My choice of this topic regarding the analysis of business and financial performance of an organisation is based on the value of the topic in real world applications. Performing analysis is my interest and it makes a lot more sense when it is based on an organisation that actually exists. Also by analysing a company from both the financial and non-financial perspective I will be able to enhance my understanding of the company in particular and the external environment faced by organisations in general. This research will help me get familiar with the essence of critical analysis related to the performance and prospects of the company. I will also be able to evaluate the quality of judgement utilised by the company management in preparing the financial statements and should be able to relate them to the implications that judgement has on the financial results of the organisation.
Any research can only be productive if the information used in developing the project is authentic and is of practical value. I choose this topic, since considerable information regarding an organization is available through the annual reports of the company that it is legally bound to produce. It is therefore, possible to gather the required information to produce a quality report on the chosen topic.
After finalizing the topic, it was a difficult choice to decide on which organisation is most suitable for my analysis. I wanted to choose an organisation that should provide me with ample resources and information to produce my report, but at the same time I wanted a company that should help me enhance my knowledge of an unfamiliar industry. I did my research on various industries and decided that the pharmaceutical industry would be an interesting choice for my report. I shortlisted a few pharmaceutical firms for my report including GlaxoSmithKline, Pfizer, Astra Zeneca, Merck & Co, Wyeth, Novartis, Aventis Pharma, Pharmacia Limited, Roche and Lilly.
My foremost choice was Novartis as I thought it was the largest organisation in the United Kingdom pharmaceuticals industry. However, an in-depth research into the industry volumes and revenues I found out that GlaxoSmithKline was the market leader in the United Kingdom for production and marketing of pharmaceutical products. Further enquiry into the information available regarding Novartis and GlaxoSmith Kline revealed that both companies were well suited for the report. However, since GlaxoSmithKline was the market leader and provided very comprehensive annual reports I decided to select the company for my project report. GlaxoSmithKline also maintains a very strong stance regarding ethical obligations of companies in the pharmaceutical industry and ethical issues in finance and accounting in general.
Analysis of the Financial Performance of GSK
I also thought it would be interesting to compare the results of GlaxoSmithKline and Novartis and obtain a deeper insight into the competitor activities and results in the industry. Both companies have a similar structure in terms of their international presence and their active involvement in the emerging and growing economies.
I became particularly interested in the pharmaceuticals industry during my research for choosing the company and I think I made a good choice as this project will definitely add to my existing knowledge of finance and its applications and help me understand more about a very important industry to the United Kingdom's market.
GlaxoSmithKline PLC
GlaxoSmithKline (GSK) was incorporated on 6th December 1999 as a public limited company under United Kingdom's (UK's) English law. The company shares are listed on both the New York Stock Exchange and the London Stock Exchange. On 27th December 2000 the company acquired Glaxo Wellcome and SmithKline Beecham, both public limited companies incorporated in the UK. The acquisition was undertaken through a merger of the two companies (GSK Published Accounts 2009).
GSK corporate head office is located in London and the company has its US control centre in Research Triangle Park, North Carolina. GSK has manufacturing or assembling plants in around 120 countries, and its products are sold in more than 150 countries. GSK and its subsidiaries comprise a key international healthcare group that is engaged in the design, innovation, improvement, manufacture and promotion of pharmaceutical and health products.
GSK employs more than 29,000 individuals in its global manufacturing and supply function (GMS) that spreads across a network of seventy eight locations in thirty three countries.
The extent of manufacturing at GSK is gigantic, as the company produces more than 4 billion packs per year including tablets, creams, ointments, inhalers, injections and liquids. The company spent over £3.7 billion on production activities in 2009.
GSK has a vision of maintaining cost efficiencies and its production sites supply high quality competitively priced products. The company focuses on upgrading production technologies and practices and has an intensive focus on research and development. Latest technologies are fundamental for motivating innovation, reducing costs, and adding elasticity to company operations.
