Report on Financial Statement Analysis
FIN440.08
APRIL 30, 2019
Topic
Report on Financial Statement Analysis between
1. ACI
2. GSK
Prepared For
Mr. Syed Asif Hossain
Lecturer, Department of Accounting & Finance
North South University
Prepared By
Name
Md. Adnan Abir
Md. Shahriar Newaz
Ashim pal
Erfan Ahmed
ID
171 1358 030
171 1603 630
171 1425 030
163 14666 30
1
Contents
Acknowledgement ................................................................................................................................................ 4
Executive Summary.............................................................................................................................................. 5
Company Background.......................................................................................................................................... 6
ACI ..................................................................................................................................................................... 6
GSK .................................................................................................................................................................... 7
Ratio Analysis ....................................................................................................................................................... 8
Liquidity ratios:................................................................................................................................................... 8
Current ratio: .................................................................................................................................................. 8
Quick ratio: ..................................................................................................................................................... 9
Cash ratio: .................................................................................................................................................... 10
Networking capital to total asset:.................................................................................................................. 11
Interval measure:.......................................................................................................................................... 12
Recommendation: ........................................................................................................................................ 12
Long-term solvency Ratios: ............................................................................................................................... 13
Debt ratio: .................................................................................................................................................... 13
Debt/Equity Ratio: ........................................................................................................................................ 14
Equity Multiplier: .......................................................................................................................................... 15
Long-term debt ratio:.................................................................................................................................... 16
Recommendation: ........................................................................................................................................ 17
Coverage Ratio: ................................................................................................................................................ 17
Time ratio: .................................................................................................................................................... 17
Cash Coverage Ratio: .................................................................................................................................... 18
Recommendation: ........................................................................................................................................ 19
Activity Ratios:.................................................................................................................................................. 20
Inventory Turnover ....................................................................................................................................... 20
Days’ Sales in Inventory: ............................................................................................................................... 21
Receivables Turnover:................................................................................................................................... 22
Average collection period: ............................................................................................................................ 23
Net Working Capital Turnover: ...................................................................................................................... 24
Fixed Asset Turnover:.................................................................................................................................... 25
Total Asset Turnover: .................................................................................................................................... 26
Profitability Ratio:............................................................................................................................................. 27
Net Profit Margin: ......................................................................................................................................... 27
Return on Assets (ROA): ................................................................................................................................ 28
Return on Equity (ROE): ................................................................................................................................ 29
Recommendation: ........................................................................................................................................ 30
Market Ratios: .................................................................................................................................................. 30
Price Earnings Ratio: ..................................................................................................................................... 30
2
Book Value per Share of Common Stock:....................................................................................................... 31
Market/Book Ratio: ...................................................................................................................................... 32
Recommendation: ........................................................................................................................................ 32
Pro-forma Statements ........................................................................................................................................ 33
Growth Rate for ACI.......................................................................................................................................... 33
Calculating EFN (External financing needed): .................................................................................................... 33
Growth Rate for GSK......................................................................................................................................... 34
Calculating EFN (External financing needed): .................................................................................................... 34
Increase in debt and equity in the way where Debt to Equity Ratio stay constant: ............................................. 35
Cash Flow from Asset ......................................................................................................................................... 35
CFFA for the ACI ............................................................................................................................................... 35
CFFA for the GSK .............................................................................................................................................. 35
Weighted average cost of capital (WACC) ........................................................................................................ 36
Cost of Equity ................................................................................................................................................... 36
Cost of Debt ..................................................................................................................................................... 37
Calculation of WACC: ........................................................................................................................................ 37
Valuation ............................................................................................................................................................ 39
Calculation ....................................................................................................................................................... 39
For ACI.......................................................................................................................................................... 40
For GSK ......................................................................................................................................................... 41
Comparison on whether undervalued or overvalued ........................................................................................ 41
Reference ............................................................................................................................................................ 42
Appendix ............................................................................................................................................................ 43
3
Acknowledgement
We would like to thank and show our gratitude to Sir Mr. Syed Asif Hossain, lecturer of
Accounting and Finance Department of North South University for giving us the opportunity to
apply ourselves using the knowledge we have received from his classes and guidance. This is for
the first time, we took part in preparing annual reports of industry giants for the mere purpose of
educational views. We would not be able to finish this project as planned or as perfectly without
the guidance of our honorable, Sir Syed Asif Hossain.
