1.87 1.13 1.13 1.24

Beximco 0.62 0.89 0.54 0.57 0.57

Fixed Assets Turnover Ratio For Beacon Pharma, Square

Pharma And Beximco Pharma (2012-2016)
2 1.87
1.68
1.6
1.24
1.2 1.13 1.13
0.94 1.02
Times

0.89
0.8 0.69 0.62
0.57 0.57 0.54
0.45
0.36
0.4

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 7: Fixed Assets Turnover Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016).

Fixed Assets Turnover Ratios indicate the efficiency of a firm to generate revenue from its fixed
assets. Here, from the chart we can see, Square Pharma had highest turnover ratios for 2012-
2016 period than Beacon Pharma and Beximco Pharma. This indicates that Square Pharma was
more efficient on using its fixed assets for revenue generation. In 2015-2016, Square had 1.87

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and 1.68 times of Fixed Assets Turnover, highest for the 5 years’ time. It means in 2015, it could
generate sales 1.87 times of its fixed assets, and in 2016 1.68 times.

On the other hand, between Beacon and Beximco Pharma, Beacon was doing good as they were
improving their turnover rate. In 2016 Beacon’s turnover was 1.02 times, while Beximco had
only 0.62 times of turnover. Indicates, Beacon is more efficient in terms of generating revenue
out of fixed assets than Beximco.

3.2.2 TOTAL ASSETS TURNOVER RATIO

Total asset turnover is a financial ratio that measures the efficiency of a company's use of its total
assets in generating sales revenue. In other words, this ratio shows how efficiently a company
can use its assets to generate sales. Generally speaking, the higher the asset turnover ratio, the
better the company is performing, since higher ratios imply that the company is generating more
revenue per dollar of assets.

This ratio measures how efficiently a firm uses its total assets to generate sales, so a higher ratio
is always more favorable. Higher turnover ratios mean the company is using its assets more
efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most likely
have management or production problems.

Total assets turnover = Net sales revenue / Average total assets (Times)

Total assets Turnover Ratio for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 0.50 0.43 0.37 0.29 0.22

Square 0.95 1.29 0.86 0.84 0.82

Beximco 0.46 0.64 0.39 0.38 0.40

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 Total assets Turnover Ratio for Beacon Pharma, Square
Pharma and Beximco Pharma (2012-2016)
1.4 1.29
1.2
1 0.95
0.82 0.84 0.86
0.8
Times

0.64
0.6 0.5 0.46
0.4 0.38 0.39 0.43
0.37
0.4
0.22
0.2
0.029
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 8: Total assets Turnover Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)

Square Pharma this time also, had better turnover ratios over the period than the other two
companies. In 2015 and 2016, it had the highest 1.29 and 0.95 times Total Assets Turnover
Ratios, indicates that it generated sales of 1.29 and 0.95 times of its total assets in 2015 and
2016.

On the other hand, between Beacon and Beximco, Beacon had a good increasing turnover than
Beximco. Beacon generated revenue of .5 times of its total assets and Beximco 0.46 times.

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3.3 LIQUIDITY ANALYSIS

3.3.1 OPERATING CYCLE

An operating cycle is the average time period between the acquisition of inventory and the
receipt of cash from the inventory's sale. A short operating cycle means a prompter return on
investment for the firm's inventory. During an economic downtown, an operating cycle typically
lasts longer than in periods of economic growth.

Operating cycle calculated by:

Operating Cycle = Days inventory outstanding + days sales outstanding

Operating Cycle for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 382.94 471.66 491.92 597.76 851.42

Square 62.65 54.83 77.34 99.81 117.39

Beximco 203.08 124.24 194.66 199.23 226.99

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 Operating Cycle For Beacon Pharma, Square Pharma And Bex-
imco Pharma (2012-2016)
900 851.52
800
700 597.76
600 491.92
500 471.66
Days

382.94
400
300 226.99 199.23 194.66 203.08
200 117.39 99.81 124.24
77.34 54.83 62.65
100
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 9: Operating Cycle for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

Operating Cycle shorter is better. Square Pharma had shorter Operating Cycle than other two
companies throughout 5 years. It indicates that they took less time to convert their purchase of
inventories into cash receipt. Which is better for the company. In 2016, it took only 62.65 days to
convert its inventories into cash. On the other hand, Beacon Pharma took the highest days to
convert inventories into cash. In 2016 it took 382.94 days, indicates it was not efficient to cash
collection. Again, Beximco Pharma had also higher Operating Cycle. In 2016, it took 203.08
days to convert inventories into cash, indicates their inefficiency of cash collection.

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3.3.2 CASH CYCLE

The cash conversion cycle is the number of days required for a company to convert resources to
cash flows. This measure calculates the time period during which each input dollar is committed
to production and sales processes before it is converted to cash through the accounts receivable
process. The cash conversion process gives insight into the financial stability of a company
because it reflects the time period during which assets are committed to business processes and
therefore are not available to invest to achieve even greater returns. As a result, the shorter the
cash conversion cycle, the better.

Cash Cycle calculated by:

(Days inventory outstanding + days sales outstanding) – days payables outstanding

The cash conversion cycle is vital for two reasons. First, it's an indicator of the company's
efficiency in managing its important working capital assets; second, it provides a clear view of a
company's ability to pay off its current liabilities.

