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BUS 505.

Financial Statement Analysis Of Square


Pharmaceuticals Ltd.
2011, 2012 & 2013
SAMEEHA ASLAM
SAHEDI AKHTER KHAN

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1

Table of Contents
Principle Activities of Square Pharmaceuticals Ltd (Square)..........................................................3
Report on Financial Performance from 2011-2013.........................................................................4
Vertical Analysis of Financial Statements from 2011-2013............................................................8
Horizontal Analysis of Financial Statements from 2011- 2013.....................................................10
Analysis of Liquidity and Profitability from 2011-2013...............................................................12
Square Pharmaceuticals Ltd......................................................................................................12
Company X................................................................................................................................17
Assessment of viability for short term credit.................................................................................22
Assessment of viability for long term credit..................................................................................23
REFERENCES..............................................................................................................................25

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Principle Activities of Square Pharmaceuticals Ltd (Square).


Square Pharmaceuticals Ltd. (Square) is a leading pharmaceutical public limited company in
Bangladesh. Square is focused on being a socially aware business with a strong sense of corporate
social responsibility and this is seen in their motto which is Being Good by Doing Well and so the
company stays away from any immoral, corrupt activities or malpractices and endeavors to be
impeccable in all their dealings (Square 2014). According to the Annual Report of 2012-2013, Square
strives for producing the best products at the lowest possible cost so that the underprivileged people in
the nation can have access to their products. Square knows that their human capital is the back-bone of
the management and operational strength of the company, and so they make sure that they provide
them with a well rounded pay- package (Square 2013, p 10a). Not only do they work towards providing
a good work environment for their own workers, but they also try to works towards the betterment of
the whole human civilizations through achievement of millennium development goals (Square 2013,
p 10b).
As mentioned above, Square is very conscious about its duties towards its stakeholders be they
customers, debtors, creditors, and financial institutions who help them. Square believes in collaboration
between its stakeholders. The company is a law- abiding entity and makes sure that it pays all its dues
like taxes to the government on time. Square is also very aware of its responsibilities towards its other
stakeholders like the shareholders of the company and strives for protection of their capital as well as
ensure highest return and growth of their assets (Square 2013, p 10c). According to their Annual
Report 2012 2013, Square strives for practicing good-governance in every sphere of activities
covering inter alia not being limited to, disclosure & reporting to shareholders, holding AGM in time,
distribution of dividends and other benefits to shareholders, reporting/dissemination of price sensitive
information, acquisition of shares by insiders, recruitment & promotion of staff, procurement
&supplies, sale of assets etc. all that directly and indirectly affect the interest of concerned groups -the
shareholders, the creditors, suppliers, employees, government and the public in general ( Square 2013,
p 10d). Not only is Square environment- conscious but its against any sort of discrimination may they
be based on caste, race, religion, gender etc (Square 2013).

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3

Report on Financial Performance from 2011-2013


Profitability Ratios
Return on common
stockholder's equity
(ROE)

Return on Assets (ROA)

Gross Profit margin

Net Profit margin

2013

2012

2011

(3341424783/

(2897710641/

(2532054550/

17555815219.50)*
100=

15042296622.50)*
100=

12769520420.50)*
100=

19.03

19.26

19.83

(3341424783/

(2897710641/

(2532054550/

22450715134)*10
0=

20449097208)*10
0=

17320430979)*10
0=

14.88

14.17

14.62

(7736011423/

(6887171623/

(5767763459/

17959489496)*10
0=

16054425243)*10
0=

13471424469)*10
0=

43.07

42.90

42.81

(3341424783/
17959489496)*10
0=

(2897710641/
16054425243)*10
0=

(2532054550/
13471424469)*10
0=

18.61

18.05

18.80

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51 ; 2012 p 50-51; 2011 p 44-45 .
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Profitability is the indicator of success or failure of a companys operating policy. Profitability trend is
good for the company in the year 2013. The total profitability of SPL was quite good from 2011 to
2013 and almost similar. ROE is net income by average common shareholders equity. ROE tells us
how many taka of net profit owners earned for each taka invested by the owners. ROE has fallen
because share capital has increased drastically in 2013. Return on Assets or ROA is net income by
average total assets and Squares ROA is pretty good. Gross profit margin is calculated by dividing
gross profit by sales. Gross profit margin in 2013 tells us that for every 100 taka sales revenue, 43 taka
gross profit was earned. The Net profit margin goes a step further and removes expenses and hence for
every 100 taka sales, 18 taka net income was earned (Weygandt, Kimmel & Kieso 838-840).
Market Performance Ratios
2013

2012

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4

2011

Earnings per Share


(EPS)
Price earnings ratio
(PER)
Dividend payout ratio

(3341424783/

(2897710641/

(2532054550/

370768664)=

264834760)=

19617390)=

9.01

10.94

129.07

(178.6/9.01)=

(237.3/10.94)=

(3272/129.07)=

19.82

21.69

25.35

((0.3+0.25)*10)/9.
01=

((0.4+0.25)*10)/1
0.94=

((0.35+0.3)*100)/1
29.07

0.61

0.59

= 0.50

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 20, 50-51 ; 2012 p 20, 50-51; 2011 p17,
44-45 . The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