4
Executive Summary
The report is about financial statement analyses of two selected companies ACI and GSK. In this
report, we have calculated the ratio analyses for four years from 2014 to 2017 and performed both
Cross-section and Time-series analysis along with interpretation and recommendation. To
calculate Pro-forma balance sheet & income statements for three years (2018-2020) we have
calculated growth rate with the three years’ historical data. Eventually we have calculated the
forecasted cash flow of the firm.
5
Company Background
ACI
In 1973, a multinational pharmaceutical company from UK known as QACI plc, established a
subsidiary in Dhaka, known as ICI Bangladesh Manufacturers Limited. In 1992, ICI plc stripped
its share to local management, and the company was renamed as Advanced Chemical Industries
(ACI) Limited.
ACI formulates and offers a diverse range of more than 387 products covering all major therapeutic
areas, which come in tablet, capsule, powder, liquid, cream, ointment, gel ,ophthalmic and
injection forms. ACI also markets world-renowned branded pharmaceutical products like
Arimidex, Casodex, Zoladex, Atarax etc. from world-class multinational companies like
ASTRAZENECA, UK and UCB, BELGIUM in Bangladesh. ACI is very active in bringing or
formulating newer products with better technology.
ACI introduced the concept of quality management system by being the first company in
Bangladesh to achieve ISO 9001 certification in 1995 and follows the policy of continuous
improvement in all its operations. In association with the concept that a pharmaceutical must
confirm effective management of environment, ACI works with standard environment
management policy, thus adorned with EMS 14001 in 2000.
ACI shows success in maintaining a highly compatible and supportive relationship with the
healthcare community of Bangladesh, with the belief that business excellence is attained through
pursuit of quality by understanding, accepting, meeting and exceeding customer expectation.
6
GSK
It is one of the leading research-based pharmaceutical company in the globe, with a powerful
combination of skills and resources that created a platform for delivering strong growth in today’s
dynamic healthcare environment. GlaxoSmithKline stands out as the only British organization in
the world’s top 20 pharmaceutical companies with over 50 subsidiaries established all over the
globe . GSK has leadership in four major therapeutic areas anti-invectives, central nervous system
(CNS) and respiratory & gastro- intestinal! Metabolic. In addition it is a leader in the important
areas of vaccines and has growing portfolio of oncology products. GSK supplies products to 140
global markets and has over 100,000 employees worldwide. Every second, this organization
delivers more than 35 doses of vaccines. Every minute, more than 1100 prescriptions are written
for GSK products.
In 1873 the company was oriented as Joseph Nathan & Company in New Zealand with the
founding of a small import-export company. It began its journey as a processing unit of abundant
fresh milk of New Zealand. The only product it was producing was Glaxo Baby Food. In 1924
Joseph Nathan & Company entered the pharmaceutical industry with the manufacture of Ostelin,
the first Vitamin D preparation. The importance of the pharmaceutical market soon came into the
play. After the 2nd world war, Glaxo improved rapidly. Glaxo Laboratories Limited absorbed its
parent Joseph Nathan & Company, and went public. In 1995 Glaxo acquired 100% share, of
Wellcome PLC on 1st May, 1995 and formed Glaxo Welcome PLC. Glaxo Wellcome achieved a
number of regulatory milestones for several of its key projects, such as ZEFFIX for the treatment
of influenza and then in 2000 Glaxo Wellcome and SmithKline Beecham merged to form
GlaxoSmithKline; a worldwide research based pharmaceutical company
7
Ratio Analysis
Liquidity ratios:
Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the
calculation of metrics. It is an indicator of whether a company’s current assets will be sufficient to meet the
company’s obligations when they become due.
Current ratio:
It is a liquidity ratio that measures a company’s ability to pay short-term and long-term
obligations. To gauge this ability, the current ratio considers the current total assets of a company (both liquid
and illiquid) relative to that company’s current total liabilities
Current ratio = Current assets /Current liabilities
Current Ratio
ACI
GSK
2014
0.81
1.73
2015
0.97
1.70
2016
0.87
1.66
2017
0.87
1.52
Current Ratio
2
1.5
Interpretation: Current Ratio .87 implies that to pay each
TK.1 of current liability ACI has TK. .87 of current asset.
