Finanl ACME - A ratio analysis of ACME corporation, Bangladesh, for term final assessment. PDF

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A ratio analysis of ACME corporation, Bangladesh, for term final assessment. ...

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FINANCIAL ANALYSIS OF ACME LABORATORIES LIMITED FROM 2017-2019

Prepared to: Dr. Md. Mohiuddin Professor Institute of Business Administration University of Dhaka

Prepared by: Name G M Fuad Hasan MD. Iftekhar Hossain Tahjib Abdullah Rivoo

Date of Submission: May 04, 2020

ID 63 95 108

Letter of Transmittal

Date: May 04, 2020 Dr. Md. Mohiuddin Professor Institute of Business Administration University of Dhaka

Subject: Submission of Report

Dear Sir, We are submitting the report “Financial Analysis of Acme Laboratories Limited from 2017-2019” as per the given instructions. We give our best to make the report meaningful and informative. We are thankful to you for your guidance and cooperation to prepare this report.

On behalf of the group,

Tahjib Abdullah Rivoo ID: 108 Section: B

Table of Contents 1.0 Introduction...........................................................................................................................................1 1.1 Objective:..........................................................................................................................................1 1.2 Scope:................................................................................................................................................1 1.3 Methodology:....................................................................................................................................1 2.0 Company Profile:...................................................................................................................................2 3.0 Financial Analysis.................................................................................................................................3 3.1 Liquidity Ratios:................................................................................................................................3 3.1.1 Current Ratio:.............................................................................................................................3 3.1.2 Acid Test Ratio:..........................................................................................................................3 Comment on Liquidity:...........................................................................................................................4 3.2 Profitability Ratios:...........................................................................................................................4 3.2.1 Profit Margin:.............................................................................................................................4 3.2.2 Return on Equity:.......................................................................................................................5 Comment on Profitability:.......................................................................................................................5 3.3 Efficiency Ratios:..............................................................................................................................6 3.3.1 Total Asset Turnover:.................................................................................................................6 3.3.2 Inventory Turnover:...................................................................................................................6 Comment on Efficiency:.........................................................................................................................7 3.4 Solvency Ratios:................................................................................................................................7 3.4.1 Debt to Total Asset:....................................................................................................................7 3.4.2 Debt to Equity Ratio:.................................................................................................................8 Comment on Solvency:...........................................................................................................................8 3.5 Horizontal Analysis:..........................................................................................................................8 3.5.1 Balance Sheet.............................................................................................................................8 3.5.2 Income Statement.....................................................................................................................10 Comment on Horizontal Analysis:........................................................................................................10 3.6 Vertical Analysis:.............................................................................................................................11 3.6.1 Balance Sheet...........................................................................................................................11 3.6.2 Income Statement.....................................................................................................................12 Comment on Vertical Analysis:.............................................................................................................12 4.0 Conclusion...........................................................................................................................................13

Executive Summary Liquidity position of Acme Laboratories Limited is in decreasing trend. Current ratio went below 1% in the latest year. Current liability has increased 40% in three years. On the contrary, current asset has increased only 4% over the same period. This has deteriorated the liquidity position of Acme Laboratories Limited. Loans and Overdrafts and Trade payable have increased 56% and 52% respectively to fuel the uptrend of current liability. Gross profit margin is decreasing by 1%year on year because of an increase in cost of goods sold. However, it does not have any negative effect on total gross profit which is in increasing trend. Total asset and inventory are almost similar over the years. Hence, profitability and efficiency position have a stable outlook. Solvency of Acme Laboratories Limited is in down trend. Long term loan has increased about 18% and shareholders’ equity has risen about 8%. All these have fueled to increase the debt to total asset and debt to equity ratio.