EPS or earnings per share measure how much net profit each common stock or ordinary share earns.
Hence the higher the EPS the better it is for the company but the EPS has been decreasing for Square.
PER for Square has been calculated by using the DSE share price. The PER reflects the investors
assessment of a companys future earnings (p 841). The PER in 2013 tells us that for every taka each
share earned, Squares shares sold for 19.82 times that amount. Finally the dividend payout ratio
measures how much of the earnings a company distributes to the shareholders as dividend. Usually it is
calculated by using cash dividend paid but in accordance with Bangladesh GAAP rules, we have used
both the proposed cash and stock dividends. We can see that Square in 2013 Square distributed 61% of
its net income as dividend to its shareholders. This is a very high value and Square should reinvest
more into the business but again this value also includes stock dividend so we cannot be sure
(Weygandt, Kimmel & Kieso p 841-842).

Asset Efficiency Ratios


2013

2012

2011

Asset Turnover ratio

(17959489496/
22450715134)=

(16054425243/
20449097208)=

(13471424469/
17320430979)=

0.80

0.79

0.78

Inventory Turnover

(10223478073/
2595750856)=

(9167253620/
2614753400.5)=

(7703661010/
2374383205.5)=

3.94

3.51

3.24

Accounts Receivable
Turnover

(17959489496/
804643313)=

(16054425243/
790366529.5)=

(13471424469/
640335259.5)=

22.32

20.31

21.04

Accounts Payable

(10223478073/

(9167253620/

(7703661010/

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980764718)=

804400386.5)=

564042566.5)=

10.42

11.40

13.66

Days Inventory

(365/3.938)=

(365/3.505)=

(365/3.244)=

92.67

104.11

112.50

Average Collection
Period
Average Payment Period

(365/22.3198)=

(365/20.3126)=

(365/21.03808)=

Turnover

Cash Conversion Cycle

16.35

17.97

17.35

(365/10.4239)=

(365/11.396)=

(365/13.6579)=

35.02

32.03

26.72

(92.6738489264
42+
16.3531824949
93135.0153949090
395)

(104.108060139226
+
17.969113119965732.0277100692346)
=

(112.49844312756
2+
17.349491900825
626.724376436768
9)=

90.05

=74.01

103.12

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p50-51; 2012 p 50-51; 2011 p44-45. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Efficiency ratios are impressive in case of Square Pharmaceuticals Ltd. Analysis indicates that the
credit management policy of SPL is satisfactory and inventory turnover indicates the increase of net
income of the firm. Specifically the asset turnover measures how efficiently a company is using its
assets to generate sales (p 839). Asset turnover is net sales by average total assets. In 2013, Square
generated sales of taka 0.8 for each taka it invested in its assets. Inventory turnover measures how
quickly a firm is able to sell its inventory. Inventory turnover is measured by dividing cost of goods
sold by average inventory. We can look at days inventory which is 365 by inventory turnover to see that
in 2013, Square took about 93 days on average to sell its inventory. Accounts receivables turnover
measures how quickly Square turns its receivables into cash. It is calculated by dividing credit sales by
average accounts receivables. The average collection period tells us that it takes Square about 16-17
days to collect its receivables. On the other hand from the average payment period, we see that Square
takes about 35 days on average to pay its creditors. Finally the cash conversion cycle gives an overall
picture of Squares asset efficiency because in 2013 it took Square about 74 days on average to get cash
(Weygandt, Kimmel & Kieso p 837-839).

Liquidity Ratios
2013

2012
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6

2011

Current Ratio

(5996697544/
3792438255)=

(6745507008/
4252934845)=

(7022213840/
4668189426)=

1.58

1.59

1.50

Acid Test Ratio

((59966975442503683240)/
3792438255)=

((67455070082687818472)/
4252934845)=

((70222138402541688329)
/4668189426)=

0.92

0.95

0.96

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Liquidity ratios tell us whether a company is capable of meeting its short-term debt obligations. The
liquidity position of the company is satisfactory. Current ratio is calculated by dividing current assets
by current liabilities. Acid test ratio tells us a bit more about how liquid a firm really is because it
doesnt count inventory hence it is a measure of a firms immediate liquidity. Ideally a current ratio
should be around 1.5 and an acid-test ratio should be around 0.8. Squares liquidity ratios are close to
the ideal figures even though the acid test ratio is a bit high. The companys current ratio and quick
ratio are in a fluctuating trend over the three years, but the difference is only marginal. Overall Square
is in a good liquidity position (Weygandt, Kimmel & Kieso p 835-836).