Current Ratio 1.52 implies that to pay each TK.1 of current
1.73
0.81
1.7
0.97
1.66
1.52
0.87
0.87
1
0.5
0
2014
2015
ACI
2016
GSK
2017
liability GSK has TK. 1.52 of current asset.
Time trend analysis: Over here on ACI’s current ratio we can see there are so fluctuations like in 2017 the
current Ratio of ACI is 0.87. In 2014 it was 0.81 and it increased to 0.97 in 2015 which is the highest among these
4 years and then the current ratio decreased to 0.87 in 2016. Though we can see a lot of fluctuations in the diagram
above but it never went up to 1.5 (which is benchmark) so we can say that ACI is not in good condition in this
term.
In 2017 the current Ratio of GSK was 1.52. It went up to 1.73 in 2014 which is the highest among these 4 years
but then it started to fall. In 2015 the ratio went down to 1.70 and in 2016 it became 1.66. However, we can see
that current ratio is still greater than 1.5 (which is bench mark) so we can say that GSK is in good condition
considering the current ratio.
Cross sectional analysis: Current ratio of GSK among all those 4 years (2014,2015,2016,2017) were greater than
the benchmark which is 1.5 but current ratio of ACI never reached 1.5 during all those years besides we found
fluctuations. So, we can easily say that GSK is in good condition compare to ACI considering current ratio
8
Quick ratio:
This ratio measures the firm’s ability to pay it’s current liabilities with it’s current asset
excluding inventory. Inventory is excluded because it’s counted as least liquid asset. So this ratio tells us the
ability of the company to pay current liabilities without depending on least liquid asset.
Quick ratio: (current asset-inventory)/current liability
Quick Ratio
ACI
GSK
2014
0.42
1.39
2015
0.54
1.41
2016
0.52
1.38
2017
0.53
1.26
Quick Ratio
1.39
1.41
1.38
0.54
0.52
0.53
2015
2016
2017
1.5
1.26
1
Interpretation: Current Ratio .53 implies that to pay each
0.42
0.5
TK.1 of current liability ACI has TK .53 of current asset
excluding inventory.
0
2014
ACI
GSK
Current Ratio 1.26 implies that to pay each TK. 1 of current
liability GSK has TK. 1.26 of current asset excluding inventory.
Time trend analysis: In 2017, ACI Company’s quick ratio was 0.53 times. 2014 it’s quick ratio is in the worst
condition among all these 4 years which was .42 with time the quick ratio started to increase and the highest was
0.54 times in 2015 which was lower than the benchmark which is 1. It means the company had not enough ability
to meet its short term financial liabilities with current liabilities excluding inventory. For GSK, the quick ratio
was in the highest position among these year in 2015 which was 1.41 but it gradually decreased and became the
lowest (1.26) in 2017 but still it’s above the benchmark 1
Cross sectional analysis: The quick ratio’s benchmark is 1. Anything below 1 is bad as it means that the firm
hasn’t the ability to pay off it’s current liability with current asset excluding inventory. So from the diagram above
we can conclude that ACI company’s ability to pay its short-term obligations increased with time but it is not
sufficient enough. In case of GSK, the ability decreased from 2014 to 2017 however it is sufficient because it’s
above the benchmark.
9
Cash ratio: The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability to pay off
its current liabilities with only cash and cash equivalents means most liquid asset. The cash ratio is much more
restrictive than the current ratio or quick ratio because no other current assets can be used to pay off current debt.
Cash Ratio = Current assets /Current liabilities
Cash Ratio
ACI
GSK
2014
0.06
0.99
2015
0.06
0.99
2016
0.05
1.02
2017
0.06
0.98
Cash Ratio
1.5
0.99
0.99
1.02
0.98
0.06
0.06
0.05
0.06
2014
2015
2016
2017
1
Interpretation: Cash Ratio .06 implies that ACI has TK.
.06 of cash to pay each TK. 1 of current liabilities.
0.5
0
ACI
GSK
Cash Ratio .98 implies that GSK has TK..98 of cash to pay each TK. 1 of current liabilities.