GSK is committed to health, safety and the environment in its mission. It focuses on developing substantial human capital in order to effectively manage a highly competitive and challenging external environment. Refined quality assurance measures are positioned to ensure quality and safety of healthcare products (GSK Published Accounts 2009).
AIMS, OBJECTIVES and RESEARCH QUESTIONS
The principal goal of this project report is to appraise historical financial performance of GlaxoSmithKline and compare the company's performance with its major competitor Novartis pharmaceuticals in order to analyse the future prospects of the company. During the research and analysis of the company it is important to set certain parameters and objectives that should be the focus of the report on GSK. The main goal of this RAP is to assemble and critically evaluate both the financial and the non-financial information pertaining to GSK in order to be able to comment on the future prospects of the company analysing the performance of the organisation over the past three year period. Other related questions will need to be answered in order to meet the objectives set for the report. A list of issues that need to be considered is provided below.
I need to determine the sources that are required to collect information regarding GSK in general and the pharmaceutical industry in particular.
Investigation into the historic growth of the company and what factors contributed in GSK becoming the largest company in its industry.
Expansion of GSK into global markets and how international expansion has affected the company.
What makes GSK the current market leader in the pharmaceutical industry?
Analysis of Porter's five forces in order to understand the external and internal environment faced by GSK.
SWOT analysis of GSK and methods to overcome the company weaknesses.
Financial analysis and ratio analysis for GSK and interpretation of the results obtained.
INFORMATION GATHERING
SOURCES:
As GlaxoSmithKline is a public limited company registered on major stock exchanges information on the company is readily available from various sources. All the required information was accessible from company website and other external sources. As sufficient information was obtainable from secondary resources there was no need to acquire primary data for company analysis. Therefore, all sources used are secondary and are mentioned as follows:
ANNUAL PUBLISHED FINANCIAL STATEMENTS OF GSK & NOVARTIS.
A large portion of the information used in this project report is gathered from the annual financial statements published by the company. As most financial data required for preparing a detailed analysis for the company is only available in the company accounts. However, the integrity of the published financial statements can be validated by reflecting upon the opinion provided by the external auditor PricewaterhouseCoopers (PWC) for GSK. The external auditors operate independently and have given an unqualified audit opinion regarding the financial accounts provided by the company.
ARTICLES
It was important to make sure that I can present an independent and unbiased view in my analysis of GSK. As most of the information is obtained from financial statements of the company there is a chance of losing objectivity in analysis results. Therefore, it was very important to obtain critical information on the company from various articles to ensure complete objectivity and independent judgement in my analysis. Articles were obtained from various sources such as The Economist and Financial Times etc.
BOOKS
To expand my theoretical understanding of related financial and marketing concepts, I used various textbooks available at the library which were very helpful in improving my concepts regarding the framework for financial analysis. Books published by Foulks Lynch for ACCA syllabuses and the curriculum for Financial Statement Analysis of the Chartered Financial Analyst (CFA) program available at the library were the key sources that assisted me in my report.
DATABASES
Databases such as Bloomberg and FAME (Financial Analysis Made Easy) were of great help in contributing to my analysis of financial statements of GSK. These databases also provide with financial ratios and trends for longer time horizons than can be inferred from the available annual reports. Other databases that were helpful include Investex Plus and Business ASAP. These databases expanded on my research and provided me with more objectivity in my analysis.
METHODS USED TO COLLECT INFORMATION
Collecting information on a company like GSK was not very hard. However, the challenging part was to handle such expansive amounts of information and differentiating between useful and unimportant information. Nonetheless, the complete information facilitated comparisons between GSK and Novartis and helped complete my analysis. Internet is the most efficient means of gathering information and I was able to acquire a lot of applicable information such as financial reports and articles from the internet.
I relied heavily on the databases available in different libraries in order to gather the required information. I also used The London City Business Library database which helped me develop a complete picture regarding the pharmaceutical industry and its recent trends.