Solvency/ Leverage Ratios


2013

2012

2011

(4602899322/
18844746184)=

(5186900507/
16266884255)=

(5626700664/
13817708990)=

0.24

0.32

0.41

Debt Ratio

(4602899322/
23447645506)=

(5186900507/
21453784762)=

(5626700664/
19444409654)=

0.20

0.24

0.29

Equity Ratio

(18844746184/
23447645506)=

(16266884255/
21453784762)=

(13817708990/
19444409654)=

0.80

0.76

0.71

Interest Coverage Ratio

((4481047443+
325281016181743100)/
325281016)=

((3978939088252604901+
433581036)/
433581036)=

((3414752310171776894+
268849071)/
268849071)=

14.22

9.59

13.06

Debt to Equity

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p50-51, 72; 2012 p 50-51, 72; 2011 p 4445, 67 . The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

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Solvency ratios measure a businesss ability to survive in the long run. EBIT has been calculated by
adding back interest expense and subtracting interest income from profit after tax. Ideally the debt and
equity ratios should be around 50% and debt to equity ratio should be around 100%. Square seems to
be a very safe company because its equity ratio is too high at around 80% and the debt ratio is too low
at 20%. In 2013 the debt to equity is also very low at 24%. These ratios were marginally better in 2011.
The interest coverage ratio is high at 14 times which is good because Square can cover its interest
expense very well but even this shows that Square has the ability to be able to pay more interest. It
seems that Square might prefer expansion through internal resources. Either way, a higher debt ratio
would help Square expand its business and Square can do this by issuing debentures, issuing preference
share and buying back ordinary shares. If Square doesnt want to take on more long term liabilities, it
can simply issue preference shares (Weygandt, Kimmel & Kieso p842-843).

Vertical Analysis of Financial Statements from 2011-2013


Square Pharmaceuticals Ltd.
Common-size Income Statements
for the years ended 2011, 2012 & 2013
2011
115.63
%
-15.63%
100.00
%
-57.19%

2012
115.81
%
-15.81%
100.00
%
-57.10%

2013
115.50
%
-15.50%
100.00
%
-56.93%

42.81%

42.90%

43.07%

Operating Expenses:

-22.39%

-22.21%

-21.62%

Selling and Distribution Expenses

-15.75%

-15.14%

-15.71%

Administrative Expenses

-4.65%

-4.37%

-4.11%

Financial Expenses

-2.00%

-2.70%

-1.81%

PROFIT FROM OPERATIONS

20.43%

20.69%

21.45%

6.19%

5.34%

4.75%

PROFIT BEFORE WPPF

26.62%

26.02%

26.20%

Allocation for WPPF

-1.27%

-1.24%

-1.25%

PROFIT BEFORE TAX

25.35%

24.78%

24.95%

GROSS TURNOVER
Less: Value Added Tax
NET TURNOVER
COST OF GOODS SOLD
GROSS PROFIT

Other Income

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8

Provision for Income Tax

-5.98%

-5.97%

-5.95%

Provision for Deferred Income Tax

-0.57%

-0.76%

-0.40%

PROFIT AFTER TAX FOR THE YEAR

18.80%

18.05%

18.61%

0.69%

0.87%

-0.57%

19.48%

18.92%

18.04%

Other Comprehensive Income


Gain/(Loss) on Marketable Securities
(Unrealized)
Total Comprehensive Income for the Year

Note. The data is from Square Pharmaceuticals 2013, p 50- 51; 2012 p 50-51; 2011 p 44-45.

Financial expenses have fallen which means profit from operation went up in 2013. There was also a
loss on marketable securities. Mostly the income statement amounts improved in 2013 compared to
2012.

Square Pharmaceuticals Ltd.


Common-size Balance Sheets
as at 2011, 2012 & 2013
2011

2012

2013

63.89%

68.56%

74.43%

35.91%
4.56%

40.87%
5.94%

39.76%
15.86%

Investment - Long Term (at Cost)


Investment in Marketable Securities (Fair
Value)

20.73%

18.51%

16.30%

2.68%

3.24%

2.51%

Current Assets:

36.11%

31.44%

25.57%

Inventories

13.07%

12.53%

10.68%

Trade Debtors

3.97%

3.77%

3.42%

Advances, Deposits and Prepayments

2.69%

2.69%

2.77%

14.47%

9.72%

4.73%

1.90%
100.00
%

2.74%
100.00
%

3.98%
100.00
%

Shareholders' Equity:

71.06%

75.82%

80.37%

Share Capital

10.09%

12.34%

15.81%

ASSETS:
Non-Current Assets:
Property, Plant and Equipment-Carrying
Value
Capital Work-in-Progress

Short Term Loan


Cash and Cash Equivalents
TOTAL ASSETS
SHAREHOLDERS' EQUITY AND
LIABILITIES:

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9

Share Premium

10.47%

9.49%

8.68%

General Reserve

0.54%

0.49%

0.45%

Tax Holiday Reserve


Gain on Marketable Securities
(Unrealized)

5.67%

0.00%

0.00%

1.33%

1.86%

1.27%

42.96%

51.64%

54.15%

Non-Current Liabilities:

4.93%

4.35%

3.46%

Long Term Loans - Secured

3.37%

2.37%

1.34%

Deferred Tax Liability

1.56%

1.98%

2.12%

Current Liabilities:

24.01%

19.82%

16.17%

Short Term Bank Loans

13.51%

9.40%

4.75%

Long Term Loans - Current Portion

2.46%

2.22%

2.18%

Trade Creditors

3.77%

4.08%

4.63%

Liabilities for Expenses

0.41%

0.44%

0.47%

3.86%
100.00
%

3.68%
100.00
%

4.15%
100.00
%

Retained Earnings

Liabilities for Other Finance


TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES

Note. The data is from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.