The cash conversion cycle looks at how quickly the company turns its inventory into sales, and
its sales into cash, which is then used to pay its suppliers for goods and services. While the quick
and current ratios are more often mentioned in financial reporting, investors would be well-
advised to look at this metric as a measurement of the true liquidity of a company.

The longer that inventory is on hand, the longer it takes to collect accounts receivables.
Combined with a shorter duration for payments to the company's suppliers, this indicates that
cash is being tied up in inventory, receivables and is being used more quickly to pay trade
payables. If this situation becomes a trend, it will reduce, or squeeze, a company's available cash.
Conversely, a positive trend in the cash conversion cycle will add to a company's liquidity.

A shorter CCC means greater liquidity, which translates into less need to borrow, more
opportunities to realize price discounts with cash purchases for raw materials and an increased
capacity to fund the expansion of the business. Conversely, a longer CCC increases the
company's cash needs.

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Cash Cycle for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 358.97 443.99 444.57 561.85 812.34

Square 38.39 27.89 57.78 72.73 93.01

Beximco 168.16 94.08 164.52 165.91 181.88

Cash Cycle for Beacon Pharma, Square Pharma and Beximco

Pharma (2012-2016)
900 812.34
800
700
600 561.85
500 444.57 443.99
Days

400 358.97
300
181.88 165.91 164.52 168.16
200 93.01 94.08
72.73 57.78
100 27.89 38.39
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 10: Cash Cycle for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

It took the highest for Beacon Pharma to convert their resources in cash flows. In 2016, it took
about 359 days to convert their resources into cash. On the other hand, it took only 38 days for
Square Pharma and 168 days for Beximco Pharma. Square Pharma had the shortest cash cycle,
indicates their better liquidity.

26 | P a g e
3.4 LIQUIDITY RATIOS

Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these
ratios show the cash levels of a company and the ability to turn other assets into cash to pay off
liabilities and other current obligations.

Liquidity is not only a measure of how much cash a business has. It is also a measure of how
easy it will be for the company to raise enough cash or convert assets into cash. Assets like
accounts receivable, trading securities, and inventory are relatively easy for many companies to
convert into cash in the short term. Thus, all of these assets go into the liquidity calculation of a
company.

3.4.1 CURRENT RATIO

The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of liquidity
because short-term liabilities are due within the next year.

This means that a company has a limited amount of time in order to raise the funds to pay for
these liabilities. Current assets like cash, cash equivalents, and marketable securities can easily
be converted into cash in the short term. This means that companies with larger amounts of
current assets will more easily be able to pay off current liabilities when they become due
without having to sell off long-term, revenue generating assets.

Current Ratio = Current Assets / Current Liabilities (Times)

Current Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 2.08 2.26 2.03 2.17 2.00

Square 4.41 4.07 2.71 1.75 1.91

Beximco 2.68 2.86 1.78 2.03 2.30

27 | P a g e
 Current Ratio for Beacon Pharma, Square Pharma and Bex -
imco Pharma (2012-2016)
5 4.41
4.07
4
2.71 2.86
3 2.68
2.3
Times

2.17 2.26 2.08

2 1.91 2.03 2.03
2 1.75 1.78

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 11: Current Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

From the above chart, we can observe that Current Ratios for Square Pharma were higher than
Beacon and Beximco Pharma. In 2016, it had highest 4.41 times current ratio, indicates, it can
pay off its liabilities 4.41 times by its current assets. The Current Ratio higher is better. Square
Pharma showed efficiency in their liquidity policy.

On the other hand, between Beacon Pharma and Beximco Pharma, Beximco did good. In 2016
the most recent year, Beximco had 2.68 times Current Ratio, means, it could pay off its liabilities
2.68 times by its current assets. Where, Beacon Pharma had 2.08 times, means, they could pay
off their liabilities 2.08 times by its current assets.

28 | P a g e
3.4.2 QUICK RATIO

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay
its current liabilities when they come due with only quick assets. Quick assets are current assets
that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-
term investments or marketable securities, and current accounts receivable are considered quick
assets.

The quick ratio is often called the acid test ratio in reference to the historical use of acid to test
metals for gold by the early miners. If the metal passed the acid test, it was pure gold. If metal
failed the acid test by corroding from the acid, it was a base metal and of no value.

The acid test of finance shows how well a company can quickly convert its assets into cash in
order to pay off its current liabilities. It also shows the level of quick assets to current liabilities.

Higher the quick ratio better for the company as it indicates more ability to pay out liabilities out
of quick assets. Obviously, as the ratio increases so does the liquidity of the company. More
assets will be easily converted into cash if need be. This is a good sign for investors, but an even
better sign to creditors because creditors want to know they will be paid back on time.

Quick asset or Acid test ratio = (Current asset- inventories)/ Current liabilities (Times)

Quick Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 0.35 0.32 0.28 0.24 0.15

Square 2.74 1.98 1.36 0.62 0.55

Beximco 0.72 0.64 0.34 0.42 0.56

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 Quick Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)
3 2.74
2.5
1.98
2
Times

1.5 1.36

1 0.64 0.72
0.550.56 0.62
0.42 0.34 0.35
0.5 0.15 0.24 0.28 0.32

0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 12: Quick Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

We can see from the chart that Square Pharma had the better liquidity condition than other two
companies. Because, it had the highest Quick Ratio than Beacon and Beximco. The higher Quick
Ratio indicates that Square had more assets can be liquid if needed to pay off liabilities. In most
recent year 2016, Square had 2.74 times of Quick Ratio, means it had 2.74 times more quick
assets than its liabilities. Where, Beacon and Beximco Pharma had 0.35 and 0.72 times more
quick assets than their quick assets. Thus, Beacon and Beximco were behind Square Pharma in
terms of liquidity position.

