Introduction
Julphar Gulf Pharmaceutical Industries is a leading pharmaceutical company based in the U.A.E. that carries research, development, and distribution of medicines. The company currently has 12 units of production in the U.A.E. and sells medicines in 40 countries. The current paper investigates the company’s performance in the period 2012-15 using financial ratio analysis, common size financial statements, and DuPont analysis.
Ratio Analysis
The ratio analysis is carried out in the following to evaluate the company’s performance using different categories of ratios.
Profitability Ratios
The gross profit margin of the company improved in 2015 after it slightly declined in 2014. It could be due to better control of input cost by the company. The return on assets declined in 2013 and 2014. However, its value did not change much during the four-year period. Furthermore, the return on equity declined in 2014 due to the decline in the company’s net profit. The income statement indicated that the company’s selling and distribution expense significantly increased in 2014.
Table 1: Profitability Ratios.
Liquidity Ratios
The company’s liquidity position remained strong in the four-year period. It could be noted that the value of the current ratio increased to 2.34 in 2015, which was well above the benchmark value of one. Moreover, the value of the acid test ratio also improved in that period. However, it could be highlighted that the company’s cash position was weak. The company’s current liabilities were much more than its cash. It could create problems for the company in the coming periods as it has a significant amount of external debt that could deplete its cash quickly.
Table 2: Liquidity Ratios.
Efficiency Ratios
The company’s efficiency remained strong in terms of high values of total asset turnover and fixed asset turnover. However, it could be noted that the company’s account receivables turnover and inventory turnover remained very low during the four-year period. It could affect the company’s liquidity and create financial problems. The company’s expansion plans are dependent on its ability to generate cash quickly. Therefore, the management should take measures to improve the company’s efficiency.
Table 3: Efficiency Ratios.
Gearing Ratios
The company’s solvency position was very strong during the four-year period. The company used its internal equity to finance its operations and expansion programs. It could be indicated the company is unlikely to face any major problem as it generated strong operating profit and managed its capital structure effectively.
Table 4: Gearing Ratios.
Vertical Analysis
The vertical analysis (see Appendix A) indicates that the company’s property, plant, and equipment, and trade receivables were major components of its total assets in the four-year period. The equity attributed to owners remained substantially high in that period. Furthermore, it could be noted that the company had short-term borrowings which were settled during the year.
Horizontal Analysis
The horizontal analysis (see Appendix B) indicates that the company made significant short-term investments. Furthermore, it could be noted that the company’s investment lost value in 2014 and 2015, and it also incurred liabilities related to foreign currency transactions. The company’s cash position weakened in 2014 and then improved in 2015. The company’s sales declined in 2014 and then improved in 2015. It affected the company’s net profit, which also declined by 11.40% in 2014.
DuPont Analysis
DuPont analysis considers different elements of return on equity and uses values of three ratios, including net profit margin, asset turnover, and equity multiplier, to calculate the calculate of return on equity.
The following table provides calculations of the three ratios included in DuPont analysis along with the values of return on equity from 2012 to 2015.
Table 5: DuPont Analysis.
From the table provided above, it could be noted that the company’s asset turnover gradually declined in the four-year period. The equity multiplier, which indicates the proportion of assets financed by the company’s equity, first improved and then declined. The net profit margin of the company was 17% in 2012 and 2013 and then declined to 15% in 2014. Its value was 15% in 2015 as well. The product of the three ratios indicates that the return on equity improved in 2013. However, its values were 9.5% and 9.9% in 2014 and 2015. The main reason for the decline in its value was inefficient asset management by the company, as it could be noted that despite an increase in the company’s assets, its sales did not increase in the same manner.