Capital work in progress has increased sharply because Square is working on a unit in Gazipur (Square
2013 p 60). Non-current assets have gone up but non- current liabilities have gone down. Current assets
have decreased and retained earnings have increased. This reinforces what was said earlier in the
solvency evaluation that Square prefers to finance growth through internal resources.

Horizontal Analysis of Financial Statements from 2011- 2013


Square Pharmaceuticals Ltd.
Trend Analysis of Income Statements
for the years ended 2011, 2012 & 2013
2011
100.0
0
100.0
0
100.0
0

GROSS TURNOVER
Less: Value Added Tax
NET TURNOVER
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10

2012

2013

119.36

133.17

120.59

132.22

119.17

133.32

COST OF GOODS SOLD


GROSS PROFIT
Operating Expenses:
Selling and Distribution Expenses
Administrative Expenses
Financial Expenses
PROFIT FROM OPERATIONS
Other Income
PROFIT BEFORE WPPF
Allocation for WPPF
PROFIT BEFORE TAX
Provision for Income Tax
Provision for Deferred Income Tax
PROFIT AFTER TAX FOR THE YEAR
Other Comprehensive Income
Gain/(Loss) on Marketable Securities
(Unrealized)
Total Comprehensive Income for the Year

100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0

119.00

132.71

119.41

134.12

118.23

128.75

114.58

132.97

112.11

117.76

161.27

120.99

120.70

140.02

102.74

102.21

116.52

131.23

116.52

131.23

116.52

131.23

119.03

132.55

158.61

93.17

114.44

131.96

151.36

(109.7
2)

115.74

123.45

Note. The data is from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.

Revenue and expenses have both increased on average.

Square Pharmaceuticals Ltd.


Trend Analysis of Balance Sheets
as at 2011, 2012 & 2013
ASSETS:
Non-Current Assets:
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11

2011

2012

2013

100.0

118.4

140.48

Property, Plant and Equipment-Carrying


Value
Capital Work-in-Progress
Investment - Long Term (at Cost)
Investment in Marketable Securities (Fair
Value)
Current Assets:
Inventories
Trade Debtors
Advances, Deposits and Prepayments
Short Term Loan
Cash and Cash Equivalents
TOTAL ASSETS
SHAREHOLDERS' EQUITY AND
LIABILITIES:

0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0
100.0
0

Shareholders' Equity:
Share Capital
Share Premium
General Reserve
Tax Holiday Reserve
Gain on Marketable Securities
(Unrealized)
Retained Earnings
Non-Current Liabilities:
Long Term Loans - Secured
Deferred Tax Liability
Current Liabilities:
Short Term Bank Loans
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0
125.5
9
143.5
8
98.49
133.3
3
96.06
105.7
5
104.6
5
110.1
5
74.11
158.5
0
110.3
3
117.7
2
135.0
0
100.0
0
100.0
0
0.00
153.9
6
132.6
2

133.53
418.93
94.78
113.05
85.40
98.50
103.70
124.12
39.42
251.80
120.59

136.38
189.00
100.00
100.00
0.00
114.84
152.01

97.44

84.55

77.60
140.3
9

47.80
164.11

91.10

81.24

76.75

42.35

Long Term Loans - Current Portion


Trade Creditors
Liabilities for Expenses
Liabilities for Other Finance
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES

100.0
0
100.0
0
100.0
0
100.0
0
100.0
0

99.78
119.3
7
119.9
5
105.1
8
110.3
3

106.96
148.10
137.87
129.73
120.59

Note. The data is from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.

Share capital and retained earnings have increased drastically and so has capital work in progress.
Current and non-current liabilities and current assets have gone down. Square may be using internal
resources instead of long term liabilities to finance expansion.

Analysis of Liquidity and Profitability from 2011-2013


Square Pharmaceuticals Ltd.
Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests
that the company would be unable to pay off its obligations if they came due at that point. While this
shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt
- as there are many ways to access financing - but it is definitely not a good sign (Investopedia 2014).
Current Ratio=Current Assets/Current Liabilities (Weygandt, Kimmel & Kieso p 843-44).
Following table shows the Current ratios of Square Pharmaceuticals in different years:
Year
Current Ratio