LIMITATIONS TO INFORMATION GATHERING
Most information regarding GSK was available easily and the process did not involve many limitations. My concentration was on obtaining information from secondary sources and as GSK is traded on London Stock Exchange (LSE) the company is required by law to provide its annual statements to investors. As too much information on the company was available it was rather time consuming to determine the best sources of information. I have to review a large portion of each source in order to determine if the information was reliable and independent.
ETHICAL ISSUES
Objectivity
In order to ensure objectivity in my report I made sure that I use information from all the sources available and to think beyond the financial statements for my analysis. Most importantly, I conducted the non-financial analysis before the financial analysis in order to make sure that numbers in the financial statements would not result in the formation of a pre-mature opinion. Hence, I collected information from unlike sources and examined a variety of facets of GSK's position.
Integrity:
Owing to the availability of information and previous research analysis on GSK over the internet and libraries there was a danger to my integrity to copy the information. However, as I understand this is not just an examination report but also a learning experience for me, I worked on the report myself and used the ACCA guidelines on ethical integrity and report requirements to ensure originality of my work.
ANALYSIS
A company needs to be evaluated based on its structural competencies and its financial soundness. Any analysis that ignores these components or views them in isolation can have serious flaws and could result in wrong conclusions (Harvard Business School 2006). This report focuses on both the non-financial analysis of GSK as well as a complete financial analysis to comment on the expected future performance of the organisation. The report provides a complete analysis of all important components of the statement of financial position, income statement, cash flow statement, management and analysis reports, auditor's reports and corporate social responsibility report.
Key financial ratios have been calculated to complete compare performance over prior years, through the analysis of trends in the appropriate ratios over time and a basic analysis of the competitor (i.e. Novartis) is included for inter-firm and industry analysis.
The analysis of GlaxoSmithKline is as follows:
STRATEGY AND ITS ANALYSIS
STRATEGY
GSK business strategy focuses on both organic and inorganic growth in order to meet the objectives of the company. The strategy is consistent in the international markets and GSK is always aggressively searching for business opportunities that should add to shareholder's value (GSK Published Accounts 2009). The company is not only focusing on its core business model and medical products but through an intensive research program it is endlessly diversifying into various healthcare segments through employing innovative strategies. Business strategy of GSK is a balance between product orientation and customer orientation (Hansen and DiMasi 1991). The company looks into complicated problems faced by individuals pertaining to the healthcare segment and carries out extensive research in order to develop solutions to customer problems. In the western world obesity is a huge problem, so GSK developed a weight-loss product to address the issue. Most products produced by GSK are high in demand and the demand for such products in highly inelastic. However, the company is operating in a highly regulated market and has to maintain its prices in accordance to the legal requirements. For unregulated segments of the market, competition remains intensive and acts as a automatic mechanism for maintaining competitive prices. GSK aims at developing new products and benefiting from patents obtained during the process.
The Objectives of the business strategy of GSK are:
To grow core business in the UK market.
To further expand its operations internationally and benefit from low production costs.
To be well diversified in the healthcare market in order to be able to ensure business sustainability.
To maintain high quality for its products due to a high legal risk faced by the healthcare business.
To cater for healthcare needs internationally and serve poor markets at low cost.
To maintain an ethical stance towards helping the poor and contributing towards development of health systems in selected impoverished areas providing support through its own profits.
Andrew Witty, the company CEO for GSK comments:
"Our strategy is delivering and we believe that GSK is now moving to a position where it can deliver long-term financial performance on a sustainable basis for shareholders".
(GSK Annual Report 2009, pp. 2)
NON-FINANCIAL ANALYSIS
David (2006) discusses the importance of analysing the strengths, weaknesses, threats and opportunities for a company to demonstrate its long term commitment to sustainability. A SWOT Analysis for GSK follows:
STRENGTHS
MARKET LEADER:
GSK is the market leader in the pharmaceuticals industry in the UK and remains a market leader in many emerging markets. The positioning of GSK as the market leader in many global markets is a strength of the company that provides it with new opportunities for growth (Roberts 1999). However, the goals are to maintain this position in the UK and also focus on growth in other developed markets such as the US. GSK is the fourth largest pharmaceutical company in the US by comparison of sales and needs to improve its competitive position to expand further (Madura 2006).