Time trend analysis: In 2014 the ACI company’s cash ratio 0.06 and with time it remained almost constant as
shown in the diagram excluding 2015 where it went down to .05. The cash ratio of GSK Company was 0.99 in
2014 but it gradually increased to 1.02 in 2016 being the highest among the 3years but 2017 it decreased a bit.
Cross sectional analysis: According to liquidity consideration higher the cash ratio is better because more the
cash a firm has, they don’t need to depend on other less liquid current asset. In the diagram cash ratio of ACI was
the lowest compare to GSK in all 4years. Also we can see in the diagram GSK company had good cash every
year which is almost 1. So, according to this ratio GSK is in a better position
10
Networking capital to total asset: This ratio measures how much the firm has invested in current
asset apart from the current liabilities out of the total asset investment.
Net working capital to total asset: networking capital/total asset
NWC to total assets
ACI
GSK
2014
-0.14
0.37
2015
-0.02
0.37
2016
-0.08
0.34
2017
-0.08
0.30
Interpretation: NWC to asset ratio -.08 implies that ACI
has invested TK. -.08 out of each TK. 1 that the firm invested
in total asset.
Cash Ratio .98 implies that GSK has TK. .98 of cash to pay
NWC to total assets
0.4
0.3
0.2
0.1
0
-0.1
-0.2
0.37
0.37
-0.02
-0.14
0.34
-0.08
0.3
-0.08
2014
2015
2016
2017
ACI
-0.14
-0.02
-0.08
-0.08
GSK
0.37
0.37
0.34
0.3
each TK. 1 of current liabilities.
Time trend analysis: ACI’s networking capital to total assets is the highest in 2015 being -0.02 and the lowest
in 2014 being -0.18 as we can see from the diagram that there ratio is less than 0 from 2014 to 2017. It means
they don’t have much investment in NWC rather their creditor invested in it. The networking capital to total asset
of GSK Company was the highest in 2014 being 0.37 and the lowest in 2017 being 0.30 as we can see from the
diagram that there is a sharp decline from 2014 to 2017.
Cross sectional analysis: In comparison, the networking capital to total asset GSK is in good position as this
ratio always bigger than 1 always represents healthiness of the firm. Besides if we look at the values like the
highest of GSK company was 0.30 whereas for ACI was -0.02 so it can be said GSK invest in NWC more than
ACI but we can’t say that ACI is doing bad because this ratio might be negative for capital intensive firm because
they don’t need to bother about NWC as their creditor might invest in it, they give their concentration more in
fixed asset.
11
Interval measure: It is a very powerful ratio that measures the number of days a company can operate
using only its current assets without depending on further investment. It is considered a measure of liquidity
since it evaluates a company’s ability to meet its financial obligations.
Interval measure: current asset/average daily operating costs
Interval Measure
ACI
GSK
2014
2015
2016
2017
831.13
848.13
865.39
868.98
978.22 1,123.94 1,006.84 1,121.93
Interval Measure
1500
1123.94
1006.84
1121.93
831.13
848.13
865.39
868.98
2014
2015
2016
978.22
1000
Interpretation: Interval measure 868.98 days means ACI can
500
run their day to day activity for 868.98 days without further
0
investment.
Interval measure 1121.93 days means GSK can run their day to
ACI
2017
GSK
day activity for 1121.93 days without further investment.
Time trend analysis: The interval measure was the highest in 2017 being 868.98 days for ACI and the lowest
was 831.13 days. The number of days the company can operate using only its current assets without further
investment are increased from 2014 to 2017. The interval measure for GSK Company was the lowest 978.22 days
in 2014 but it increases to 1121.93 days in 2017 being the highest.
Cross sectional analysis: In comparison GSK Company’s ability to operate using only its current assets was
more than ACI Company from the very beginning in 2014 till the end in 2017. GSK was able to operate for a
longer period compare to ACI Company without depending on new investment.
Recommendation: After analyzing all liquidity ratio we find that ACI is not in good condition in terms of
liquidity because their current ratio and quick are below the benchmark. Besides their cash ratio is not in a good
health. So, ACI needs to invest in their current assets taking long term debt because short term debt won’t give
them much liquidity.