2013
1.58

2012
1.59

2011
1.50

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

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13

From the analysis, we can see that in 2011 the current assets were 1.50 times than the current liabilities
that has not fluctuated much throughout these three years. A minimal increase is seen in 2012 and it
went up to 1.59 times which kept slightly decreasing and resulted at 1.58 times in 2013. So Squares
current ratio is close to the ideal of 1.5: 1.The reason for such stability can be there not investing
remarkably on assets and not making any huge loan or financing from outside. If we take a closer look
on the balance sheet, this assumption gets a more realistic touch. Year by year assets have gone slightly
up and the liabilities as well, but proportionately assets were a little higher than the liabilities which
actually reflected as a marginal increase in the ratio.
Quick/ Acid Test ratio: The acid-test ratio is a more conservative version of another well-known
liquidity metric -- the current ratio. Although the two are similar, the Acid-Test ratio provides a more
rigorous assessment of a company's ability to pay its current liabilities. It does this by eliminating all
but the most liquid of current assets from consideration. Inventory is the most notable exclusion,
because it is not as rapidly convertible to cash and is often sold on credit. Some analysts include
inventory in the ratio, though, if it is more liquid than certain receivables (Investing Answers 2014).
Quick Ratio= (Current Assets-Inventories)/Current Liabilities (Weygandt, Kimmel & Kieso p 843)
Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in different years:
Year
Acid Test Ratio

2013
0.92

2012
0.95

2011
0.96

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Analysis of this ratio speaks in a same language as current ratio. In 2011, the acid test ratio was .96
times which decreased very silently and resulted as 0.92 times in 2013. Both of these ratios portray the
idea that square has so far an almost constant liquidity position which is good at some point, but at the
same time it can be said that they have not been able to improve them-selves. Standing at this point, we
can make an assumption that may be their profit margin was not so high that they can make some
investments paying off the liabilities that could result in an increase in assets and decrease in liabilities
to make the liquidity position far better. Or since the ideal quick test ratio is 0.8: 1, Square may be a

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little too liquid but at the same time the ideal for depends on the type of industry as well. From both the
current and acid test ratio we can assume that Squares liquidity position is sound.
Average Inventory Turnover (Days):
The formula to calculate days in inventory is the number of days in the period divided by the inventory
turnover ratio. This formula is used to determine how quickly a company is converting their inventory
into sales. A slower turnaround on sales may be a warning sign that there are problems internally, such
as brand image or the product, or externally, such as an industry downturn or the overall economy
(Days in Inventory 2014).
Calculated as:
Inventory turnover in days = 365 / Inventory Turnover (Weygandt, Kimmel & Kieso p 843-44).
Following shows the Earnings per Shares of Square Pharmaceuticals in different years:
Year
2013
Inventory turnover in 92.67

2012
104.11

2011
112.50

days
Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

In 2011, the firms inventory turnover was 112.50 days, which decreases over the period of time. In
2012, it decreases to 104.11 days, which ultimately reached 92.67 days in 2013. Squares days
inventory has decreased which may indicate that their inventory management system is in a good shape
or that. In essence a reduction in Days inventory is good for Square.
Return on total asset: Return on total asset measures the amount of Net Income earned by utilizing
each dollar of Total Assets. The equation is:
Return on Total Assets (ROA) = Net income available to total common shareholders / Total assets
(Weygandt, Kimmel & Kieso p 843-44).
Following shows the Return on Total Assets of Square Pharmaceuticals in different years:
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Year
ROA%

2013
14.88

2012
14.17

2011
14.62

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

In 2013 it had the highest return on assets of 14.88%. In 2011 it was 14.62% of total assets; in 2012 it
was 14.17% of total assets. Return on assets shows the overall earning power of total assets irrespective
of capital structure. The higher the return on total assets is better. But the trend of SPLs return on assets
shows fluctuations since 2011. The reason of the decline in 2012 was due to the more investment in
total assets, but ROA increased to 14.88 on year 2013.
Gross Profit Margin: GP Margin gives us the amount of Gross profit a firm is earning per taka of its
sales. The equation is as follows:
Gross Profit Margin (GPM) = Gross profit / Gross turnover (Weygandt, Kimmel & Kieso p 943-44).
Year
GP Margin%

2013
43.07

2012
42.90

2011
42.81

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Gross profit margin indicates the efficiency of management in turning over the companys goods at a
profit. The gross profit margin measures the percentage of each sales remaining after the company has
accounted for the costs of goods sold. The higher the gross profit margin indicates that the company is
in good position/ which can be viewed in the year 2013. In 2013 the company converted its gross profit
to Taka 43.07 of per 100 Taka sales. Its increasing from the year 2011 through 2012. So the gross
profit margin of Square is in an upward trend from 2011-2013.
Net Profit Margin:
Net Profit Margin gives us the net profit that the business is earning per taka of sales. The equation is as
follows:
Net Profit margin = Net income available to the stockholders / gross turnover (Weygandt, Kimmel &
Kieso p 843-44).
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Following shows the Net Profit Margin of Square Pharmaceuticals in different years:
Year
NP Margin%

2013
18.61

2012
18.05

2011
18.80

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Therefore, the Net Profit Margin was 18.80% in 2011; it decreased to 18.05% in 2012 and then again
increased to 18.61% in 2013. The net profit margin ratio indicates the efficiency of management in
turning over the companys goods at a profit. A high profit margin ratio is a sign of a good management
and a relatively low profit margin is definitely a danger signal warranting a careful and detailed
analysis of the factors responsible for it like operating, administration, distribution expenses etc. From
the above figure it can be observed that the net profit margin was comparably high in 2011, but due to
increase of the cost of goods sold, net profit margin was low in the next two years.
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).
Debt to Equity Ratio = Total Liabilities / Total Equity (Weygandt, Kimmel & Kieso p 843-44).
Year
Debt to Equity Ratio