BRAND NAME:
GSK is an established and trusted brand name in the mind of both the institutional buyers and individual consumers. A substantial goodwill is attached to the brand as it has successfully served in many international markets and has developed solutions for fatal diseases. The brand is positively positioned in the minds of consumers due to intensive efforts by the company to serve the community and not only profit from business operations (Iktar 2008). The company focuses on methods of reducing its carbon emissions and is known to care for the environment in which it operates. GSK brand is trusted for its effective results, high quality and commitment to improve healthcare products and their delivery to end users.
DIVERSIFIED BUSINESS:
GSK has a well diversified business in terms of the products it offers and the markets it serves. GSK's portfolio of products encompasses three focal categories: The over-the-counter (OTC) medicines, oral healthcare products and products catering to nutritional healthcare segment. The company has a well-diversified range of products including weight loss medicine, analgesics, smoking control products, medicines to support erectile dysfunction, energy drinks and cleansers (GSK Published Accounts 2009). The company has heavy presence in all major developed economies and at the same time, it maintains its market leader position in many emerging and developing economies (Scherer 2004).
RESEARCH FOCUS AND PATENTS:
Bamfield (2006) mentions that research and development is the key to success in the pharmaceutical industry. GSK has a focal emphasis on research and development (R&D). The company has developed one of the strongest research initiatives to discover prospective new drugs and that can facilitate the healthcare industry, the company mission and the shareholder's value. In 2009, the R&D managed around 150 projects in human clinical trials across the world. Research focuses not only on development of new products but also on identifying compounds used in competitor products in order to create a complete product that includes all the benefits desired by a customer.
WEAKNESSES
PRICE CONTROLS
Pharmaceutical industry is highly regulated in many markets and due to the inelastic demand of healthcare products prices of most drugs are regulated through price controls in most markets. However, price controls are necessary to ensure products reaching a mass market they reduce motivation for discovering new products or producing products that involve high cost raw materials (Henry and Lexchin 2002). In many developed markets this problem can be resolved by working with the regulatory bodies and developing an understanding in removing price controls for high cost products. However, in most emerging markets such corporation is difficult and can impede in the production and delivery of many healthcare products. As GSK has a prime focus on developing economies these excessive price controls can limit growth of the company.
NUTRITIONAL HEALTHCARE SEGMENT
GSK lags behind its competitors in products related to nutritional healthcare. The company records lowest growth in this segment, when its competitors have grown substantially in the nutritional healthcare markets. GSK needs to enhance its focus on this segment in terms of both R&D and marketing in order to regain its competitive position in the nutritional healthcare segment (GSK Published Accounts 2009).
OPPORTUNITIES
EMERGING MARKETS
GSK has maintained a strong presence in emerging markets from its very inception. This focus on serving emerging markets exposes the company to various growth opportunities due to its strong branding in these countries. The acceptability of GSK brand in the emerging markets remains very high and these markets are rapidly growing to the benefit of GSK.
THREATS
PATENT LITIGATIONS
Patent litigations are common in the healthcare business as many corporate giants are fiercely competing against each other to obtain product patents, to defend their existing patents and to accrue large amounts of benefits associated with these patents (Caves and Winston 1999). Many companies are accused for violating patents by back-tracking the components of other patented products and producing similar products. At times strong protection for patent rights is not available in developing economies and infringement of patents can become a major threat to the profitability of a company in those markets.
COMPETITION
Healthcare industry is highly competitive with many corporations attempting to take control of a maximum possible market share. Any compromise on quality or bad word in the market can lead to loss of a substantial share to competition (Hill and Jones 2009).
PORTERS FIVE FORCES
THREATS OF NEW ENTRANTS
Pharmaceutical industry involves high fixed investment in terms of infrastructural requirements and investment in research and development. Also, access to technologies and infrastructure is important for the industry. A value is placed to obtaining quality human capital and involves substantial costs. Thus the threat of potential new entrants that result in a loss of market share for GSK remains low.