30 | P a g e
3.4.3 CASH RATIO

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability to pay off
its current liabilities with only cash and cash equivalents. The cash ratio is much more restrictive
than the current ratio or quick ratio because no other current assets can be used to pay off current
debt–only cash.

This is why many creditors look at the cash ratio. They want to see if a company maintains
adequate cash balances to pay off all of their current debts as they come due. Creditors also like
the fact that inventory and accounts receivable are left out of the equation because both of these
accounts are not guaranteed to be available for debt servicing. Inventory could take months or
years to sell and receivables could take weeks to collect. Cash is guaranteed to be available for
creditors.

The cash ratio shows how well a company can pay off its current liabilities with only cash and
cash equivalents. This ratio shows cash and equivalents as a percentage of current liabilities.

As with most liquidity ratios, a higher cash coverage ratio means that the company is more liquid
and can more easily fund its debt. Creditors are particularly interested in this ratio because they
want to make sure their loans will be repaid. Any ratio above 1 is considered to be a good
liquidity measure.

Cash Ratio = (Cash + Marketable Securities)/ Current liquidities

Cash Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 0.09 0.05 0.03 0.01 0.01

Square 2.52 1.61 1.09 0.42 0.36

Beximco 0.08 0.07 0.05 0.14 0.18

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 Cash Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)
3
2.52
2.5
2
1.61
Times

1.5
1.09
1
0.36 0.42
0.5 0.18 0.14
0.01 0.01 0.03 0.05 0.05 0.07 0.09 0.08
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 13: Cash Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

As we saw a better position on Current Ratio and Quick Ratio for Square Pharma, it is obvious
that their Cash Ratio will be higher too. Square Pharma in 2016 had 2.52 times Cash Ratio
higher than Beacon Pharma and Beximco Pharma, means they could pay off their liabilities 2.52
times by their cash and cash equivalent assets. On the other hand, Beacon Pharma and Beximco
Pharma could pay off their liabilities 0.09 times and 0.08 times only by their cash and cash
equivalent assets. It also indicates that they have more current liabilities than cash and cash
equivalent assets.

32 | P a g e
3.5 LONG TERM DEBT AND SOLVENCY RATIO

Solvency ratios, also called leverage ratios, measure a company’s ability to sustain operations
indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency
ratios identify going concern issues and a firm’s ability to pay its bills in the long term. Many
people confuse solvency ratios with liquidity ratios. Although they both measure the ability of a
company to pay off its obligations, solvency ratios focus more on the long-term sustainability of
a company instead of the current liability payments.

Solvency ratios show a company’s ability to make payments and pay off its long-term
obligations to creditors, bondholders, and banks. Better solvency ratios indicate a more
creditworthy and financially sound company in the long-term.

3.5.1 DEBT TO CAPITAL RATIO

The debt to capital ratio is a liquidity ratio that calculates a company’s use of financial leverage
by comparing its total obligations to total capital. In other words, this metric measures the
proportion of debt a company uses to finance its operations as compared with its capital.

This ratio is really a measure of risk and allows us to calculate how well a company can handle a
down turn in sales because it highlights the relationship between debt and equity financing.
Financing operations through loans carries some level of risk because the principal and interest
must be paid to the lender. Thus, companies with higher ratios are considered riskier because
they must maintain the same level of sales in order to meet their debt servicing obligations. A
down turn in sales could spell solvency issues for the company.

Investors use the debt-to-capital metric to gauge the risk of a company based on its financial
structure. A high ratio indicates that the company is extensive using debt to finance its
operations; whereas, a low metric means the company raises its funds through current revenues
or shareholders. Likewise, creditors use this measurement to assess whether the company is
suitable for a loan or is too leveraged to afford one.

33 | P a g e
A high ratio does not always mean a bad thing. Look at utility companies for instance. They
often carry high levels of debt because their operations are capital intensive. This translates into a
higher debt-to-capital ratio, but it doesn’t mean they will be insolvent soon. Utility companies
have an extremely steady base of customers and as such their revenues are consistent. This
means they are able to meet their obligations without worrying about downturns in revenues.

Contrast this with new, expanding companies. These companies might not have established
customer bases, but they still need to finance their day to day operations. They may have steady
sales at the moment, but this is not a guarantee like with the utility companies. Eventually, the
new company sales could level off or simply decrease leaving fewer funds to service its debt. A
high debt to capital ratio for this company would indicate risk.

Debt to Capital Ratio = Total Debt/ Total Capital

Debt to Capital Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016):

Year 2016 2015 2014 2013 2012

Beacon 41% 39% 38% 35% 39%

Square 12% 11% 15% 21% 22%

Beximco 26% 26% 28% 28% 25%

34 | P a g e
 Debt to Capital Ratio for Beacon Pharma, Square Pharma and
Beximco Pharma (2012-2016)
45% 41%
39% 38% 39%
40% 35%
35%
30% 28% 28%
25% 26% 26%
25% 22% 21%
%

20% 15%
15% 11% 12%
10%
5%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 14: Debt to Capital Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)

As we see on the chart that, Beacon Pharma had the highest Debt-to-Capital Ratio over 5 years.
Indicates Beacon had more leverage than the other two firms. Beacon Pharma in 2016, had 41%
Debt-to-Capital Ratio, means, 41% of its capital was financed by debt. Higher debt is not always
good for the company, when it does not have strong customer base. Beacon may be considered
as riskier to the investors.