2013
0.24

2012
0.32

2011
0.41

Note. The data in column 2, 3, 4 are from Square Pharmaceuticals 2013, p 50-51; 2012 p 50-51; 2011 p 44-45.
The data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Debt to equity ratio for the company was 0.24 in 2011. The ratio decreased to 0.32 in 2012. In 2013, it
was 0.24. Debt to Equity ratio shows the relationship between debt financing and equity financing. A
high ratio shows a large share of financing by the creditors. By using debt capital or trading on equity,
company can magnify the shareholders profit. In 2011, the companys liabilities were Taka 0.41
compare to the Shareholders equity of Taka 1. This decreased to Taka 0.24 in 2013. Generally a debt to
equity ratio should be 1:1 or 100%. Square is too risk free at present and seeing the trend it seems as if
like Square prefers equity financing over debt financing. However Square could still benefit from
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having a higher debt to equity ratio because investors like debenture holders face the lowest risk in a
company so it is easier to issue more debentures than it is to issue ordinary shares. More debentures
would mean that Square would have access to more funds and thus could expand faster.

Company X
Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests
that the company would be unable to pay off its obligations if they came due at that point. While this
shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt
- as there are many ways to access financing - but it is definitely not a good sign (Investopedia 2014).
Current Ratio=Current Assets/Current Liabilities (Weygandt, Kimmel & Kieso p 843-44).
Following table shows the Current ratios of Square Pharmaceuticals in different years:
Year
Current Ratio

2013
4.3

2012
4.1

2011
4.0

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

From the analysis, we can see that in 2011 the current assets were 4.0 times than the current liabilities
that has not fluctuated much throughout these three years. A minimal increase is seen in 2012 and it
went up to 4.1times which kept slightly increasing and resulted at 4.3 times in 2013. The reason for
such stability can be there not investing remarkably on assets and not making any huge loan or
financing from outside. Year by year assets have gone slightly up and the liabilities as well, but
proportionately assets were a little higher than the liabilities which actually reflected as a marginal
increase in the ratio. Over all Company X is in a bad liquidity position it has too many funds sitting idle
which could otherwise be invested in non- current assets. The ideal current ratio is 1.5:1. Company Xs
ratio is too high which is not good because being too liquid means that they are too conservative and
they should invest more.

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Quick/ Acid Test ratio: The acid-test ratio is a more conservative version of another well-known
liquidity metric -- the current ratio. Although the two are similar, the Acid-Test ratio provides a more
rigorous assessment of a company's ability to pay its current liabilities. It does this by eliminating all
but the most liquid of current assets from consideration. Inventory is the most notable exclusion,
because it is not as rapidly convertible to cash and is often sold on credit. Some analysts include
inventory in the ratio, though, if it is more liquid than certain receivables (Investing Answers 2014).
Quick Ratio= (Current Assets-Inventories)/Current Liabilities (Weygandt, Kimmel & Kieso p 843-44).
Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in different years:
Year
Acid Test Ratio

2013
2.6

2012
3.3

2011
3.1

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Analysis of this ratio speaks in a same language as current ratio. In 2011, the acid test ratio was 3.1
times which decreased very silently and resulted as 2.6 times in 2013. Both of these ratios portray the
idea that Company X has too many assets sitting idle. They have slightly improved their position in
2013 but this needs more work because the ideal quick ratio is 0.8:1. After looking at both the liquidity
ratios of Company X, we can assume that they have a lot of assets tied up in inventories and that they
are too conservative. Hence Company Xs inventory may be too expensive or they generally prefer
producing and stocking up a lot instead of using a more efficient system like just in time. Either way
they need to manage their current assets and liabilities better.
Average Inventory Turnover (Days):
The formula to calculate days in inventory is the number of days in the period divided by the inventory
turnover ratio. This formula is used to determine how quickly a company is converting their inventory
into sales. A slower turnaround on sales may be a warning sign that there are problems internally, such
as brand image or the product, or externally, such as an industry downturn or the overall economy
(Days in Inventory 2014).
Calculated as:
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Inventory turnover in days = 365 / Inventory Turnover (Weygandt, Kimmel & Kieso p 843-44).
Following shows the Earnings per Shares of Square Pharmaceuticals in different years:
Year
Inventory turnover in

2013
43

2012
36

2011
34

days
Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

In 2011, the firms inventory turnover was 34 days. In 2012, it increased to 36 days, which ultimately
reached 43 days in 2013. Average inventory shows the number of days to convert inventory into sales.
For Company X, it indicates inventory management system is not in a good shape because Days
inventory should not be increasing continuously over the years. It means that they have a lot of
inventory lying around for a longer period of time.
Return on total asset: Return on total asset measures the amount of Net Income earned by utilizing
each dollar of Total Assets. The equation is:
Return on Total Assets (ROA) = Net income available to total common shareholders / Total assets
(Weygandt, Kimmel & Kieso p 843-44).
Following shows the Return on Total Assets of Square Pharmaceuticals in different years:
Year
ROA%

2013
20.1

2012
33.0

2011
32.2

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

In 2013 it had the lowest return on assets of 20.1%. In 2011 it was 32.2% of total assets; in 2012 it was
33.0% of total assets. Return on assets shows the overall earning power of total assets irrespective of
capital structure. The higher the return on total assets the better it is for the company. But Company Xs
return on assets shows a downward trend since 2011. The reason of the decline on 2013 could be due to
more investment in non-current assets, excess assets tied up in current assets etc.