THREATS OF NEW SUBSTITUTE PRODUCTS
Due to the heavy existence of competition in the pharmaceutical industry and a great reliance on research and development initiatives that threat from new substitute products remains relatively high for GSK. However, for new products developed by the company this threat is minimized through the protection available through obtaining patent rights for the product. In some developing markets obtaining or protecting patent rights can be costly, ineffective and undesirable. This can result in the introduction of substitute products in those markets (Lidstone and MacLennan 1999)
BARGAINING POWER OF SUPPLIERS
Bargaining power of suppliers in the medical industry varies from different raw materials required by the company. In most cases pharmaceutical companies produce their own raw materials to ensure quality. Days of payables ratio for GSK is high indicating that bargaining power of suppliers is generally not very strong (GSK Published Accounts 2009).
BARGAINING POWER OF CUSTOMERS
Healthcare industry deals with a highly inelastic demand curve and the buying power of individual customers remains low. Due to the existence of a number of established pharmaceutical companies the bargaining power of institutional buyers is relatively strong and competitive prices are required to gain more of the market share (Porter 2008).
INTENSITY OF COMPETITVE RIVALRY
Intensity of competitive rivalry remains high for the pharmaceutical industry (Luke et al. 2004). Many companies including Novartis, Pfizer, Astra Zeneca, Merck & Co, Wyeth, Aventis Pharma, Pharmacia Limited, and Roche are fiercely competing against GSK for gaining control over market share both locally and globally.
FINANCIAL ANALYSIS
SALES
GSK has enjoyed an impressive increase of 16.49 % in sales, as revenues increased from 24,352 million in 2008 to 28,368 million pounds in 2009 .This is even higher compared to a 7.20% increase in sales from 2007 to 2008.The chart below aids in explaining the increase in sales for GSK.
This improvement is attributable to the fact that GSK managed to achieve its strategic goal of diversifying and driving growth in emerging markets, with a growth rate of 12% during the year. GSK particularly performed well in the consumer healthcare and vaccine segment and recorded a growth of 7% and 15% respectively. Although sales volume declined in USA due to specific brands, overall the company continued to expand its outreach in the emerging and Japanese markets. Emerging markets primarily consist of Russia, China and Latin America. Sales augmented in Asia Pacific/Japan as well but were offset by price cuts in the region. Consumer healthcare also benefitted GSK greatly by introducing anti-obesity treatment in 2007.Vaccines are promoted with the help of government tenders, thus sales automatically rise as a result of the authenticity and reliability of the product (GSK Published Accounts 2009).
Similarly, Novartis also experienced an increase in sales from USD 41, 46 million in 2008 to USD 44, 267 million in 2009. However, when compared to a 16.49% rise in GSK's sales, Novartis total revenue grew only by 7%.This depicts that GSK is performing better than its competitors especially Novartis as far as growth in revenue is concerned.
GSK
USA
EUROPE
REST OF THE WORLD
Portion
187 bn
131 bn
150 bn
Percentage
40%
28%
32%
Global sales of pharmaceuticals have grown from 468 billion to 366 billion in a year and the pie chart above clearly indicates that among the three geographical divisions, USA was the highest contributor as it delivered 40% of total sales in 2009. Being an English company, GSK has managed to substantially increase its international sales from USA and the rest of the world that account for a total of 62% of total sales as compared to only 28% sales from Europe.
PROFITABILITY RATIOS
GROSS PROFIT MARGIN
Gross Profit margin experienced a fall from 76.59% in 2007 to 73.66% in 2008 .During this year, sales as well as cost of goods sold increased but the increase of 20.65% in cost of goods sold was higher than 7.20% boost in sales, consequently leading to a fall in the overall ratio. Here, the increase in sales was greater than the increase in cost of goods sold. The graph above also shows the changes in gross profit margin and finally it settles at 74.02% in 2009.