On the other hand, Square and Beximco had lower Debt-to-Capital Ratio throughout the period.
In 2016, the most recent year, Square Pharma had 12% and Beximco Pharma had 26% of Debt-
to-Capital Ratio. Indicates, Square Pharma financed 12% of its capital by debt and Beximco
26%. Which indicates their strong financial health. They are less risky to the investor.

35 | P a g e
3.5.2 DEBT TO EQUITY RATIO

The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to total
equity. The debt to equity ratio shows the percentage of company financing that comes from
creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank
loans) is used than investor financing (shareholders).

A lower debt to equity ratio usually implies a more financially stable business. Companies with a
higher debt to equity ratio are considered riskier to creditors and investors than companies with a
lower ratio. Unlike equity financing, debt must be repaid to the lender. Since debt financing also
requires debt servicing or regular interest payments, debt can be a far more expensive form of
financing than equity financing. Companies leveraging large amounts of debt might not be able
to make the payments.

Creditors view a higher debt to equity ratio as risky because it shows that the investors haven’t
funded the operations as much as creditors have. In other words, investors don’t have as much
skin in the game as the creditors do. This could mean that investors don’t want to fund the
business operations because the company isn’t performing well. Lack of performance might also
be the reason why the company is seeking out extra debt financing.

Debt to Equity Ratio = Total debt / Total equity

Debt to Equity Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016):

Year 2016 2015 2014 2013 2012

Beacon 70% 63% 60% 53% 63%

Square 14% 12% 17% 25% 28%

Beximco 36% 35% 39% 39% 34%

36 | P a g e
 Debt to Equity Ratio for Beacon Pharma, Square Pharma and
Beximco Pharma (2012-2016)
80%
70%
70% 63% 63%
60%
60% 53%
50%
39% 39% 36%
40% 34% 35%
%

28%
30% 25%
20% 17% 14%
12%
10%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 15: Debt to Equity Ratio for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

As of Debt-to-Capital, here also Beacon Pharma had the highest Debt-to-Equity Ratio than other
two firms in 2012-2016. In most recent year 2016, Beacon had 70% of Debt-to-Equity Ratio,
which is huge for a firm. It means, 70% of its equity was financed by loan or debt. Beacon had
financed its operations less by its own money than creditors. Which indicates Beacon as risky for
the investors.

On the other hand, between Square Pharma and Beximco Pharma, Square Pharma had done
better. Square had 14% of Debt-to-Equity Ratio in 2016, indicates that it financed only 12% of
its equity by debt. Again, Beximco Pharma had 36% in 2016, which indicates that it financed
only 36% of its equity by debt. Square is less risky than the other two firms. And for Beximco,
we cannot say it is risky, as it has a very strong customer base and fund.

37 | P a g e
3.5.3 TIMES INTEREST EARNED RATIO

The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage ratio
that measures the proportionate amount of income that can be used to cover interest expenses in
the future.

In some respects, the times interest ratio is considered a solvency ratio because it measures a
firm’s ability to make interest and debt service payments. Since these interest payments are
usually made on a long-term basis, they are often treated as an ongoing, fixed expense. As with
most fixed expenses, if the company can’t make the payments, it could go bankrupt and cease to
exist. Thus, this ratio could be considered a solvency ratio.

The times interest ratio is stated in numbers as opposed to a percentage. The ratio indicates how
many times a company could pay the interest with its before tax income, so obviously the larger
ratios are considered more favorable than smaller ratios.

In other words, a ratio of 4 means that a company makes enough income to pay for its total
interest expense 4 times over. Said another way, this company’s income is 4 times higher than its
interest expense for the year.

As you can see, creditors would favor a company with a much higher times interest ratio because
it shows the company can afford to pay its interest payments when they come due. Higher ratios
are less risky while lower ratios indicate credit risk.

TIE = EBIT / Interest Expenses

TIE Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 1.37 1.23 1.24 1.10 1.62

Square 629 704 47.30 36.07 15.61

Beximco 6.19 4.33 3.34 3.65 3.42

38 | P a g e
 TIE Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)
800 704
700 629
600
500
Times

400
300
200
15.61 36.07
100 47.3
4.33 6.19
1.62 3.42 1.1 3.65 1.24 3.34 1.23 1.37
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 16: TIE Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

Because of the low debt amount, Square Pharma had less interest expenses and very high Time
Interest Earned Ratio. So, it had more capability to pay off its interest expenses and loan service
payments. It is more solvent than the two other firms as it has less risk of going bankrupt.

On the other hand, TIE Ratio for Beacon and Beximco was lower because of their higher debt
and interest expenses. In 2016, Beacon and Beximco Pharma had 1.37 and 6.19 times of TIE
Ratio. Which indicates them as riskier than Square Pharma.