On the other hand GSK is doing absolutely well considering the liquidity their current ratio and quick ratio is over
benchmark besides difference between this two ratios is not too high it means they didn’t invest in inventory too
much. Cash Ratio, NWC to Total Asset and Interval Measure are also a way more better compare to ACI. GSK
is operating their daily activity in the right way, they don’t need to make any change.
12
Long-term solvency Ratios:
Long-term solvency ratios are proportions to measure the ability of a business to meet its long-term debt
commitments such as interest payments, principal payments, and other long-term debts. Long-term solvency
ratios are also known as financial leverage ratio because long-term debt comes with risk and risk is leverage.
Firms with long-term debt must pay interest on their borrowing and a firm’s chances of bankruptcy depends how
efficiently it maintains its risk. Nevertheless, higher long-term solvency ratios also have advantages because firms
with higher debt have to pay less amount of tax because of its high-interest payment. So, firms position according
is long-term debt obligations depends on its ability to pay interest. Four major solvency ratios are considered to
compare the ability of Heidelberg cement and Lafarge cement to meet their long-term debt obligations.
Debt ratio: The debt ratio is a part of the solvency ratio that measures the extent of company’s leverage. It
refers to the percentage of a firm’s assets that are financed by its total debt. Firms with a higher debt ratio are
considered riskier unless they don’t have enough cash flow available to pay back the debt. For Small Capital
Company high debt ratio is riskier and companies with large capital and regular positive cash flow and profit can
maintain high debt ratio.
Debt Ratio: (Total asset – Total liability) / Total asset
Total Debt Ratio
ACI
GSK
2014
2015
80.58% 67.61%
55.17% 53.20%
2016
77.35%
52.05%
2017
80.12%
57.87%
Debt Ratio
100.00%
80.58%
80.00%
Interpretation: Debt ratio 80.12% implies that ACI has
80.12% of debt financing out of the total asset investment.
60.00%
77.35%
80.12%
67.61%
55.17%
40.00%
52.05%
57.87%
53.20%
20.00%
Debt ratio 57.8% implies that GSK has 57.8% of debt
0.00%
2014
financing out of the total asset investment.
2015
ACI
2016
GSK
2017
Time-series analysis: The debt ratio of ACI from 2014 to 2017 implies that it has correspondingly 80.58, 67.61,
77.35, and 80.12 TK of debt financing out of its each 100 TK of total asset financing. And the debt ratio of GSK
from 2014 to 2017 implies that it has correspondingly 55.1748, 53.1968, 52.0477 and 57.8727 TK debt financing
of its each 100 TK of total asset financing. For both ACI and GSK rest of the asset is financed by through equity.
13
Cross sectional analysis: We can’t say it now that were both companies in good or bad condition yet, we have
to have a look on TIE ratio first if it’s more than 3 they were in good condition and if it’s below 3 they were not
in good condition. As for both company’s debt ratio is greater than 50% in all years. That means both firms
depend more on debt financing. In all years ACI was financing more assets from debt than GSK and that is a
matter of threat for the company if they enable to pay interest on time.
Debt/Equity Ratio:
Debt to equity ratio is another major ratio that is used to measure firms financial
leverage in terms of debt and the value of shareholders’ equity. It is calculated by dividing a firm’s total liability
by its total assets. It refers to the usage of debt in order to finance its asset relative to the value of shareholders’
equity. How much is the debt financing out of each amount of equity financing is measured through debt to equity
ratio.
Debt/Equity Ratio = Total Liabilities / Shareholders’ equity
Debt/Equity
ACI
GSK
2014
4.15
1.23
2015
2.09
1.14
2016
3.41
1.09
2017
4.03
1.37
Debt/Equity Ratio
6.00
4.15
4.00
2.00
1.23
0.00
Interpretation: Debt to equity ratio 4.03 times
2014
implies ACI has debt financing is TK.4.03 out of each
3.41
2.09
1.14
2015
ACI
4.03
1.09
1.37
2016
2017
GSK
Tk.1 of equity financing
Debt to equity ratio 1.37 times implies GSK has debt financing is TK.1.37 out of each Tk.1 of equity financing
Time-series analysis: ACI debt to equity ratio fluctuating yearly in a significant way. Comparing year to year, it
had more debt financing out of its equity financing after 2014. In 2014 it was 4.15 which was highest and in 2015
it was 2.09 which was the lowest among these 4 years. In 2017 it again raised up to 4.03. For GSK, its
Debt to equity ratio was increasing yearly but it’s not that much significant, in 2017 it was 1.37 which is highest
and in 2014 it was 1.13 which was lowest among those 4 years.
