Introduction
AstraZeneca is one of the global pharmaceutical companies with its products being marketed in more than 100 countries. The company has a wide range of pharmaceutical products for the treatment of diseases from breast cancer to migraine. The company was formed in the year 1999 and is a British-Swedish pharmaceutical company with shares listed in the London and New York Stock Exchanges. The Company is one of the constituents of FTSE 100 index. A review the financial position of the company as revealed by the income statement and balance sheet of the company for the year 2008 and 2007 by calculating key financial ratios is presented below.
“Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment.”
The company’s growth in total revenue is presented in the following figure. As compared to the year 2007 the revenue of the company has increased by 6.90 %.
Profitability Ratios
“Profitability ratios offer several different measures of the success of the firm at generating profits.” (Net MBA)
Gross Profit to Revenue
With the increase of $ 1,863 million in the gross profit for the year 2008 over the year 2007, the Company has been able to register a growth of 8.05 percent in gross profit over the 2007 level. This implies that the company has a strong presence in the market and was able to maintain the prices at constant level. The company was in the two year period was also able to maintain the costs under control to achieve a higher gross profit percentage.
Operating Profit to Revenue
Corresponding to the increase in the gross profit to sales percentage, the operating profits of the company has also gone up to 28.94 percent in the year 2008 from 27.38 percent in the year 2007. The company has been able to maintain its financial performance during the period.
Liquidity Ratios
Liquidity ratio is defined “as a class of financial metrics that is used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger is the margin of safety that the company possesses to cover short-term debts.” (Investopedia1) Liquidity Ratios are the ones that exhibit the short-term liquidity of the company.
Current Ratio
AstraZeneca cannot be said to maintain a comfortable current ratio, as normally a current ratio of 2 is considered healthy. The company’s current ratio at 1.21 for 2008 is below2. However the position of current ratio has increased from the previous year ratio of 1.12 which indicates the company has not generated a spectacular cash flow for the period.
Acid Test Ratio
This ratio indicates the short term liquidity of the company which is more rigorous than the current ratio, by including only easily realizable current assets and eliminating inventory from the calculation of the ratio. Conventionally a ratio 1:1 is considered satisfactory. The company’s ratio for year 2008 at 1.09 is satisfactory and it has increased from 0.99 for the previous year. The reason for the lower acid test ratio may be the accumulation of more trade and other receivables.
Gearing Ratios
“Long-term solvency focuses on a firm’s ability to pay the interest and principal on its long-term debt. There are two commonly used ratios relating to servicing long-term debt. One measures ability to pay interest, the other the ability to repay the principal.” (Free Tutorial)
Gearing Ratio
Gearing ratio explains the relationship between the long-term debts of the company and its equity. The company should be able to maintain a correct balance between the debt and equity so that the company can ensure a good return for the company’s shareholders. In the case of AstraZeneca, it may be observed that the gearing ratio of the company for the year 2008 has come down as compared to the year 2007. This implies that the company has consolidated its long-term liquidity position to a marginal extent.
Interest Cover
This analysis exhibits the ease with which the company is able to pay off its interest liabilities out of its earnings.This ratio shows the financial ability of the company to meet the timely interest payments to the creditors and lenders of the Company. This ratio is based on the net income of the firm and for the year the ratio is decreased than the last year indicating a ‘Weakness’ for the company implying that the interest expenses has increased over the year.
Investment Ratios
Price Earnings Ratio
The objective of calculating this ratio is to examine the correlation between stock price and the earnings of the company for the period under review. P/E suggests the expectations of the market about the company’s earnings in the future. A higher P/E indicates the stock is overpriced and the market has high hopes about the future of the stock. For the company the ratio is low for the year indicating weakness.
Dividend Yield
This ratio indicates the amount of dividend paid out by the company during the year in relation to the investment in the share price. Dividend yield is the return on investment as applicable to a particular stock. The yield from the shares of AstraZeneca has gone up to 4.63% for 2008 from 4.09% in 2007.
Book Value per share of Common Stock
Book Value per Share of Common Stock – represents the amount of money that the common equity holders are likely to get back in the event of the liquidation of a company (Investopedia). Even though this has improved over last year still the ratio indicates that the stock of the company is overvalued as the market price at $ 41.03 is much higher than the book value. Therefore this is a ‘weakness’ for the company.
Limitations of Ratio Analysis
Despite its help in assessing the financial strength of the companies, ratio analysis suffers from certain limitations. First, since different companies follow different accounting policies it may not always possible to evolve meaningful inter-firm comparisons based on ratio analysis. Secondly there is the likelihood that the companies may adopt earnings adjustments to manipulate the accounting information in which case the ratio analysis will lead to presenting false information to the users. This is clearly an information problem arising because of basing the ratio calculations sometimes on outdated financial information contained in the financial statements presented by the companies. In any case historical financial information cannot be considered good for decision-making especially with respect to investments in stocks. Third, the ratio analysis may get vitiated and provide meaningless information because of changes in price, technology or changes in accounting policies over the time. Financial statements on which the ratio analysis is based represent summaries of the accounting records. There is a distinct possibility that while summarizing some important information relevant to the users of the financial statements might have been omitted. Ratios based on such summarized statements therefore may not be relevant for the decision-making by the users.
Works Cited
Finpipe.com. Financial Ratio Analysis. 2009. Web.
Investopedia. Book Value per Common Share. 2009. Web.
Investopedia 1 Liqudity Ratio. 2009. Web.
NetMBA. Financial Ratios. 2007. Web.