39 | P a g e
3.5.4 FIXED CHARGE COVERAGE

The fixed charge coverage ratio is a financial ratio that measures a firm’s ability to pay all of its
fixed charges or expenses with its income before interest and income taxes. The fixed charge
coverage ratio is basically an expanded version of the times interest earned ratio or the times
interest coverage ratio.

The fixed charge coverage ratio is very adaptable for use with almost any fixed cost since fixed
costs like lease payments, insurance payments, and preferred dividend payments can be built into
the calculation. The fixed charge coverage ratio shows investors and creditors a firm’s ability to
make its fixed payments. Like the times interest ratio, this ratio is stated in numbers rather than
percentages. The ratio measures how many times a firm can pay its fixed costs with its income
before interest and taxes. In other words, it shows how many times greater the firm’s income is
compared with its fixed costs.

In a way, this ratio can be viewed as a solvency ratio because it shows how easily a company can
pay its bills when they become due. Obviously, if a company can’t pay its lease or rent
payments, it will not be in business for much longer.

Higher fixed cost ratios indicate a healthier and less risky business to invest in or loan to. Lower
ratios show creditors and investors that the company can barely meet its monthly bills.

Fixed Charge Coverage Ratio = Earning before fixed charges and taxes / Fixed Charges

Fixed Charge Coverage Ratio for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 1.36 1.20 1.09 1.05 1.60

Square 543.63 617.75 45.06 34.43 14.51

Beximco 5.09 4.09 3.15 3.45 3.25

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 Fixed Charge Coverage Ratio for Beacon Pharma, Square
Pharma and Beximco Pharma (2012-2016)
700 617.75
600 543.63
500
400
Times

300
200
14.51 34.43
100 45.06
1.6 3.25 1.05 3.45 1.09 3.15 1.2 4.09 1.36 5.09
0
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 17: Fixed Charge Coverage Ratio for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)

As the fixed charges such as interest expenses and lease payments are lower for Square Pharma,
their fixed charges could easily have paid off by their earnings before interest and taxes. Thus,
Square Pharma had higher ratio of Fixed Charge Coverage. In 2015, it had 618 times of Fixed
Charge Coverage Ratio and in 2016, it was 544 times.

On the other hand, Beacon Pharma and Beximco Pharma had higher fixed charges than its
income before interest and taxes. So, they had lower ratio of Fixed Charge Coverage.

41 | P a g e
3.5.5 CASH FLOW-TO-DEBT RATIO

The cash flow to debt ratio is a liquidity ratio that measures a company’s ability to pay off its
obligations with its operating cash flows. In other words, this calculation shows how easily a
firm’s cash flow from operations can pay off its debt or current expenses.

The cash flow to debt ratio shows the amount of money a company has available to meet current
obligations. It is reflected as a multiple, illustrating how many times over earnings can cover
current obligations like rent, interest on short term notes and preferred dividends. Essentially, it
shows current liquidity.

This measurement gives investors, creditors and other stakeholders a broad overview of the
company’s operating efficiency. Companies with huge cash flow ratios are often called cash
cows, with seemingly endless amounts of cash to do whatever they like.

For individuals, a high cash flow to debt ratio is like having a nice buffer in a checking account
to save after all monthly living expenses have been covered. Banks look closely at this ratio to
determine repayment risk when issuing a loan to a business. This is similar to consumer lending
practices where the lender wants the borrower to remain under a certain debt-to-income
threshold.

CFO to Debt Ratio = CFO / Total debt

CFO to Debt Ratio for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 27% 3% 4% 14% 9%

Square 202% 40% 139% 113% 100%

Beximco 29% 39% 27% 28% 30%

42 | P a g e
 CFO to Debt Ratio for Beacon Pharma, Square Pharma and
Beximco Pharma (2012-2016)
250%
202%
200%

150% 139%
113%
100%
%

100%

50% 40%39%
30% 28% 27% 27% 29%
9% 14%
4% 3%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 18: CFO to Debt Ratio for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

As off Square Pharma had less debt, they could have paid those debts by their operating cash
flows easily. Thus their CFO to Debt Ratios were higher throughout the period. In 2016, the ratio
was 202%, means, their operational cash flow was 202% of their total liabilities.

On the other hand, Beximco and Beacon Pharma had lower CFO to Debt ratios. Indicates their
lower operating cash flows.

43 | P a g e
3.6 PROFITABILITY ANALYSIS (RETURN ON SALES)

Profitability ratios compare income statement accounts and categories to show a company’s
ability to generate profits from its operations. Profitability ratios focus on a company’s return on
investment in inventory and other assets. These ratios basically show how well companies can
achieve profits from their operations.

Investors and creditors can use profitability ratios to judge a company’s return on investment
based on its relative level of resources and assets. In other words, profitability ratios can be used
to judge whether companies are making enough operational profit from their assets. In this sense,
profitability ratios relate to efficiency ratios because they show how well companies are using
their assets to generate profits.

3.6.1 GROSS MARGIN RATIO

Gross margin ratio is a profitability ratio that compares the gross margin of a business to the net
sales. This ratio measures how profitable a company sells its inventory or merchandise. In other
words, the gross profit ratio is essentially the percentage markup on merchandise from its cost.
This is the pure profit from the sale of inventory that can go to paying operating expenses.

Gross margin ratio is often confused with the profit margin ratio, but the two ratios are
completely different. Gross margin ratio only considers the cost of goods sold in its calculation
because it measures the profitability of selling inventory. Profit margin ratio on the other hand
considers other expenses.

