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Balance Sheet cum Income Statement of the Two Companies – AstraZeneca Plc and GlaxoSmithKline Plc from 2011 to 2014

Discuss about the Financial Accounting Report for Policy on Stock Prices.

The report studies the impact of profitability of the two companies on investor performance indicators selected in this report. The two companies are AstraZeneca Plc and GlaxoSmithKline Plc, which are one of the big non-financial companies. Both of these companies are listed on the London stock exchange and both are pharmaceutical companies. Some analysis would be done in the following sections relating to these companies that would help to understand their profitability and their performance indicator analysis as well (Warren, Reeve and Duchac 2013). Moreover, profitability between the two companies would be compared on investor performance ratios between the two companies.

 

AstraZeneca

GlaxoSmithKline

 

2014

2013

2012

2011

2014

2013

2012

2011

Net Sales

26095

25711

27973

33591

23006

26505

26431

27387

COGS

5842

5261

6026

5393

7323

8585

7925

7332

Operating Profit

2137

3712

8148

12795

3597

7028

7392

7807

Gross Profit

20253

20450

21947

28198

15683

17920

18506

20055

Operating Expenses

787

595

970

777

12086

10892

11145

12248

Preferred Dividends

0

482

323

312

0

0

0

0

Current Assets

16697

20335

19048

23506

14678

15227

13692

16167

Current Liabilities

17330

16051

13903

15752

13295

13677

13815

15010

Total Assets

58595

55899

53534

52830

40651

42086

41475

41080

Total Liabilities

38949

32646

29588

29358

33715

34274

35665

33048

Shareholder's Equity

19646

23253

23946

23472

4936

7812

5810

8032

Net Income

1249

3267

7646

12367

2756

5436

4565

5261

Weighted Average Share Common Outstanding Shares

1263

1257

1261

1361

2404

2416

2456

2514

Price Per Share

32.185

29.78

29.09

29.75

13.76

16.1

13.55

14.65

Annual Dividends per share

280

280

280

280

800

800

740

750


The balance sheet and income statement of both the companies have combined for the relevance of the calculation of profitability and key performance indicators. Nevertheless, after looking at the balance sheet and income statement, it can be deciphered that the both the pharmaceutical industries show same level of values across years but 2014 shows a dip in values. This may be due to the change in culture and strategies.

Profitability analysis means the analysis of the profit earning capacity of the companies based on the recent results (Grant 2015). The discussion of profitability of these companies would be analyzed in a systemized way. However, the best ways to analyze the profitability are effectively recorded by net profit margin, gross profit margin, operating profit margin and return on assets.

Profitability Ratios

Formula

Net Profit Margin

“Net Income/Net Sales”

Operating Profit Margin

“Net Income - COGS -operating expenses/ Net Sales

ROA (Return on Assets)

“Net Income/ Average Total Assets”

Gross Profit Margin

“Net Income-COGS/ Net Sales”


Table 1 Profitability Ratios

It is a British-Swedish pharmaceutical company. It has its headquarters in London, in the United Kingdom. It is also a multinational company and the seventh largest pharmaceutical company in the world measured by the sales of prescription drugs, in the year 2012. This company has its operations across 100 countries (Astrazeneca.co.uk 2016). It has manifested its strong existence in market by working on drugs aligned with respiratory, inflammation, autoimmune, cardiovascular, metabolic, infection, and oncology and neuroscience diseases. Having partners all across the world, AstraZeneca has a wide global reach. The brief description of its profitability is discussed as follows:

Profitability Ratios

2014

2013

2012

2011

Net Profit Margin

4.79%

12.71%

27.33%

36.82%

Operating Profit Margin

8.19%

14.44%

29.13%

38.09%

ROA (Return on Assets)

2.182%

5.971%

14.37%

23.81%

Gross Profit Margin

77.61%

79.54%

78.46%

83.95%


Table 2 Profitability Ratios of AstraZeneca from 2011 to 2014

The profits examined on each of the profitability ratio has been declining drastically such that the net profit margin declined from 36.8 2% in 2011 to 4.79% in 2014. However, it followed the same pattern in sales, revenue, and the assets converted into sales (Leuz 2012). Nevertheless, its earnings forecasts are depleting which may be not good for the company as the investor would not want to invest in a company fallowing a declining trend over the years.

