Porter’s five force model and Ratios analysis of SQUARE Pharmaceutical

ASSIGNMENTON

Financial Analysis and Control

(FIN-434)

Topic: Porter’s five force model and Ratios analysis of SQUARE Pharmaceutical

Submitted to:

Tazrina Farah

Lecturer

Department of Business Administration

Daffodil International University

Submitted by:

NAME ID NO. BATCH SECTION

Md.Farhad Sarker 091-11-924 22nd A

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Date of Submission: 11-12-11

Letter of Transmittal

11th December, 2011

Tazrina Farah

Lecturer

Department of Business Administration

Faculty of Business and Economics

Daffodil International University

Dear Madam,

We submit here our term paper as you have assigned us to prepare. You asked us to

prepare a term paper basis on “Porter’s five force model and Ratios analysis of

SQUARE Pharmaceutical”.

The term paper based on: “Porter’s five force model and Ratios analysis of SQUARE

Pharmaceutical” has helped us to know how mutual fund created and where the fund

uses and we enforced our best effort. Surely it has enriched our knowledge and promoted

our study. We have also learnt much about financial market of Bangladesh.

Thank you for giving us such an opportunity for working on such topic.

We will be honored to provide you any additional information, if necessary.

Sincerely Yours

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Acknowledgement

We express our gratitude to our respectable course teacher Tazrina Farah

For assigning us such a term paper that deals with the true events of the real life and

financial market. .

The title of the assignment is “Porter’s five force model and Ratios analysis of

SQUARE Pharmaceutical” is very effective for us since it is very much relevant with

our course. We tried our best to find out the valuable insights from the survey. We also

discussed about the assignment team wise. Library works were common activities. We

hope that our effort will result in a product that can lead any layman to become interested

about the practices.

So, finally we want to pay our gratitude to our course teacher for giving the greatest

opportunity to work on such an assignment that will be very helpful in the future life.

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Abstract

Ratios are used in much of our daily life. We buy cars based on miles per gallon, we

evaluate baseball players by earned run and batting average; basket ball players by field

goal and foul shooting percentage, and so on. These are all ratios constructed to judge

comparative performance. Financial ratios serve a similar purpose, but we must know

what is being measured to construct a ratio and to understand the significance of the

resultant number.

Financial ratios are used to weight and evaluate the operating performance of firm. To

judge comparative performance here discussed on different ratios of SQUARE Pharma.

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Table of Contents

Number Topic Page Number

1. OBJECTIVE 07

2. Methodology 08

3. Limitation 09

4. About Square Pharmaceuticals ltd. 10

5. Industry Analysis 11-12

6. Force 01:Rivalry among existing firms 13-14

7. Force 02:Threat of new entrants 14-15

8. Force 03:Threat of substitute Products 16

9.Force04:Bargaining power of buyers

16-17

10.Force 05:Bargaining power of

Suppliers

17

11. Liquidity Ratios 18-24

12. Financial Risk Ratios 24-27

13. Operating Efficiency 27-29

14. Operating Profitability 29-34

Conclusion 35

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OBJECTIVE

The Broad objective of this assignment is to know about the practical

financial position of a square pharma by analyzing ratios. To analyze the

ratios the performance of company can be measured. We analyze liquidity

ratios, profitability ratios operating ratios etc. We emphasis on companies

current position and also discuss the Porter’s five force model to know

company’s position.

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Methodology

Methodology of the report is mainly based on collection of the Primary &

secondary as well as using appropriate method for estimating different issues not

mentioned therein.

Data Collection

Primary data collection and different types of secondary data are used in this

analysis with a view to making the Assignment preparation worthwhile. In

doing so, relevant information have been taken from,

Through internet (References has given below the data).

Business Analysis And Valuation, (G. Palepu, Healy) Second

Edition.

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Limitation

Limitation of the report:

Some important information could not be exposed for the lack of authorization.

Lack of work time

Lack of available data.

.

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About Square Pharmaceuticals ltd:

SQUARE today symbolizes a name - a state of mind. But its journey to the

growth and prosperity has been no bed of roses. From the inception in 1958,

it has today burgeoned into one of the top line conglomerates in Bangladesh.

Square Pharmaceuticals Ltd., the flagship company, is holding the strong

leadership position in the pharmaceutical industry of Bangladesh since 1985

and is now on its way to becoming a high performance global player.

Industry Analysis:

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Industry Analysis is a vital part of the decision making process in business. Industry

Analysis helps investor to take decision. Industry Analysis also helps entrepreneurs to

iron out the wrinkles in their business plans.