It only makes sense that higher ratios are more favorable. Higher ratios mean the company is
selling their inventory at a higher profit percentage. A company with a high gross margin ratios
mean that the company will have more money to pay operating expenses like salaries, utilities,
and rent. Since this ratio measures the profits from selling inventory, it also measures the
percentage of sales that can be used to help fund other parts of the business.

Gross Margin = Gross Profit / Sales

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Gross Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 48% 48% 47% 50% 54%

Square 50% 48% 44% 44% 44%

Beximco 46% 46% 46% 46% 47%

Gross Margin for Beacon Pharma, Square Pharma and Beximco

Pharma (2012-2016)
60% 54%
50% 48% 50%
50% 47% 47% 46% 48% 46% 48% 46%
44% 44%46% 44%
40%
30%
%

20%
10%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 19: Gross Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

In terms of Gross Profit Margin all three companies had similar ratios over the period. Their
higher Gross Profit Ratios indicate that they are selling their inventories at a higher percentage.
Though, Beacon Pharma’s Gross Profit Margin was in decreasing mode, indicates that they had
sales in a lower profit. In 2016, it had 48% of Gross Profit Margin Ratio, means, it could make
48% of gross profit from its 100% sales. On the other hand, Beximco Pharma had a constant

45 | P a g e
Gross Profit Margin, 46% from 2013-2016, means, it could make 46% of gross profit from its
100% sales. Square Pharma on the other hand, had an increasing level of Gross Profit Margin,
from 44% in 2013, it increased its margin to 50% in 2016. Gross Profit Margin Ratio 50% in
2016 means, it could generate 50% of gross profit from its sales.

3.6.2 OPERATING MARGIN

The operating margin ratio, also known as the operating profit margin, is a profitability ratio that
measures what percentage of total revenues is made up by operating income. In other words, the
operating margin ratio demonstrates how much revenues are left over after all the variable or
operating costs have been paid. Conversely, this ratio shows what proportion of revenues is
available to cover non-operating costs like interest expense.

This ratio is important to both creditors and investors because it helps show how strong and
profitable a company’s operations are. The operating profit margin ratio is a key indicator for
investors and creditors to see how businesses are supporting their operations. If companies can
make enough money from their operations to support the business, the company is usually
considered more stable. On the other hand, if a company requires both operating and non-
operating income to cover the operation expenses, it shows that the business’ operating activities
are not sustainable.

A higher operating margin is more favorable compared with a lower ratio because this shows
that the company is making enough money from its ongoing operations to pay for its variable
costs as well as its fixed costs.

Operating Margin = Operating Income / Sales

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Operating Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Year 2016 2015 2014 2013 2012

Beacon 11% 14% 14% 17% 35%

Square 34% 32% 27% 26% 26%

Beximco 22% 22% 22% 22% 24%

Operating Margin for Beacon Pharma, Square Pharma and

Beximco Pharma (2012-2016)
40% 34%
35% 32%
35%
30% 26% 26% 27%
24%
25% 22% 22% 22% 22%
20% 17%
%

14% 14%
15% 11%
10%
5%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 20: Operating Margin for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

Square Pharma had an increased level of Operating Profit Margin throughout the period. It had
the highest margin among the three companies. In 2016, Square Pharma had 34% of Operating
Profit Margin, means that for every 100 Taka of income, they had 34 Taka remaining after the
operating expenses have been paid. It is higher from the Beacon Pharma and Beximco Pharma.
As Beacon Pharma had only 11% of Operating Profit Margin, means for every 100 Taka of

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income, they had only 11 Taka remaining in 2016 after all the operating expenses were paid off.
On the other hand, Beximco had only 22 Taka remaining after the operating expenses as their
margin was 22% in 2016.

3.6.3 MARGIN BEFORE INTEREST AND TAX (EBIT MARGIN RATIO)

EBIT Margin is the ratio of Earnings before Interest and Taxes to net revenue - earned. It is a
measure of a company's profitability on sales over a specific time period.

This indicator gives information on a company's earnings ability. Increase in EBIT is mainly due
to growth of net revenue, good cost control and strong productivity, Decrease in EBIT margin
largely results from reduction in revenue and higher operating costs. EBIT margin is most useful
when compared against other companies in the same industry. The higher EBIT margin reflects
the more efficient cost management or the more profitable business. If no positive EBIT margin
can be generated over a longer period, then the company should rethink the business model.
Note: This margin can be used as relative indicator for international, cross-industry comparisons.
EBIT margin, however, varies greatly between industries, as factors both net revenue and EBIT
directly impact on the EBIT margin. E.g. retailers have quite a small EBIT margin as they rely
on small margins accompanied with high sales volume. Other industries would have small sales
volume but expect to offset that with higher EBIT margins.

EBIT Margin = EBIT / Sales

EBIT Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Years 2016 2015 2014 2013 2012

Beacon 11% 14% 16% 18% 35%

Square 37% 34% 28% 27% 28%

Beximco 23% 24% 26% 27% 29%

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 EBIT for Beacon Pharma, Square Pharma and Beximco
Pharma (2012-2016)
40% 37%
35% 34%
35%
30% 28%29% 27% 27% 28%
26%
24% 23%
25%
20% 18%
16%
%

14%
15% 11%
10%
5%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 21: EBIT Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

In terms of EBIT Margin, Beacon Pharma in 2012 had 35% of EBIT Margin, means it had 35%
profitability before interest and tax on revenue. But its margin decreased drastically in the next
few years (2013-2016). Indicates that it did not have good revenue and cost management and
productivity.