1.0 Introduction 1.1 Objective: The report shows the liquidity, profitability, efficiency and solvency position of Acme Laboratories Limited by analyzing various ratios. Moreover, horizontal and vertical analysis are presented to get the indepth view of the company over the last 2 years. 1.2 Scope: The report is fully focused on the last two years data of Acme Laboratories Limited. Liquidity outlook is determined by calculating current ratio and acid test ratio. Profitability is also determined by two ratios: profit margin and return on equity. To find out the efficiency of Acme Laboratories Limited, total asset turnover and inventory turnover are analyzed. Finally, to find the solvency position of Acme Laboratories Limited, debt to equity ratio and debt to total asset ratio are considered. Moreover, Horizontal analysis and vertical analysis on broad balance sheet and income statement items are covered. All data presented in ratio analysis, vertical analysis and horizontal analysis are for accounting period 2017-18 and 2018-19 of Acme Laboratories Limited. 1.3 Methodology: Secondary data are used to analyze ratios of report. Annual reports 2017-18 and 18-19 of Acme Laboratories Limited are used. All data of graphs and tables are also taken from the annual reports.

2.0 Company Profile: In 1954, ACME was founded modestly as a Proprietorship Firm at Narayangonj by the Late Hamidur Rahman Sinha, with a very noble and holistic motto to ensure health, vigor and happiness for all. In 1976, the ACME was converted into a Private Limited Company for giving it perpetual shape. ACME started its international business operations in 1995 by exporting medicines to Bhutan. Since then, ACME made a strong presence in the international market. At present, ACME is successfully exporting its quality products to more than 20 countries in South Asia, South East Asia, Africa and Central America. In 2011 The ACME Laboratories Limited converted into a Public Limited Company for strengthening its capacity & skill and also accelerating its speed to meet the global challenges of 21 st century. More than 7,000 employees currently work here. Vision of Acme Laboratories Limited is to ensure Health, Vigor and Happiness for all. Acme maintains a high standard of pollution free environment as per GMP Regulations, WHO standards and laws of the land. In the year 2011, the company upgraded its MDI facility to HFA based from CFC based in order to make the project more environment friendly. As a part of involvement to promote education, The ACME Laboratories Ltd. has donated to the following educational institutions for building up their infrastructures: Late Hamidur Rahman Sinha Bhabon at Loahjong Collage, Late Noor Jahan Sinha Bhaban at Malkhana School & Collage, Ichahpur K.B College Bhaban, Sirajdi Khan High School Bhaban, Nowapara High School Bhaban, Ichahpur High School Bhaban, Kolma high school Sinha Bhaban, Taltola Jam-e Mosque. Centralized Effluent Treatment Plant (ETP) and incinerators also are in place in order to process industrial wastage and meet green environmental requirements. It is currently producing more than 500 products in different dosage forms covering broader therapeutic categories which include anti-infective, cardiovascular, anti-diabetics, gastrointestinal, CNS, respiratory disease etc. among many others. The success in local market prompted Acme to explore the international market and over the years it gained a firm presence in South East Asia, Africa and Central America. ACME earned two prestigious awards from State Pharmaceutical Corporation (SPC), Sri Lanka in 2019. As a part of continuous improvement policy the company renewed and upgraded its ISO Certification to ISO 9001:2015 in the year 2017

3.0 Financial Analysis 3.1 Liquidity Ratios: 3.1.1 Current Ratio: Table-1: Current Ratio 2017 – 2018 1.1060

2016 – 2017 1.2530

2018 - 2019 0.9335

Figure-1: Current Ratio

Current Ratio 1.4000 1.2000 1.0000 0.8000 0.6000 0.4000 0.2000 -

2016 - 2017

2017 - 2018

2018 - 2019

It measures firm’s ability to pay current liabilities out of its current assets. As we can see from the current ratio of the previous 3 years, it has shown a decreasing trend. 3.1.2 Acid Test Ratio: Table-2: Acid Test Ratio 2017 – 2018 0.4231 Figure-2: Acid Test Ratio

2016 – 2017 0.4487

2018 - 2019 0.3781

Acid Test (quick) Ratio) 2018 - 2019 2017 - 2018 2016 - 2017

-

0.1000

0.2000

0.3000

0.4000

0.5000

The acid test ratio is almost as same as the current ratio, but their only difference is that acid test ratio only counts for everything other than inventory and prepaid expenses. The logic behind this is that inventory and prepaid expenses are the least liquid assets in the current asset category and are not easily convertible to cash in case of an emergency cash need.

