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The pharmaceutical industry has flourished in the recent past. While many other industries faced
financial difficulties in the 2019-2020 pandemic period, most pharmaceutical companies have never
breached their footsteps. The sales volume of the majority of these companies continued to grow
steadily. However, despite these overall positive results in the industry, Riham, Chairman of Sultan
Pharmaceuticals Corporation, was not happy with the financial picture of Sultan Pharmaceuticals
Corporation. Although Riham is relieved to see a recovery from the sales downturn her company faced
in 2019, she remains extremely concerned about the profitability generated by these sales. The company
has maintained a profitable position, but one of the key questions about Riham relates to the sufficiency
of the profits. On several occasions, it has faced its vice president, Amr, with such concern. However, so
far Riham does not consider that her questions have been satisfactorily resolved. In response to her
inquiries, Amr indicated that the company's operating profits have increased by an " astonishing 141%"
over the past four years. Based on this fact, Amr is convinced that the company's financial position has
improved impressively. As additional supporting statements to his conviction in the overall prosperity of
the company, Amr points to the fact that Sultan's production cost has consistently been less than half of
the dollar sales of its products.
Although Amr concluded that the company is doing well, Riham still desires more specific financial
information regarding the strengths and weaknesses of Sultan Pharmaceuticals. In this regard, she
obtained the financial statements of the main competitor of Sultan Pharmaceutical Industries, Imhetep
Pharmaceuticals Corporation. Riham for some time let go of competitive pressure from this firm. Hence,
she believes that an analysis of an in-depth comparison between the two entities would explain whether
her dissatisfaction was justified or not.
Although Reham did not have the opportunity to conduct a full investigation, she calculated the return
on assets for Imhetep Pharmaceuticals Corporation and found it to be well above the equivalent figure
for Sultan. Furthermore, she has noticed her firm's earnings per share to be less than the same
computation for Imhetep Pharmaceuticals Corporation in 1976. On the other hand, she did take some
comfort in discovering Sultan's return-on-common to be somewhat closer to Imhetep Pharmaceuticals
Corporation than the return-on-assets. Also, Riham made a point to compute her competitor's growth in
operating income during the most recent four-year period, which proved to be less than the comparable
growth rate for Sultan. Since she had not performed a thorough examination, she could not definitely
explain the reasons for the more narrow margin between the two firm's return on common and Sultan's
larger growth rate in operating income; however, he thought it to be the result of recent investment
decisions and Sultan's dividend policy.
In a recent meeting with the firm's financial officer, Riham enumerated his concerns as being:
1. Is the business maintaining an adequate liquidity position?
2. Is the management of Sultan Corporation generating sufficient return on the firm's assets?
3. Does the financial mix appear to be appropriate?
4. Is a plentiful return on equity being provided to attract future common stockholders? In this
particular matter, Riham is especially interested in knowing the key variables having an impact upon
the return on equity.
Case Requirements
1. Perform a financial-ratio analysis that gives detailed attention to Riham’s four questions.
Conduct your investigation in terms of both time (the five years given) and relative to Imhetep
Pharmaceuticals Corporation. Where relevant, use a 365-day year in your computations.
2. Make recommendations to Riham with respect to any financial matters needing attention.
3. Evaluate both Riham’s and Amr’s beliefs about the financial position of the company.
Beginning account receivable and inventory balance for 2017 were $3,000,000,000 and $3,300,000,000
respectively
Sultan Pharmaceuticals Corporation
Income statements for 2017–2021
Million dollars
2017 2018 2019 2020 2021
Sales 21,159 24,903 23,082 26,418 30,138
Cost of godds sold 10,365 11,904 10,578 12,345 14,469
Gross operating income 10,794 12,999 12,504 14,073 15,669
Depreciation 468 549 522 585 615
Administrative and selling expenses 7,962 8,418 7,776 8,793 10,158
Research and development 894 990 1,062 1,191 1,347
Operating income 1,470 3,042 3,144 3,504 3,549
Other income 462 474 516 519 648
Earnings before interest and taxes 1,932 3,516 3,660 4,023 4,197
Interest expenses 366 420 483 558 759
Earnings before taxes 1,566 3,096 3,177 3,465 3,438
Taxes (40%) 626 1,238 1,271 1,386 1,375
Net income 940 1,858 1,906 2,079 2,063
Beginning account receivable and inventory balance for 2017 were $2,100,000,000 and $1,800,000,000
respectively
Imhetep Pharmaceuticals Corporation
Income statements for 2017–2021
Million dollars
2017 2018 2019 2020 2021
Sales 11,736 13,104 15,126 18,348 21,114
Cost of godds sold 3,279 3,597 3,504 4,341 5,178
Gross operating income 8,457 9,507 11,622 14,007 15,936
Depreciation 249 240 348 396 441
Administrative and selling expenses 4,692 5,238 6,279 7,473 8,619
Research and development 642 756 858 900 1,113
Operating income 2,874 3,273 4,137 5,238 5,763
Other income 0 33 81 105 192
Earnings before interest and taxes 2,874 3,306 4,218 5,343 5,955
Interest expenses 30 36 45 60 99
Earnings before taxes 2,844 3,270 4,173 5,283 5,856
Taxes (40%) 1,138 1,308 1,669 2,113 2,342
Net income 1,706 1,962 2,504 3,170 3,514