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Gross Profit Margin: GP Margin gives us the amount of Gross profit a firm is earning per dollar of its
sales. The equation is as follows:
Gross Profit Margin (GPM) = Gross profit / Gross turnover (Weygandt, Kimmel & Kieso p843-44).
Year
GP Margin%

2013
78.1

2012
83.3

2011
81.2

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Gross profit margin indicates the efficiency of management in turning over the companys goods at a
profit. The gross profit margin measures the percentage of each sales remaining after the company has
paid for its goods. In 2013 the company converted its gross profit to Taka 78.1 per 100 Taka sales. This
might have happened because net sales have decreased so inventory is not being sold or because the
costs of goods sold has increased. Either way even though the gross profit margin is very high, it still
needs to be investigated as to why it has gone down in 2013.
Net Profit Margin:
Net Profit Margin gives us the net profit that the business is earning per dollar of sales. The equation is
as follows:
Net Profit margin = Net income available to the stockholders / gross turnover (Weygandt, Kimmel &
Kieso p 843-44).
Following shows the Net Profit Margin of Company X in different years:
Year
NP Margin%

2013
28.8

2012
29.5

2011
25

Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Therefore, the Net Profit Margin was 25% in 2011, increased to 29.5% in 2012 and then again
decreased to 28.8 in 2013. The net profit margin ratio indicates the efficiency of management in turning
over the companys goods at a profit. A high profit margin ratio is a high sign of a good management
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and a relatively low profit margin is definitely a danger signal warranting a careful and detailed
analysis of the factors responsible for it. Company Xs net profit margin has gone up over from the low
in 2011. But it is till alarming that even though gross profit margin is so high at about 78%, net profit
margin is just about 28% in 2013. The trend is also similar in 2012 and 2011. This basically means that
Company X needs to take a look at its operating, financial, selling and administration expenses.
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).
Debt to Equity Ratio = Total Liabilities / Total Equity (Weygandt, Kimmel & Kieso p 843-44).
Year
2013
Debt to Equity Ratio 89

2012
95

2011
90

%
Note. The data in column 2, 3, 4 are from Tareq (2014), BUS -505: Principle of Accounting Assignment 1. The
data in column 1 is from Accounting Principles p. 843-44, (Weygandt, Kimmel & Kieso 2014, 2015)

Debt to equity ratio for the company was 90% in 2011. The ratio increased to 95% in 2012. In 2013, it
was fell to 89%. Debt to Equity ratio shows the relationship between debt financing and equity
financing. A high ratio shows a large share of financing by the creditors. By using debt capital or
trading on equity, company can magnify the shareholders profit. In 2011, the companys liabilities were
Taka .90 compared to the Shareholders equity of Taka 1. This fell in 2013. Company Xs debt to equity
ratio is close to the ideal of 100%. This means that the company is availing all the opportunities it has
to expand. At the same time it can be said that they maybe a little risky but if their interest coverage
ratio is high than they should be fine. Also it depends on whether Company X is effectively using its
total assets or total equity and liabilities but as we have seen return on assets has fallen so Company X
needs to be a careful if it wants to stay solvent and profitable in the long term.

Assessment of viability for short term credit

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We would prefer Company X to provide credit. Short term liquidity ratios measure the ability of a
company to pay off short term debts due in the very near future and have enough money to finance its
day to day business operations i.e., the ability to survive in the short-run. The short term creditor of the
company like suppliers of goods on credit and commercial bank providing short term loans are
primarily interested in knowing the company ability to meets its current obligation as and when they
became due. The short term obligation can only be met when there are sufficient liquid assets if the
firm fail to meet such obligation its good will be effected in the market and it will result in the loss of
creditor confident. But a very high liquidity position is not good because it means the firm has tied up
excessive funds in the current assets so it is very important to have a proper balance in regard to the
liquidity of the firm. Square Pharmaceuticals Ltd. is showing a declining current ratio. On the other
hand Company X is showing an increasing current ratio. A declining ratio might be a sign of a
deteriorating financial condition, or it might be the result of eliminating obsolete inventories or other
stagnant current assets. An improving ratio might be the result of stockpiling inventory, or it might
indicate an improving financial situation. In short, the current ratio is useful, but tricky to interpret. The
general rule of thumb calls for a current ratio of at least 2. SPL has a ratio less than 2 and Company X
has a ratio of greater than 2. This also makes Company X a more preferable choice. The acid-test ratio
measures how well a company can meet its obligations without having to liquidate or depend too
heavily on its inventory. Ideally, each dollar of liabilities should be backed by at least $1 of quick
assets. Square Pharmaceuticals Ltd. has a quick ratio of less than 1 in contrast to Company X. Acid test
ratio also suggest that we should consider becoming a short term creditor for Company X rather than
SPL. Thats why we would prefer to become a short term creditor for Company X rather than Square
Pharmaceuticals Ltd.