Cross-sectional analysis: From 2014 to 2017 ACI debt ratio was higher than GSK ratio. That means ACI’s debt
financing is more than GSK out of it’s each TK of equity financing. Therefore, GSK is depending less on debt
than ACI but before seeing TIE we can’t come up with conclusion.
14
Equity Multiplier:
Equity multiplier measures the amount of the total asset that is financed by equity.
Meanwhile, it also refers to the level of debt financing that is used for obtaining an asset. Higher ratio means
fewer assets are obtained by the firm's stockholders than by firm's creditors.
Equity multiplier = total asset / Total equity = 1 + Debt/Equity ratio
Equity Multiplier
ACI
GSK
2014
5.15
2.23
2015
3.09
2.14
2016
4.41
2.09
2017
5.03
2.37
Equity Multiplier
6.00
5.15
4.00
4.41
3.09
2.23
Interpretation: Equity multiplier 5.03 times implies that
2.00
ACI has Tk.5.03 of asset out of each Tk.1 coming out of
0.00
2.09
2.37
2016
GSK
2017
2.14
2014
equity financing. The rest coming from debt.
5.03
2015
ACI
Equity multiplier 2.37 times implies that ACI has Tk.2.37 of asset out of each Tk.1 coming out of equity
financing. The rest coming from debt.
Time-series analysis: In these years ACI’s equity multiplier was fluctuating from 2014 to 2017. In 2014 it was
at the top among these years which was 5.15. In 2015 it went down to 3.09 times and in 2017 it went up to 5.03
times, they might have borrowed more for total asset expanding. On the other hand, GSK’s equity multiplier was
2.23 in 2014, then it decreased in the next two years and then again it increased in 2017 up to 2.37.
Cross-sectional: ACI’s equity multiplier ratio was higher than GSK in all years. It means GSK was relying more
on equity financing rather than on debt financing for raising total asset. In comparison, ACI was relying less on
equity financing for gaining asset rather than GSK.
15
Long-term debt ratio: Long-term debt ratio measures how the long-term debt capital the firm has used
out of total long term financing. From the total liabilities of a firm, not all debts are "interest payable" such as
salary payable, rent payable, only long-term debts are "interest payable". This ratio shows firm's actual financial
risk from its total debt financing.
Long term debt ratio = LTD / (LTD + TE)
Long-term debt Ratio
ACI
GSK
2014
29.51%
8.20%
2015
24.69%
1.87%
2016
38.51%
0.24%
2017
45.89%
0.76%
Long-term Debt Ratio
60.00%
38.51%
40.00%
29.51%
Interpretation: Long term debt ratio 45.86% implies that
20.00%
8.20%
ACI’s long-term debt is Tk.45.86 out of each TK.100 of total
0.00%
2014
long term financing.
45.89%
24.69%
1.87%
0.24%
0.76%
2015
2016
2017
ACI
GSK
Long term debt ratio .76% implies that GSK’s long-term debt
is Tk.0.76 out of each TK.100 of total long term financing
Time-series analysis: In 2017 this ratio for ACI was 45.89% which is the highest among all. In 2015 it was
24.69% which is the lowest among all these years. Though there are so many fluctuations but the ratio never went
up to 50% it means ACI is more depending on current debt compare to long term debt, which is interest bearing
debt. On the other hand GSK’s long term debt ratio was falling from 2014 to 2017. In 2014 it was 8.20% where
as it became .76% in 2017. It means GSK merely depend on long term debt, their lion share of debt is short term.
Cross-sectional analysis: This ratio tells how much of the total long term financing is the interest bearing. As
this ratio for both of this firm is below 50% it means they depends on short term debt more compare to long term
financing which is interest bearing. Among all these years we see GSK’s long term debt ratio is a way more lower
than ACI’s. IT means ACI’s interest bearing debt is a way more higher than GSK, but we can’t say if the ACI or
GSK are doing good or bad if they have the ability to pay of interest which is measured by PIE ratio. If PIE is
bigger than 3 then this ratio more than 50% won’t be bad else company is at risk of defaulting.