Profitability Analysis of the Companies

It is a pharmaceutical company of British origin. It has its headquarter in London. It is also a multinational company. This company was established in the year 2000. GSK was the fifth largest pharmaceutical company in the year 2015 (Gsk.com 2016). The profitability of the company can be analysed on the help of ratios taken into consideration.

Profitability Ratios

2014

2013

2012

2011

Net Profit Margin

11.98%

20.51%

17.27%

19.21%

Operating Profit Margin

15.64%

26.52%

27.97%

28.51%

ROA (Return on Assets)

6.662%

13.011%

11.059%

12.775%

Gross Profit Margin

68.17%

67.61%

70.02%

73.23%


Table 3 Profitability Ratios of GlaxoSmithKline from 2011 to 2014

The GlaxoSmithKline another non-financial company and of the competitors of AstraZeneca, even shows a declining trend just like its competitor. The ratios show declining trend but not on a drastic scale. The net profit margin of the company was 19.21% in 2011, which had come down to 11.98% in 2014. The trend is followed by conversion of assets into sales; costs of goods sold as well as rise in operating expenses.

The key performance indicator (KPI) analysis of investor performance is measured to study the effectiveness of the organization against its objectives. However, choosing correct investor performance indicator is very essential for the organization as it is need to transfer business objectives to measured goals (Barth 2015). The organization is examined on the efficiency of each department for example; IPI useful for finance would be different from IPI useful for the sales department (Mahajan, Naurial and Singh 2014). These assessments very often tend to identify the potential improvements. Hence, performance indicators are often associated with initiatives for revenue, cost and conversions (Krause and Arora 2010). The indicators that constitute important for investors to evaluate performance are given as:

KPI’s

Formula

Debt/Equity Ratio

“Total Liabilities/ Shareholder's Equity”

Current Ratio

“Current Assets/ Current Liabilities”

E.P.S (Earnings Per Share)

“Net Income- Preferred Dividends/Weighted Average Share Common Outstanding Shares”

Dividend Yield

“Annual Dividends per share/ Price per share”


Table 4 Key Performance Indicators (KPIs)

The KPI’s of AstraZeneca is essentially based on the reputation and government objectives involved in the key areas. The global quality team of this company is one of the largest company based on quality performance. However, the company ensures trends that are data driven as well as designs and delivers a powerful application on each manufacturing site (Baguley and Winter 2012). The company globally has achieved success because evaluating on KPI’s factors and the performance can be shown with the help of ratios.

KPI’s

2014

2013

2012

2011

Debt/Equity Ratio

1.982541

1.403948

1.235613

1.2507669

Current Ratio

0.963474

1.266899

1.370064

1.492255

E.P.S

0.988915

2.215593

5.807296

8.8574578

Dividend Yield

8.699705

9.402283

9.625301

9.4117647


Table 5 KPIs of AstraZeneca from 2011 to 2014

Each KPI shows different level of indication in the organization. The leverage ratio shows that the debt in the organization is increasing from 1.25:1 to 1.98:1 in 2011 and 2014 respectively, which is surpassing the favorable debt position which is 1:1 (Bodie 2013). However, depicting that debt is accumulating. The current ratio is showing a falling trend depicting fall in current assets or the issue of not meeting its short-term debt. The two areas where the investor will have maximum attention would be E.P.S and Dividend Yield. The dividend yield of the remains consistent across all years but E.P.S has declined to larger extent constituting only 0.98% in 2014 against 8.85% in 2011.

Investor's Key Performance Indicator (KPI) Analysis on the Companies

GSK company is experiencing a shift in its cultural environment whether is relevant to leadership, people, partnership, process, business or customer results. The changes are mainly manifested due to the drive for change experienced by many organizations. However, in order to define the problem of its key indicators, The company has created a strategy for every group whether it is business partners, stakeholders, employees or society. The R&D of GSK is creating a vital environment for sustaining competitive advantage (Mehmood 2012).