OPERATING PROFIT MARGIN
The column chart above represents the fall in operating profit margin in from 2007 to 2008, it decreased by 3% from 23.83% to 20.76%, this decline was two-fold. Since cost of goods sold increased in 2009, gross profit margins were lower in 2008 and at the same time operating expenses increased by 95%, leading to a lower operating income. Again, in 2009, it rose but the increase was negligible. The increase in operating profit margin to 21.32% was a result of a 5% fall in operating expenses and a decent increase in sales. Operating profit margin, thus, depicts that the profit generated from sales has fallen from year 2007 to year 2008 and then risen slightly in 2009.
ASSET TURNOVER
Asset turnover for GSK shows a similar trend as that of previous ratios, it is falling from the year 2007 to the year 2008 from 1.31 to 1.25 respectively. This is surprising because total revenue has increased substantially over this period. But this fall is mainly caused by a stronger increase in average assets, as they rose by 27.32% in 2008. In this case, asset turnover ratio explains that management is not utilizing assets as efficiently as before. However, an increase to 1.12 in 2009 shows a slight improvement. This is due to an increase in total revenue as compared to an increase in average assets. A sharp fall in this ratio and then a slight increase is seen with the help of the line graph below.
RETURN ON CAPITAL EMPLOYED AND RETURN ON SHAREHOLDERS
The graph very clearly delineates that return on capital employed was the highest in 2007 standing at 36.76%.it means that the capital employed by GSK is yielding high returns and that the company is very profitable. Such a high ROCE motivates investors to invest in the company. However, a sharp decline in 2008 can have adverse affects for the company. An ROCE of 24.03% in 2008 is the lowest amongst the three years. An investor would only invest in the company if he believes that he can earn high profits otherwise he will invest elsewhere. In 2009, the ROCE rises again, showing hope for the investors of high returns on their capital.
RETURN ON EQUITY
Similarly, return on equity shows the rate of return applicable to the ordinary shareholders (Gibson 2009). However, in this case, ROE does not rise in 2009; in fact, it deteriorates year after year. In 2007, it was 61.90%, which was the highest in three years. After that, it stood at 58.05% and 46.51% respectively. A decreasing ROE reflects badly on GSK's profitability position; however, the figure is still higher compare to most competitors.
The graph above shows a consistent decline in GSK's ROE. It comprises of two main components, return on net operating assets (RNOA) and return on Debt. RNOA also shows a declining trend from 31.17% to 25.85% in one year and then it increases to 27.70% in the next year. In other words, it reflects lowered management performance. Whereas return on debt rises sharply in 2008 from 29.99% to 43.13% but then falls again to 36.69% in 2009. The overall effect is the deterioration of return on equity. Operating income has also fallen during these three years because of an increase in operating expenses and capital employed risen immensely, thus leading to a decline in both ratios ROCE and ROE.
LIQUIDITY RATIOS
CURRENT RATIO
Current ratio for GSK is in the acceptable level, ranging from 1.32 to 1.72. This ratio is extremely important for the liquidity of a company as it denotes whether the company has enough liquid assets to cover its current liabilities. It should remain above one and below two according to the general rule (Morton 2002). If it is below one, it means that the company may not be able to convert its assets into cash to cover current liabilities and may become a victim of bankruptcy and if it is above two, it means that the company has too many assets lying idle which could be used to generate profits. GSK, according to the current ratio, enjoys a comfortable liquidity position.
QUICK RATIO
Quick ratio is a better measure of liquidity than the current ratio. This is so because acid ratio or quick ratio subtracts the amount of inventories from current assets and then divides them by current liabilities (Berry 2006). It shows a company's actual ability to pay immediate current liabilities. Although it declines and rises as shown in the chart above, it is still above one, showing that GSK has no major liquidity problems.