Michael Porter has identified five forces that are widely used to assets the structure of

any industry. Porter’s five forces are:

Rivalry among existing firms

Threat of new entrants

Threat of substitutes

Bargaining power of buyers

Bargaining power of Suppliers

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Force 01:

Rivalry among existing firms:

1. Industry Growth rate:

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh

and it has been continuously in the 1st position among all national and multinational

companies since 1985. It was established in 1958 and converted into a public limited

company in 1991. The sales turnover of SPL was more than Taka 11.46 Billion (US$

163.71 million) with about 16.43% market share (April 2009– March 2010) having a

growth rate of about 16.72%.

2. Concentration and Balance Competitors:

The number of firms in an industry and their relative sizes determine the degree of

concentration. Lots of similar size and strong competitor exist in the market and price

competition is likely to be harsh. So square pharma product price is competitive.

Square pharma is growing company; the competition is low

3. Degree of differentiation and switching cost:

Product differentiation is not the driver, cost competitiveness is. However, companies

like Square pharma has created big brands in over the years, which act as product

differentiation tools. This will enhance over the long term, as product patents come into

play from 2005.

4. Excess Capacity and Exit barrier:

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It is quit impractical for square pharma or other firms to exit from this industry

because of they can not use those machineries in other purpose. Also here some rules

and regulation exist no one can not easily exist from this industry.

Force 02:

Threat of new entrants:

Pharma industry is one of the most easily accessible industries for an entrepreneur in

Bangladesh. The capital requirement for the industry is very low, creating a regional

distribution network is easy, since the point of sales is restricted in this industry in

Bangladesh.

1. Economies of scale:

Square pharma can easily produce based on economies of scale but it is quite difficult

to new entrants for produce based on economies of scale.

2. First mover advantage:

It was established in 1958 and converted into a public limited company in 1991.First

mover advantage is part of the standard lore of the I-Cubed Economy. It means that the

first company into a market generally wins.

2. Access to channels of distribution and relationship:

The Square pharma is a large pharmaceutical company in our country so they have large

distribution channel and good relationship with the retailers.

Distribution Channel at a Glance

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Force 03:

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Threat of substitute Products:

This is one of the great advantages of the pharma industry. Whatever happens, demand

for pharma products continues and the industry thrives. One of the key reasons for high

competitiveness in the industry is that as an on going concern, pharma industry seems to

have an infinite future.

However, in recent times, the advances made in the field of biotechnology, can prove to

be a threat to the synthetic pharma industry.

Force 04:

Bargaining power of buyers:

The unique feature of pharma industry is that the end user of the product is different from

the influencer (read doctor). The consumer has no choice but to buy what doctor says.

However, when we look at the buyer's power, we look at the influence they have on the

prices of the product.

In pharma industry, the buyers are scattered and they as such does not wield much power

in the pricing of the products. However, government with its policies, plays an important

role in regulating pricing through the NPPA (National Pharmaceutical Pricing Authority).

1. Price Sensitivity:

Square pharma is produced the pharmaceutical products which are undifferentiated

product and there are few switching cost.

3. Relative Bargaining Power:

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Two factors related to the relative bargaining power

Number of buyer :

The buyers bargaining power is determined by the number of buyer relative to the

number of suppliers.

Volume per buyer:

It is determined by volume of purchase by single buyer. The number of buyer of

Squre pharma is a single buyer with several alternative suppliers.

Force 05:

Bargaining power of Suppliers:

The pharma industry depends upon several organic chemicals. The chemical industry is

again very competitive and fragmented. The chemicals used in the pharma industry are

largely a commodity.

The suppliers have very low bargaining power and the companies in the pharma industry

can switch from their suppliers without incurring a very high cost.

However, what can happen is that the supplier can go for forward integration to become a

pharma company. Companies like Orchid Chemicals and Sashun Chemicals were

basically chemical companies, who turned themselves into pharmaceutical companies. In

case of Squre pharma thre is low bargaining powers of suppliers.

Liquidity Ratios:

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1. Current ratio=

Year 2010-11= = 1.50

Year2009-10 = = 2.05

Year2008-09 = = 1.45

Year2007-08 = = 1.26

Year2006-07 = = 1.44

Interpretation: The current ratio is one of the most commonly cited financial ratio. It measures the firm’s ability to meet its short term liabilities. A current ratio of 2.0 is occasionally cited as acceptable. Here we see that, the current ratios are fluctuating in last few years. From (2006-07, 2007-08, 2008-09, 2010-11) it was in ups and down. It may not a good sign for square pharmaceutical. But only in 2009-2010 the current ratio was 2.05 which were acceptable if the square pharmaceutical company maintain that ratio it may good for further investment.