KPI’s

2014

2013

2012

2011

Debt/Equity Ratio

6.830429

4.387353

6.138554

4.114542

Current Ratio

1.104024

1.113329

0.991097

1.077082

E.P.S

1.146423

2.25

1.858713

2.092681

Dividend Yield

58.13953

49.68944

54.61255

51.19454


Table 6 KPIs of GlaxoSmithKline from 2011 to 2014

According to the Key Performance Indicators, the company’s debt position is at its worst because of the accumulated long-term debt which has been increasing since 2011 and has reached to 6.83:1 in 2014. However, the current position of the company is considerably low depicting though it is able to pay off its short-term but still the debt burden is increasing on the company. However, the E.P.S value is fluctuating amongst the years but the dividend yield based on the share prices has increased due to change in its cultural environment (Ali, Sharif and Jan 2015).

AstraZeneca Plc and GlaxoSmithKline Plc said to be renown competitors are struggling on maintain profitability of the organizations. According to the annual reports of 2011 to 2014 in both the companies, generating profits had been as issue because the debt of the company is accumulating due non-financial company (Dunne 2015).  

On the other hand, the general profitability position of GSK shows a better trend than AstraZeneca. There was some downward trend also for GSK, but it was balanced by revue generating in the organization that helped in incurring less of operating expenses. However, the other factor that outlines the brief of this problem is the Crestor crunch faced by AstraZeneca which turned out to be expensive but helped in recovery of GSK (Ficenec 2016).

According to the profitability, ratios depicted in Figure 1 (a), (b), (c) and (d) a comparison has been made between the companies.

Net Profit Margin of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 1 (a) Net Profit Margin of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 1 (c) Operating Profit Margin of AstraZeneca Plc and GlaxoSmithKline Plc

ROA of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 1 (d) ROA of AstraZeneca Plc and GlaxoSmithKline Plc

However, after comparing the data, the investor should invest in GlaxoSmithKline as the profit margins of the company are better than AstraZeneca Plc. Moreover, the company shows a decreasing trend depicting decrease in revenue and sales of the company from 2011 to 2014.

The investor’s performance ratio has been assumed to be dependent on the leverage ratio, liquidity ratio, valuation ratio and profit margin for both the companies (Delen, Kuzey and Uyar 2013). However, when investigated on investor performance debt, earning per share and dividend given to the shareholders gives an idea to the investor regarding the organization’s functionality. Nevertheless, both the companies show a high ratio on long-term as well as short-term debt. Thus, the companies had a decreasing rate of return on assets from the period of 2011 to 2014. Hence, the position relating to the investment performance is almost same for both GSK and AstraZeneca. Therefore, the analysis for investor’s investment wants to deal with debt on the first followed by dividend yield (Damodaran 2012). Conversely, if the debts grow on increasing in accompany, the profitability as well as dividend payout and yield will too get affected. This makes it vital for the management to assess the situation and take necessary measures for rectification (Bhattacharyya 2012).

According to the Key Performance Indicators (KPIs), ratios depicted in Figure 2, 3, 4 and Figure 5, a comparison has been made between the companies.

Solvency position of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 2 Solvency position of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 4 Earnings per share of AstraZeneca Plc and GlaxoSmithKline Plc

Dividend Yields of AstraZeneca Plc and GlaxoSmithKline Plc

Figure 5 Dividend Yields of AstraZeneca Plc and GlaxoSmithKline Plc

However, after comparing on the key performance indicators – current ratio, debt-to-equity ratio, EPS and Dividend yield. It can be said that though the GlaxoSmithKline Plc’s indicators are declining from 2011 but the company has been showing a consistency. Nevertheless, AstraZeneca Plc has fallen drastically as a result no investor would be interested to invest in the company.