Comment on Liquidity: Generally a current ratio above 1 is considered to be good as at that ratio, there are more current assets than current liability. So the current ratio of most recent year, which is just below 1, is a sign of concern. Another sign of concern is the decreasing current ratio trend which needs to be improved. Moreover, the quick ratio is also well below 1 and it has been decreasing for the past 3 years. As a pharmacy company, it may be understandable as there is a lot of product that can be in the inventory as the shelf life of any medicine tends to be more than one year. What is concerning is that the trend is showing a decrease. 3.2 Profitability Ratios: 3.2.1 Profit Margin: 2017 – 2018 10%

Table-3: Profit Margin 2018 - 2019 9%

(http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html ) (For Reference) Figure-3: Profit Margin

Profit Margin 12% 10% 8% 6% 4% 2% 0% 2017 - 2018

2018 - 2019

It measure net profit portion in sale. Profit margin is in decreasing trend and it has lost almost 1% within two years. Generally, pharmacy companies have a profitability margin of around 10%. So we can say that acme has been doing well in terms of profitability margin for the last two years.

3.2.2 Return on Equity: Table-4: ROE

2017 – 2018 8.25%

2018 - 2019 8% Figure-4: ROE

ROE 2018 - 2019

2017 - 2018

-

0.0200

0.0400

0.0600

0.0800

0.1000

Return on Equity simply shows the return for each dollar invested by the shareholders. As we can see, the return on equity is around 8%. But as we have seen before, this ratio also shows a decreasing trend. Comment on Profitability: Both ROE and profit margin have negative trend. Profit margin and ROE decreased 1% and .25% respectively in two years. 3.3 Efficiency Ratios: 3.3.1 Total Asset Turnover: 2017 – 2018 47.35%

Table-5: Total Asset Turnover 2018 - 2019 47.58% Figure-5: Total Asset Turnover

Total Asset Turnover 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

2017 - 2018 2018 - 2019

Total asset turnover calculates the amount of revenue generated for each dollar of assets. It measures the firm’s ability to use its assets for productive way. It also measures asset utilization efficiency of the company. We can see that the total asset turnover is around 47% and it has shown a slight increase over the past year. 3.3.2 Inventory Turnover: Table-6: Inventory Turnover 2017 – 2018 2018 - 2019 2.9558 2.9433

Figure-6: Inventory Turnover

Inventory Turnover 3.5 3 2.5 2 1.5 1 0.5 0

2017 - 2018

2018 - 2019

It measures the firm’s ability to convert its inventory into sale. It measure selling efficiency. As we can see, the inventory turnover for ACME is around 3 which means that the company sells and refills its inventory 3 times a year. Comment on Efficiency: Total asset turnover and inventory turnover are almost similar in two years. 3.4 Solvency Ratios: 3.4.1 Debt to Total Asset: 2017 – 2018 45.92%

Table-7: Debt to Asset Ratio 2018 - 2019 48.93% Figure-7: Debt to Asset Ratio

Debt to Asset Ratio 0.6 0.5 0.4 0.3 0.2 0.1 0

2017 - 2018

2018 - 2019

The debt to total asset ratio depicts how much debt a company has for each dollar of its assets. It is observed that ACME has around 50% of debt for 100% of its assets and it can easily repay its loans by selling their assets. 3.4.2 Debt to Equity Ratio: Table-8: Debt to Equity

2017 – 2018 85%

2018 - 2019 96% Figure-8: Debt to Equity

Debt to equity 1.2 1 0.8 0.6 0.4 0.2 0

2017 - 2018

2018 - 2019

Debt to equity ratio depicts the situation of the company about for each dollar invested by the shareholders, how much debt the company has. As we can see here, the ratio is very close to 1, especially in the recent years. From this we can say that the company has almost similar investment by its shareholders as it has investment from the creditors. Comment on Solvency: Lenders’ contribution to the company’s asset is close to 50% and it is in uptrend. Moreover, Acme has an uptrend in debt to equity ratio. Debt has increased 11% compared to its equity.