EFFICIENCY RATIOS
DAYS OF ACCOUNTS RECEIVABLES
This ratio is preferred to be on the lower side because it represents the number of days debtors take to pay back. The higher this ratio, the inferior the efficiency of the company and it might also have to face cash problems (McDonald and Morris 1984). GSK has low receivable days of 88.29 in 2007, but it took a large leap and rose to 93.90 in 2008, weakening the overall efficiency of GSK. However, GSK controlled the situation and brought its receivable days down to 83.53 in 2009 leading to not only an improvement in the efficiency of GSK but also better performance in its operations.
DAYS OF ACCOUNTS PAYABLE
Payable day's ratio is the average time a company takes to pay off its creditors or suppliers. The higher it is, the better it is for the company since it receives extra time to arrange for the funds (Bragg 2007). It is high and further increases to 345.65 in 2008 but again fell to 334.93 in 2009. GSK, being one of the largest companies of the world, exercises the power to enjoy repayment extension due to its reliability.
INVENTORY TURNOVER
Best inventory management is witnessed in 2008 where this ratio is the lowest at 1.58. This demonstrates that GSK is effectively managing its stocks and inventory supplies. However, it does stay at this low level and rises to 1.82 in 2009. Overall, it is still on the lower side and it is possible to maintain it at this level by incorporating thorough planning and effective management of inventory.
GEARING RATIOS
This ratio determines the proportions of equity and debt involved in the running of a company. The higher the gearing ratio, the higher the level of debt utilized for funding purposes (Myers 1984). GSK has a low gearing ratio in 2007 but it increases to 2.53 in 2008, which depicts that the level of debt as compared to equity has risen. However, in 2009 it substantially falls to 1.86. Equity has increased throughout the span of three years from 20658 million in 2007 to 30744 million pounds in 2009.But the level of debt was quite significant in 2008 which led to a high gearing ratio. As the company has an increasing return on its debt this policy is effective in enhancing shareholder value.
INTEREST COVER RATIO
In 2007, the interest cover ratio of GSK was 19.27 showing that changes in profits should not affect the ability of the company to pay dividends. However, a sharp drop in 2008 to 9.04 depicts a worrisome picture for the shareholders if this trend continues. This change is attributable to increase in financial costs by 86.09% in 2008 as compared to a smaller increase in operating profit. Although, the interest cover ratio increased in 2009 to 10.22, this increase substantially reduces the concerns of shareholders regarding the ability of the firm to pay interest commitments.
INVESTOR'S RATIOS
DIVIDENDS PER SAHRE AND EARNINGS PER SHARE
Brigham and Houston (2007) discuss that an investor mainly focuses on two ratios that are dividends per share and earnings per share. The former deals with the immediate return to the shareholders whereas the latter focuses on future value of the company and its stock.
The Dividend per share ratio increased from 13.28 to 14.09 in the latest year. This increase reflects favourably on the returns given out to shareholders. Earnings per share also increased due to a substantial rise in the operating income and a fall in number of shares outstanding from 2008 to 2009. EPS stood at 22.9 in 2008 and rose to 28.38 in 2009. Therefore, GSK has been able to generate more wealth than contributed by its shareholders.
Novartis's Earnings per share, even though increased from 2008 to 2009 from 3.59 to 3.70 respectively, the percentage increase is still comparatively low compared to that of GSK.
DIVIDEND COVER
This ratio has also fallen from 2.20 to 1.65 in 2008. This depicts that GSK can still pay annual dividends from earnings but the capacity has decreased. It rose in 2009 but only slightly to 1.66.
CONCLUSION
GlaxoSmithKline (GSK) is one of the world's leading research-based pharmaceutical and health care companies. They develop and manufacture prescription medicines, vaccines, over-the-counter medicines, oral care, and nutritional health care products under the brands Horlicks, Lucozade and Ribena. GSK by diversifying into new products as well as geographical areas has reinforced the long-term growth focus of the company. The organisation believes in growing into a diversified global business, delivering high vale products and simplifying its operations to increase efficiency.