Conclusion

The assignment can be summarized based on the investment to take place. The profitability and Key Performance Indicators are the basic factors that help the investor to carry out investment practices in the organization. However, the assignment deals with these factors to be assessed on AstraZeneca Plc and GlaxoSmithKline Plc, the two British organizations that are based on profitability Pharmaceutical organizations. The result based on profitability highlighted that the organizations are facing a decreasing trend due to the changes in the current environment. Nevertheless, on profitability factor, the investor will invest in GSK. On the other hand, on KPIs, the investor will invest in AstraZeneca Plc.

It is highly recommended for the management of both the companies to assess the general pharmaceutical market relating to cultural changes in the environment relating to their sphere of activity and efficiently identifying the reasons for poor market performance. Consequently, changing environment will give investors a warning regarding the investment in the pharmaceutical company.

Moreover, both the companies are undervalued and are working flat to return to growth. According to the investment criteria, investment in pharmaceutical sector, especially in these two countries show the traits of classic contrarian value investments. However, it is advised that when one of the companies undertakes R&D, then that is the time investor should think of investment. Nevertheless, AstraZeneca Plc and GlaxoSmithKline Plc is trying hard, but as per internal and external factors, AstraZeneca GlaxoSmithKline is performing better and AstraZeneca’s Competitor is taking the lead. However, Glaxo has 258 products, which are under development and will be marketed by 2020 whereas Astra has 222 new products and expects to be marketed by 2018. Both the companies are in competition and are expected to grow together with a close-knit competition (Hargreaves 2015). The investors are advocated to see other factors as well before investment.

References

Ali, A., Sharif, I. and Jan, F.A., 2015. Effect of Dividend Policy on Stock Prices. Journal Of Management Info, 6(1), pp.55-85

Astrazeneca.co.uk. 2016. AstraZeneca – Home.  Available at: https://www.astrazeneca.co.uk/ [Accessed 21 Mar. 2016]

Baguley, M.J. and Winter, M.J.E. eds., 2012. Outsourcing clinical development: strategies for working with CROs and other partners. Gower Publishing, Ltd..

Barth, M.E., 2015. Financial Accounting Research, Practice, and Financial Accountability. Abacus, 51(4), pp.499-510.

Bhattacharyya, A.K., 2012. Financial Accounting for business managers. PHI Learning Pvt. Ltd..

Bodie, Z., 2013. Investments. McGraw-Hill.

Damodaran, A., 2012. Investment valuation: Tools and techniques for determining the value of any asset (Vol. 666). John Wiley & Sons.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications,40(10), pp.3970-3983.

Dunne, N., 2015. Competition Law and Economic Regulation. Cambridge University Press.

Ficenec, J. 2016. Questor share tip: AstraZeneca faces Crestor crunch in year ahead. Telegraph.co.uk. Available from: https://www.telegraph.co.uk/finance/markets/questor/12141816/Questor-share-tip-AstraZeneca-faces-Crestor-crunch-in-year-ahead.html [Accessed 21 Mar. 2016].

Grant, R.M., 2015. Contemporary Strategy Analysis 9e Text Only. John Wiley & Sons.

Gsk.com. 2016. Home | GSK. Available at: https://www.gsk.com/ [Accessed 21 Mar. 2016].

Hargreaves, R. 2015. Why GlaxoSmithKline plc And AstraZeneca plc Are The Best Bargains In The FTSE 100! | The Motley Fool UK. Fool.co.uk. Available at: https://www.fool.co.uk/investing/2015/10/21/why-glaxosmithkline-plc-and-astrazeneca-plc-are-the-best-bargains-in-the-ftse-100/ [Accessed 21 Mar. 2016].

Krause, H. and Arora, D., 2010. Key Performance Indicators.

Leuz, C., 2012. Empirical Research on Financial Reporting, Disclosure & Capital Market Regulation. Journal of Accounting Research, 38, pp.91-124.

MAHAJAN, V., Nauriyal, D.K. and Singh, S.P., 2014. Efficiency and Ranking of Indian Pharmaceutical Industry: Does Type of Ownership Matter?.Eurasian Journal of Business and Economics, 7(14), pp.29-50.

Mehmood, F., 2012. Growth by Merger-A long-term analysis of GlaxoSmithKline.

Warren, C., Reeve, J. and Duchac, J., 2013. Corporate financial accounting.

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