2. Quick ratio=

Year 2010-11= =0 .96

Year2009-10 = = 1.06

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Year2008-09 = = 0.65

Year2007-08 = = 0.68

Year2006-07 = = 0.84

Interpretation: We calculate quick ratio to see the real picture of liquid asset. Quick ratio is always less than current ratio. Quick ratio is more stringent than current ratio. In 2010-11 ratio was .96 that means the company has not more liquidate money, because it was less 1.

3. Cash ratio=

Year 2010-11= =0 .19

Year2009-10 = = 0.29

Year2008-09 = = 0.15

Year2007-08 = = 0.06

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Year2006-07 = = 0.06

Interpretation: The Cash ratio is an indicator of a company’s liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash. Cash cover the current liabilities. In 2009-10 cash ratio was commendable but in 2010-11 it is slightly below .

4. Account Receivable Turnover:

Year 2010-11= = 17.44 times

Year2009-10 = = 22.55 times

Year2008-09 = = 20.56 times

Year2007-08 = = 22.92 times

Year2006-07 = = 23.23 times

Average collection period:

Year 2010-11= = 21 days

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Year2009-10 = = 16 days

Year2008-09 = = 18 days

Year2007-08 = = 16 days

Year2006-07 = = 16 days

Interpretation:

In 2006-10 the company’s credit system is so tight but in 2010-11 it’s credit system is slightly flexible. Avg. collection period indicate how much time required to collect the credit.

5. Account Payable Turnover =

Year 2010-11= = 10.50 times

Year2009-10 = = 16.62 times

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Year2008-09 = = 45.66 times

Year2007-08 = = 48.10 times

Year2006-07 = = 70.43 times

Average Payment period:

Year 2010-11= = 35 days

Year2009-10 = = 22 days

Year2008-09 = = 8 days

Year2007-08 = = 8 days

Year2006-07 = = 5 days

Interpretation:

Average payment period indicates that how much time required to payment. If the time period is long it is better for company but if it is continued then it may be

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harmful for the company. Here we see that company’s payment system is moderate position.

6. Inventory Turnover =

Year 2010-11= = 3.03 times

Year2009-10 = = 2.97 times

Year2008-09 = = 2.70 times

Year2007-08 = = 2.40 times

Year2006-07 = = 2.76 times

Average Processing Period:

Year 2010-11= = 120 days

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Year2009-10 = = 123 days

Year2008-09 = = 135 days

Year2007-08 = = 152 days

Year2006-07 = = 132 days

Interpretation:

In 2010-2011 the company’s average processing period was 120 days which is less than previous year. As a manufacturing industry it’s a very good sign. If inventory processing period is high, it’s indicating the processing is slow and more capital is required to process. The average processing period may vary industry to industry.

Cash Conversion Cycle: Avg. Collection Period + Avg. Processing Period – Avg. Payment Period

Year 2010-11 = 21 + 120 – 35

=106 days

Year2009-10 = 16 + 123 - 22

= 117 days

Year2008-09 = 18 + 135 – 8 = 145 days

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Year2007-08 = 16 + 152 – 8

= 160 days

Year2006-07 = 16 + 132 – 5

= 143 days

Interpretation:The cash conversion cycle measures the number of days a company’s cash is tied up in the production and sales process of its operations and the benefit is gets from payment terms from its creditors. As we know that CCC times as lower as possible is good for company. Here we see that the time was becoming lower then previous year that is good sign for company.

Financial Risk Ratios:

7. Debt Equity Ratio =

Year 2010-11= = .047

Year2009-10 = = .088

Year2008-09 = = 0.045

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Year2007-08 = = .072

Year2006-07 = = .067

Interpretation: If debt Equity Ratio is high the cost of capital is low but it has risk of bankruptcy. If the ratio is low the cost of capital is high but bankruptcy risk is low. In 2010-11 the company debt equity ratio is low there less risk of bankruptcy.

8. Debt to total Capital Ratio =

Year 2010-11=

= .045

Year2009-10 =

= .081

Year2008-09 =

= .043

Year2007-08 =

= .067

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Year2006-07 =

=.063

Interpretation:The debt ratio measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, greater the amount of other people’s money being used in an attempt to generate profits.2010-11 it is less than previous year it may not a good sign for the company.