On the other hand, Square Pharma and Beximco Pharma had good EBIT Margin than Beacon
Pharma. Square Pharma continuously increased its margin, which is a good sign for the
company. In 2016 it had 37% of EBIT Margin, higher than other two firms. Indicates Square’s
growing net revenue, good cost management and productivity. Beximco Pharma had a similar
rate of EBIT Margin from 2012-2016, also indicates its good financial condition.

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3.6.4 PRE-TAX MARGIN

The pretax profit margin is the ratio of a company's pre-tax earnings to its total sales. The higher
the pretax profit margin, the more profitable the company.

EBT Margin = EBT / Sales

EBT Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Years 2016 2015 2014 2013 2012

Beacon 3% 3% 2% 1% 12%

Square 37% 34% 28% 27% 26%

Beximco 20% 19% 20% 21% 22%

EBT Margin for Beacon Pharma, Square Pharma and Beximco

Pharma (2012-2016)
40% 37%
34%
35%
30% 27% 28%
26%
25% 22% 21% 20% 19% 20%
20%
%

15% 12%
10%
5% 2% 3% 3%
1%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 22: EBT Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

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Beacon Pharma had the lowest EBT Margin from 2012-2016. Because of its high debt, Beacon
Pharma had higher interest expenses. Thus, its earnings before tax decreased, and because of that
its EBT Margin also decreased. In 2016, it had only 3% of EBT Margin, means, it had only 3%
remaining profit after paid off the interest expenses.

On the other hand, Square Pharma had the highest EBT Margin among two other companies. As
Square had lower debt and interest expenses, its EBT Margin gone high. In 2016, Square Pharma
had 37% of EBT profit margin. Beximco Pharma also had stable EBT Margin, indicates its good
debt management.

3.6.5 PROFIT MARGIN

Profit margin is a profitability ratios calculated as net income divided by revenue, or net profits
divided by sales. Net income or net profit may be determined by subtracting all of a company’s
expenses, including operating costs, material costs (including raw materials) and tax costs, from
its total revenue. Profit margins are expressed as a percentage and, in effect, measure how much
out of every dollar of sales a company actually keeps in earnings.

Profit margin may also indicate certain things about a company’s ability to manage its expenses.
High expenditures relative to revenue (i.e. a low profit margin) may indicate that a company is
struggling to keep its costs low, perhaps due to management problems. This is an indication that
costs need to be under better control. High expenditures may occur for many reasons, including
that the company has too much inventory (relative to its sales), that it has too many employees,
and that it is operating in spaces that are too large and thus is paying too much in rent. On the
other hand, a higher profit margin indicates a more profitable company that has better control
over its costs, compared with its competitors.

Profit Margin = Net Income / Net Sales (revenue)

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Profit Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Years 2016 2015 2014 2013 2012

Beacon 2% 2% 1% 1% 8%

Square 29% 24% 19% 18% 18%

Beximco 14% 15% 14% 13% 14%

Profit Margin for Beacon Pharma, Square Pharma and Bex-

imco Pharma (2012-2016)
35%
29%
30%
24%
25%
18% 18% 19%
20%
14% 14% 15% 14%
%

15% 13%

10% 8%
5% 1% 1% 2% 2%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 23: Profit Margin for Beacon Pharma, Square Pharma and Beximco Pharma (2012-
2016)

Profit Margins for Beacon Pharma were lower among the three companies. In 2016, it only had
2% of Profit Margin. It means it had only 2% of net profit after all operating expenses, interest,
taxes and preferred stock dividends (but not common stock dividends) have been deducted from
a company's total revenue.

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On the other hand, Square Pharma had the highest margin among three companies. In 2016,
Square Pharma achieved 29% of Profit Margin, means it had 29% of net profit after all operating
expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have
been deducted from a company's total revenue. So, we can say Square Pharma is much profitable
than Beacon Pharma and Square Pharma. Again, Beximco Pharma had 14% of net profit margin
in 2016, which also indicates that they are a profitable company.

3.6.6 RETURN ON ASSET (ROA)

The return on assets ratio, often called the return on total assets, is a profitability ratio that
measures the net income produced by total assets during a period by comparing net income to the
total assets. In other words, the return on assets ratio or ROA measures how efficiently a
company can manage its assets to produce profits during a period.

Since company assets’ sole purpose is to generate revenues and produce profits, this ratio helps
both management and investors see how well the company can convert its investments in assets
into profits. You can look at ROA as a return on investment for the company since capital assets
are often the biggest investment for most companies. In this case, the company invests money
into capital assets and the return is measured in profits.

In short, this ratio measures how profitable a company’s assets are. Return on assets is displayed
as a percentage and its calculated as:

ROA = Net Income / Total Assets

Return on assets for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Years 2016 2015 2014 2013 2012

Beacon 1% 1% 1% 0.2% 2%

Square 28% 31% 17% 15% 15%

Beximco 7% 9% 5% 5% 6%

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 Return on assets for Beacon Pharma, Square Pharma and Bex-
imco Pharma (2012-2016)
35% 31%
28%
30%
25%
20% 17%
15% 15%
%

15%
9%
10% 6% 7%
5% 5%
5% 2% 1% 1% 1%
0%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 24: Return on assets for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

Beacon Pharma was the lowest ROA holder among the three companies. This indicates that they
were not good at converting their investments in assets into revenue and profit. In the most
recent year 2016, they only had 1% of ROA, means they could only generate 1% net profit form
their total assets.