16
Recommendation: After all the long-term solvency ratios we find out both firm has debt financing more than
their equity financing where ACI’s debt financing is more interest bearing compare to GSK’s. So, ACI is at more
risk for defaulting if they don’t maintain a healthy PIE ratio. Besides, GSK’s interesting bearing debt is too low
compare to ACI. If they have the ability to pay more interest which we find out later by PIR ratio, they should
take long term debt as it’s tax deductible.
Coverage Ratio:
It is also called leverage ratio. Leverage ratios measure a firm’s efficiency and ability to service its debt and pay
its obligations such as interest expense.
Time ratio: Times interest earned ratio also known as interest coverage ratio. This ratio measures the ability
of the firm to pay off it’s interest from the EBIT or operating profit. If TIE ratio is above 3, the firm is in good
condition.
TIE: EBIT/Interest
TIE Ratio
ACI
GSK
2014
1.87
343.64
2015
2.22
314.57
2016
2.35
421.65
2017
1.49
745.49
TIE
600.00
400.00
Interpretation: If ACI’s operation remains the same the firm
200.00
will be able to meet it’s interest expense for another 1.49
0.00
times with it’s EBIT
745.49
800.00
421.65
343.64
314.57
1.87
2.22
2.35
1.49
2014
2015
2016
2017
ACI
GSK
If GSK’s operation remains the same the firm will be able to meet its interest expense for another 745.49 times
with it’s EBIT.
17
Time-series analysis: Times interest ratio for both of the companies had been fluctuating from 2014 to 2017.
ACI’s times interest earned ratio in 2014 was 1.87 and it increased in 2015 having 2.22 times and in 2017 it
decreased up to 1.49 times. Times interest ratio for GSK in 2014 was 343.64 and it had decreased in 2015 and
again increased in 2016 and in 2017 it was 745.49 which is highest. GSK has significantly done well in 2017 with
the highest value of times interest ratio among all the four years.
Cross-sectional analysis: In comparison, GSK is more efficient as its times interest ratio is way too much higher
than ACI times interest earned ratio. In every year, GSK could have paid higher times of interest than ACI and
ACI is not good in this position because in every year ACI’s times interest earned ratio is lower than benchmark.
Cash Coverage Ratio: Cash coverage ratio measures the ability of firms to pay interest with its operating
profit including its non-cash depreciation. Higher cash coverage ratio is better for firms which means the firm is
efficient enough to pay its interest with its operating profit along with noncash depreciation
Cash coverage ratio: (EBIT + Depreciation) / Interest expense
Cash
Coverage
Ratio
ACI
GSK
Cash coverage ratio
2014
2.07
361.21
2015
2.49
329.46
2016
2.61
441.10
2017
1.69
780.06
1,000.00
500.00
Interpretation: If operation remain same this ratio 1.69
for ACI and 780.06 for GSK implies that ACI has the
780.06
361.21
329.46
441.10
2.07
2.49
2.61
1.69
2014
2015
2016
2017
0.00
ability to pay its interest expense for 1.69 times and GSK
ACI
GSK
has the ability to pay its interest expense for 780.06 times with EBIT including its noncash expense.
Time-series analysis: Cash coverage ratio for ACI had been fluctuating from 2014 to 2017. ACI’s ratio was 2.07
in 2014 then it increased to 2.49 in 2015 and 2.16 in 2016 and in 2017 it decreased up to 1.69. Cash coverage
ratio for GSK had been increased from 2014 to 2017. GSK’s ratio was 361.21 in 2014 then it decreased to 329.46
in 2015 and increased to 441.10 in 2016 and in 2017 it increased up to 780.06.
18
Cross-sectional analysis: In comparison, GSK is more efficient as its cash coverage ratio is way too much higher
than ACI cash coverage ratio. In every year, GSK ratio goes up which is good for them but ACI is not good in
this position because in every year ACI’s cash coverage ratio goes down.
Recommendation:
We found that GSK’s TIE is a way bigger than benchmark so they should take more loan as interest is tax
deductible. On the other hard ACI’s TIE and cash coverage ratio both are not in a good health as PIE is below 3.