9. Financial Leverage Ratio =

Year 2010-11=

= 1.41

Year2009-10 =

= 1.30

Year2008-09 =

= 1.33

Year2007-08 =

= 1.51

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Year2006-07 =

= 1.43

Interpretation:If financial leverage ratio is low it is good for the company, if it is high it is not goods for a company. In 210-11 FLR is high then previous year, it is not being a good sign.

10. Times Interest Earned =

Year 2010-11=

= 10.23

Year2009-10 =

= 7.71

Year2008-09 =

= 5.96

Year2007-08 =

= 4.86

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Year2006-07 =

= 7.71Interpretation:The times interest earned ratio sometimes called the interest coverage ratio, measures the firm’s ability to make contractual interest payments. The higher the value of this ratio, better able the firm is able to fulfill its interest obligation. Here we can see that in 20210-2011 the ratio was 10.23. That is a good sign for the company.

Operating Performance Ratios:

Operating Efficiency:

11. Total Asset Turnover =

Year 2010-11=

= .69

Year2009-10 =

= .75

Year2008-09 =

= .74

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Year2007-08 =

= .65

Year2006-07 =

= .72

Interpretation:The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. Here we see that, in 2010-2011 it was lower than previous years that refer company may fall to proper utilize its assets.

12. Fixed Asset Turnover =

Year 2010-11=

= 1.93

Year2009-10 =

= 2.04

Year2008-09 =

= 2.00

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Year2007-08 =

= 2.02

Year2006-07 =

= 2.12

Interpretation:

In 2010-2011 it was lower than previous years that refer the company may fall to utilize its fixed assets.

Operating Profitability:

13. Gross Profit Margin = * 100

Year 2010-11= * 100

= 42.81 %

Year2009-10 = * 100

= 42.76 %

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Year2008-09 = * 100

= 42.24 %

Year2007-08 = * 100

= 41.19 %

Year2006-07 = *100

= 43.09 %

Interpretation:

Gross profit margin indicates that how efficient the management is in using its labor & raw materials in the process of production. But in 2010-2011 it was little bit lower compare to the year of 2006-2007.

14. Operating Profit Margin = * 100

Year 2010-11= * 100

= 20.43 %

Year2009-10 = * 100

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= 20.77 %

Year2008-09 = * 100

= 24.12 %

Year2007-08 = * 100

= 20.70 %

Year2006-07 = * 100

= 24.34 %

Interpretation:

The operating profit margin indicates that how efficiently the managers of a firm are doing business operation to gain profit. In 2010-2011 it was a bit of lower compare with the year of 2006-2007.

16. Net Profit Margin = * 100

Year 2010-11= * 100

= 18.80 %

Year2009-10 = * 100

= 18.21 %

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Year2008-09 = * 100

= 19.25 %

Year2007-08 = * 100

= 16.73 %

Year2006-07 = * 100

= 17.37 %

Interpretation:

Net profit margin measures the percentage of each operating income\revenue tk remaining after all costs and expenses. The higher the firms net profit margin, the better position a company are. Here we can see that, in year 2010-11 the ratio was 18.80% which was less compare to the year2008-09.

17. Return on Equity ( ROE ) =

Year 2010-11=

= 18.32 %

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Year2009-10 =

= 17.81 %

Year2008-09 =

= 19 %

Year2007-08 =

= 16.42 %

Year2006-07 = * 100

= 17.77 %

Interpretation:

The return on equity (ROE) is a measure of the rate of return flowing to the banks stockholders. It approximates the net benefit that the stockholders have received from investing their capital in the bank. Generally higher this return, the better of this owner.Here we can see that the roe the company is relatively low to the year of 2008-09

18. Return on Asset ( ROA )=

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Year 2010-11=

= 13.02 %

Year2009-10 =

= 13.74 %

Year2008-09 =

= 14.26 %

Year2007-08 =

= 10.88 %

Year2006-07 =

= 12.43 %

Interpretation:

The Return on asset is primarily an indicator of managerial efficiency. Here we can see that ROE of Year 2010-11 is comparatively low than the year2008-09.

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19. Earnings Per Share =

Year 2010-11 =Tk.129.07

Year2009-10 = Tk. 106.43

Year2008-09 =Tk. 125.25

Year2007-08 = Tk. 154.53

Year2006-07 = 145.74

Interpretation:

Earnings per share are a easy measurable instrument of an institution. More the earning per share holders will get more benefit. Here we can see that earning per share is less than the previous years.

Conclusion:

Square pharmaceutical limited is a leading manufacturer of pharmaceutical formulations. It has today burgeoned into one of the top line conglomerates in Bangladesh.

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Porter’s five force model and Ratios analysis of SQUARE Pharmaceutical

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