On the other hand, Square Pharma in 2015 and 2016 achieved their highest ROA in 5 years. In
2015, it gained 31% ROA, means it could generate 31% net profit from their total assets and
28% in 2016. Beximco Pharma, was better than Beacon Pharma. In 2015, it had 9% ROA, means
it could generate 9% of net profit from its total assets, which was highest for them in 5 years. In
2016, Beximco had 7% of ROA.

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3.6.7 RETURN ON EQUITY

The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to
generate profits from its shareholders’ investments in the company. In other words, the return on
equity ratio shows how much profit each dollar of common stockholders’ equity generates. ROE
is also indicator of how effective management is at using equity financing to fund operations and
grow the company.

Return on equity measures how efficiently a firm can use the money from shareholders to
generate profits and grow the company. Unlike other return on investment ratios, ROE is a
profitability ratio from the investor’s point of view—not the company. In other words, this ratio
calculates how much money is made based on the investors’ investment in the company, not the
company’s investment in assets or something else.

That being said, investors want to see a high return on equity ratio because this indicates that the
company is using its investors’ funds effectively. Higher ratios are almost always better than
lower ratios, but have to be compared to other companies’ ratios in the industry. Since every
industry has different levels of investors and income, ROE can’t be used to compare companies
outside of their industries very effectively.

Many investors also choose to calculate the return on equity at the beginning of a period and the
end of a period to see the change in return. This helps track a company’s progress and ability to
maintain a positive earnings trend. ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income / Shareholder's Equity

Return on Equity for Beacon Pharma, Square Pharma and Beximco Pharma (2012-2016):

Years 2016 2015 2014 2013 2012

Beacon 2% 1% 1% 0.3% 3%

Square 32% 35% 19% 19% 19%

Beximco 9% 13% 7% 7% 7%

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 Return on Equity for Beacon Pharma, Square Pharma and Bex -
imco Pharma (2012-2016)
40% 35%
35% 32%

30%
25%
19% 19% 19%
20%
%

15% 13%
9%
10% 7% 7% 7%
5% 3% 2%
0% 1% 1%
0%
2012 2013 2014 2015 2016
Years

Beacon Square Beximco

Figure 25: Return on Equity for Beacon Pharma, Square Pharma and Beximco Pharma
(2012-2016)

Beacon Pharma was the lowest ROE holder among the three companies. Indicates it did not
utilize its shareholders’ equity properly to generate its net income. On the other hand, Square
Pharma was better than Beacon and Beximco Pharma. In 2015, it generated 35% net profit from
its shareholders’ equity. In 2016, it generated 32% net profit from its shareholders’ equity.
Indicates that Square Pharma did a best use of its shareholders’ investments. Beximco Pharma
had 13% ROE in 2015, highest for them in 5 years’ period.

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4.0 FINDINGS & RECOMMENDATION

Activity Ratios: In terms of Activity Ratios Square Pharma is more efficient than
Beacon Pharma and Beximco Pharma. Beacon and Beximco Pharma should consider its
management inventory and assets management more carefully to become efficient on
making profit out of their investment.

Liquidity Ratios: Square Pharma is more liquid than the other two firms. It can pay off
its liabilities more quickly by its current assets. On the other hand, Beacon and Beximco
are less liquid firms. They need to be more concern about their current assets to be more
liquid firms. It is important because less liquid firms are less attractive to the investors as
they require more risks.

Long term debt and Solvency ratio: Square Pharma is a less risky firm than other two
firms as they have used less debt to finance their operation. On the other hand, Beacon
Pharma had 70% of its capital financed by debt. So, Beacon Pharma should concern
about their debt management. Beacon will be riskier than Square and Beximco to the
investors as well as creditors.

Profitability Ratio: As Square Pharma had higher ratios of profitability, we consider it

as a profitable company. On the other hand, Beacon Pharma is less profitable as it had
much lower profitability ratios. Beximco Pharma has a potential customer base and
strong funding base, so, we can consider this one as profitable also.

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5.0 REFERENCES

 Descriptive Data-Square Pharmaceutical Limited: Annual Report (2012-2016), Retrieved

From: http://www.squarepharma.com.bd/annual-reports.php
 Descriptive Data-Beximco Pharmaceutical Limited.: Annual Report (2012-2016),
Retrieved From: https://www.beximcopharma.com/investor/financial-reports.html
 Descriptive Data- Beacon Pharmaceutical Limited: Annual Report (2012-2016),
Retrieved From: https://www.beaconpharma.com.bd/annual-reports/
 Investopedia. Ratio Analysis. Retrieved on 21th July, 2018 from:
https://www.investopedia.com/terms/r/ratioanalysis.asp
 My Accounting Course. Financial Ratio Analysis. Retrieved on 21th July, 2018 from:
https://www.myaccountingcourse.com/financial-ratios
 White, G. I. and Sondhi, A. C. (2014), The Analysis and Use of Financial Statements,
Third Edition.

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