Assessment of viability for long term credit


When deciding whether to give a company a long term loan like a bond, it is important to think about
whether that company will be able to pay interest on the loan as it falls due and whether it will be
solvent and profitable enough in the long run when it will be time to repay that loan. The ratio is simply
a company's total long-term debt divided by its total equity (Weygandt, Kimmel & Kieso p 843-44).
Both Square and Company X have strong liquidity ratios so it shouldnt be difficult for them to make
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interest payments. Therefore we need to look at how leveraged the companies are. The debt-to-equity
ratio is a quick way to figure out how heavily indebted a company is. The bigger the debt-to-equity
ratio, the more dependent a company is on borrowed money. Generally, you like to see a company's
debt-to-equity ratio be 100% or less. That means the company's debt is equal to the amount of its
shareholder equity .As with all financial ratios, it's helpful to compare the number with other
companies in the industry. For instance, you might be comfortable with more debt in an industry like
utilities, which have huge capital requirements and stable cash flow. Square Pharmaceuticals Ltd. has a
debt-to-equity ratio of 24% versus Company X whose ratio is 89%. Company X already has a high debt
to equity ratio so the issue arises that if I give them a bond then even more of their assets will be tied to
debt which will make them a more risky investment. We even know that Square can cover its present
interest expenses at least 14 times but we dont know what Company Xs interest coverage ratio is. If
Company X is already paying a big portion of its operating income for loan interest than that would be
a problem. This may be one of the reasons as to why despite having a high gross profit margin of 78%,
Company Xs net profit margin is only about 28% because it may have high financial (interest)
expenses (Square 2013; 2012; 2011 & Tareq 2014).
At present Company Xs gross profit margin and net profit margin are falling while Squares margins
are rising. Company Xs ratios may have a higher absolute number but these are percentages so we
cannot really compare Square and Company X properly. Nevertheless Company Xs higher proportion
of external liabilities can cause long- term solvency issues if its profit making capacity keeps on
falling. It doesnt matter if the fall is small because even then it would have to pay its outside liabilities.
Another profitability ratio we can look at is ROA or return on assets. Squares ROA increased from
14.62% in 2011 to 14.88% in 2013 while Company Xs ROA fell from 32.2% in 2011 to 20.1% in
2013. This means that Square is using its assets more effectively to generate income. Even the Days
inventory shows that Squares average inventory turnover in days has continuously decreased while
Company Xs has continuously increased so Company X is not using its assets efficiently. Hence it
doesnt make sense to give Company X a long term loan which would increase its total assets if it is not
using its assets efficiently at present. Therefore we cannot be certain of Company Xs profit- making
capacity in the long term. Due to these reasons I would prefer to buy bonds of Square Pharmaceuticals
Ltd (Square 2013; 2012; 2011 & Tareq 2014).

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REFERENCES
Days in Inventory. 2014. Days in Inventory. [Online] Available at:
http://www.financeformulas.net/Days-in-Inventory.html. [Accessed 5 August 2014]
Investing Answers. 2014. Acid-Test Ratio Definition & Example [Online] Available at:
http://www.investinganswers.com/financial-dictionary/ratio-analysis/acid-test-ratio-1225 [Accessed 5
August 2014].
Investopedia 2014. Current Ratio Definition [Online] Available at:
http://www.investopedia.com/terms/c/currentratio.asp. [Accessed 5 August 2014]
Square Pharmaceuticals Ltd.( 2011). The Annual Report 2010-11.[ Online] Available at
http://www.squarepharma.com.bd/financial-reports/annual_report_2010-11.pdf [ Accessed 3 August
2014]
Square Pharmaceuticals Ltd.( 2012). The Annual Report 2011-12.[ Online] Available at
http://www.squarepharma.com.bd/financial-reports/spl_annual-report_11-12.pdf [ Accessed 3 August
2014]
Square Pharmaceuticals Ltd.( 2013). The Annual Report 2012-13.[ Online] Available at
http://www.squarepharma.com.bd/financial-reports/Annual%20Report%202012-2013.pdf
[Accessed 3 August 2014].
Square Pharmaceuticals Ltd ( 2014). Corporate Social Responsibility.[ Online]. Available at
http://www.squarepharma.com.bd/corporate-social-responsibility.php [Accessed 8 August 2014]
Tareq, Dr Mohammed (2014). BUS -505: Principle of Accounting Assignment 1. North South
University.
Weygandt, Jerry J., Kimmel, Paul D., & Kieso, Donald E. ( 2014, 2015). Accounting Principles. 10th
Edition. USA. John Willy & Sons, inc. p 826- 844.

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