3.5 Horizontal Analysis: 3.5.1 Balance Sheet ASSETS Non-Current Assets PPE Intangible Assets Investment in Securities Investment in Property Current Assets

2016-17 100% 100% 100% 100% 100% 100%

2017-18 116% 116% 74% 108% 92% 98%

2019-20 130% 130% 49% 105% 0% 104%

Inventories Trade Receivables Other Receivables Advance, Deposits & Pre-payments Advance Income Tax Material in Transit Term Deposit Cash & Cash Equivalent Total Assets EQUITY & LIABILITIES Share Holders Equity Share Capital Share Premium Revaluation Surplus Gain/(Loss) on Marketable Securities (Unrealized) Tax Holiday Reserve Retained Earnings Non-Current Liabilities Long Term Loan Provision for Gratuity Deferred Tax Liability Current Liabilities Loans & Overdrafts Current Maturity of Long Term Loan Trade Payable Provision for Income Tax Liability for Expenses & Others Dividend Payable Total equity & Liabilities NAV 3.5.2 Income Statement Income Statement Revenue Cost of goods sold Gross Profit Add: Other Income Less: Selling Marketing & Distribution Expense Add: Administrative Expense Less: Financial Expense

100% 100% 100% 100% 100% 100% 100% 100% 100%

108% 123% 10% 121% 110% 121% 54% 82% 109%

123% 130% 15% 134% 116% 155% 25% 100% 120%

100% 100% 100% 100% 100%

104% 100% 100% 98% 140%

108% 100% 100% 97% 111%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

100% 119% 126% 125% 123% 132% 111% 110% 118% 99% 110% 111% 146% 109% 104%

100% 138% 125% 118% 125% 179% 140% 156% 118% 152% 111% 119% 665% 120% 108%

2016-17 100% 100% 100% 100% 100%

2017-18 109% 111% 106% 56% 114%

2019-20 120% 123% 116% 51% 122%

100% 100%

97% 109%

97% 147%

Profit Before Contribution To WPPF & WWF Less: Contribution to WPPF & WWF Net Profit Before Tax Less: Current Tax Expenses Less: Deferred Tax(Income)/Expense Net Profit After Tax Gain/(Loss) on Marketable Securities (Unrealized) Total Comprehensive Income For the Year EPS

100%

96%

96%

100% 100% 100% 100% 100% 100%

96% 96% 109% 46% 102% 63%

96% 96% 90% 67% 103% 25%

100%

102%

103%

100%

102%

103%

Comment on Horizontal Analysis: Current asset has increased 4% in last 3 years. On the other hand, current liability has increased 40% in the same period. This has deteriorated the liquidity position of Acme Laboratories Limited. Loans and Overdrafts and Trade payable have increased 56% and 52% respectively to fuel the uptrend of current liability. Long term loan has increased about 18% and shareholders’ equity has risen about 8%. All this has prompted an increase of 20% in total asset. Revenue, Cost of Goods Sold and Gross Profit are in uptrend. However, financial expense has increased significantly about 47%. All this leads to a 3% increase in net profit after tax.

3.6 Vertical Analysis: 3.6.1 Balance Sheet Total Assets Non-Current Assets PPE Current Assets Inventories Trade Receivables Advance, Deposits & Pre-payments Advance Income Tax Material in Transit Term Deposit Cash & Cash Equivalent

100% 61% 61% 39% 10% 4% 5% 7% 2% 7% 5%

100% 65% 65% 35% 10% 5% 5% 7% 2% 3% 3%

100% 66% 66% 34% 10% 4% 5% 7% 2% 1% 4%

100% 57% 7% 17% 18% 1% 13% 12% 10% 1% 1% 31% 18% 6% 1% 6% 1%

EQUITY & LIABILITIES Share Holders Equity Share Capital Share Premium Revaluation Surplus Tax Holiday Reserve Retained Earnings Non-Current Liabilities Long Term Loan Provision for Gratuity Deferred Tax Liability Current Liabilities Loans & Overdrafts Current Maturity of Long Term Loan Trade Payable Provision for Income Tax Liability for Expenses & Others

3.6.2 Income Statement Revenue Cost of goods sold Gross Profit Add: Other Income Less: Selling Marketing & Distribution Expense Add: Administrative Expense Less: Financial Expense Profit Before Contribution To WPPF & WWF Less: Contribution to WPPF & WWF Net Profit Before Tax Less: Current Tax Expenses Less: Deferred Tax(Income)/Expense