GSK has been able to achieve their strategic goal which is witnessed by a massive increase in its sales by 16.49% in this year. This was obtained by reaching out to potential emerging markets and introducing new products with the help of research and development. Although, sales in the US declined, but emerging markets, Japan and Europe contributed heavily towards increasing revenues. Novartis and other pharmaceutical companies also experienced increase in their sales revenue but GSK surpassed most of them (GSK Published Accounts 2009).
GSK has indulged in a major restructuring plan that was introduced in 2007 and became fully functional in 2008, which is why most ratios reduced in 2008 and then rose again in 2009. For instance, all the profitability ratios, including gross profit margin, operating profit margin, asset turnover and ROE fell in 2008 and slightly grew again by 2009 when. Although, profitability declined by a small degree but overall, it shows a positive trend as these ratios started rising again in 2009. However, the company still needs to manage its expenses more effectively in order to enhance profitability.
As far as liquidity is concerned, GSK is enjoying a comfortable liquidity position and does not face liquidity risk. The current and quick ratios are at 1.45 and 1.11 respectively, and present a favourable picture. GSK has also proved to be efficient with the help of efficiency ratios. Receivable days are the lowest at 83.3 in 2009 and payable days at 334.93, even though has declined but is still relatively high. A huge difference between the two shows the bargaining power of GSK over its suppliers and clients.
From an investor's point of view, it seems to be a sound investment as both dividend per share and earnings per share show an increasing trend. From 2008 to 2009, DPS rose by 6% and EPS grew by 23.27%. GSK maintains a stable and growing dividend policy. Furthermore, GSK gives high priority to corporate social issues like focusing on environmental regulation as to upgrade the image of the company. GSK being the market leader in UK and the fourth largest company in US has an edge over other pharmaceutical companies in the word. It has managed to create a brand name that signifies trust and reliability among the general public. This positive image has been created by GSK to spread the belief that it is working for the benefit of the society at large instead of just profit maximization (Dean 2008). By fulfilling, one of its basic goals of diversification, GSK has also become less risky for shareholders along with being able to capture a wider market share. Investing in research and development, it constantly introduces new and better products for all kinds of health issues.
At the same time, GSK is considered as a trend setter for others in the industry; it has certain obligations and responsibilities to the society at large. For this reason, the board has the authority, and is accountable to shareholders, for ensuring that the group is appropriately managed and achieves the strategic objectives it sets. The company follows strong corporate governance policies and the board operates independently (Bissessur 2008).
The Board reviews the Group's internal controls and risk management policies and approves its governance structure and code of ethics (GSK Annual Report 2009).
On the whole, GSK's non-financial and financial analysis reveals that the company is performing well.
I would recommend an investor to investor in GSK, not only because it is the market leader in UK but also because of its strengths that can prove extremely beneficial for the investor in the long-run. Moreover, investor is exposed to low risk due to the extensive diversification focus of GSK.
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Appendix 1
Financial Ratios
Profitability Ratios
2007
2008
2009
ROE
61.90%
58.05%
46.51%
RNOA
31.17%
25.85%
27.70%
Return on Debt
29.99%
43.13%
36.69%
Operating Profit Margin
23.83%
20.76%
21.32%
Gross Profit Margin
76.59%
73.66%
74.02%
Solvency Ratios
Debt Ratio
0.34
0.41
0.38
Liquidity
Current Ratio
1.32
1.72
1.45
Acid Test
1.02
1.32
1.11
Interest Coverage
19.27
9.04
10.22
Turnover Ratios
Inventory Turnover
1.74
1.58
1.82
Days Inventory on Hand
210.20
230.78
201.00
Days of Accounts Receivables
88.29
93.90
83.53
Accounts Receivables Turnover
4.13
3.89
4.37
Fixed Asset Turnover
1.31
1.10
1.12
Days of Accounts Payables
333.70
345.65
334.93
Operating Asset Turnover
1.31
1.25
1.30
ROCE
36.76%
24.31%
27.40%
Gearing Ratio
1.08
2.53
1.86
Dividend cover
2.20
1.65
1.66
ROA
0.20
0.12
0.12