So, they should reduce debt and take more equity financing to get free form default risk
Please Turn Over
19
Activity Ratios:
Activity ratios measure the speed with which various accounts are converted into sales or cash, or inflows or
outflow. The measures in this section are sometimes called asset utilization ratios. These ratios measure how
efficiently or intensively a firm uses its assets to generate sales.
Inventory Turnover: This ratio measures how efficiently the firm is converting it’s inventory in to
sales.
Inventory Turnover: Cost of goods Sold/ Inventory
Inventory Turnover
ACI
GSK
2014
2.88
5.16
2015
2.81
4.77
2016
3.18
4.88
2017
3.41
4.52
Inventory Turnover
6
5.16
4.77
4.88
4.52
2.88
2.81
3.18
3.41
2014
2015
2016
2017
4
Interpretation: Inventory turnover 3.14 means ACI sold
2
and restocked 3.14 times it’s inventory during 2017.
0
Inventory turnover 3.14 means GSK sold and restocked
ACI
GSK
4.52 times it’s inventory during 2017.
Time-series analysis: Compared to 2014, GSK became inefficient in converting its inventories into sales but it
is good enough. On the other hand, ACI‘s power of converting inventories into sales increased significantly in
2017 compared to 2014
Cross sectional analysis: From 2014 to 2017, ACI lagged behind compared to GSK in converting their
inventories into sales. However, from 2014-2017, the inventory turnover value of ACI significantly increased still
GSK is in better positio
20
Days’ Sales in Inventory:
This is also known as the average age of inventory. The days’ sales of
inventory measure the number of days taken by a firm to sell or deliver its inventory.
Days’ Sales in Inventory= 365/ Inventory Turnover
Days' Sales in Inventory
ACI
GSK
2014
126.88
70.78
2015
130.03
76.54
2016
114.74
74.81
2017
106.92
80.75
Days' Sales in Inventory
150
126.88
130.03
114.74
106.92
70.78
76.54
74.81
80.75
2014
2015
2016
2017
100
Interpretation: Days’ dales in Inventory 106.92 days
50
means on and average ACI needs 106.92 days to sell out it’s
0
inventory and restock during 2017
ACI
GSK
Days’ dales in Inventory 80.75 days means on and average
ACI needs 80.75 days to sell out it’s inventory and restock during 2017
Time-series analysis: Compared to the previous years, ACI’s performance has improved significantly in 2017
as it took lower number of days to generate sales from its inventories. Whereas GSK suffered a lot in converting
their inventories into sales in 2017 compared to 2014. GSK’s performance has worsened significantly in 2017.
Cross sectional analysis: For this ratio the lower the better. So, Compared to ACI, GSK was always in a better
condition as GSK’s inventories stayed for a lesser number of periods before being converted into finished goods
unlike ACI from 2014-2016.
21
Receivables Turnover: Receivable turnover ratio measures how frequently receivables are collected and
are generating more sales over an average during a year. This ratio gives an indication of how fast a firm collects
its sales from selling its products (Stephen A. Ross, 201213). The higher the value is, the better it is for the firm.
Receivables Turnover= Net Credit Sales / Accounts receivables
Accounts Receivables
Turnover
ACI
GSK
2014
6.47
6.88
2015
5.73
5.47
2016
5.05
6.21
Interpretation: Accounts receivable turnover 4.65 means on
and average ACI collects it’s receivable 4.65 time during 2017
Accounts receivable turnover 6.7 means on and average ACI
collects it’s receivable 6.7 times during 2017
Accounts Receivable
Turnover
2017
4.65
6.70
8
6.47
6
6.88
4
5.73
6.21
6.7
5.47
5.05
4.65
2015
2016
2017
ACI
GSK
2
0
2014
Time series Analysis: Compared to the previous years, ACI performance has worsened as it generated less sales
after collecting its receivables in 2017 compared to the year 2014, 2015 and 2016. Similar changes can be seen
in the receivables ratios of GSK Cement from 2014-2015. From 2015 it is gradually increased.
Cross sectional analysis: For this ratio the higher the better as it means you are collection your receivable more
in one year. From 2014-2017 GSK was in a better condition compared to ACI as it generated more sales after
collecting its receivables except the year of 2015. In that year ACI is comparatively better than GSK.
22
Average collection period:
The average collection period is the approximate amount of time that it
takes for a business to receive payments owed in terms of accounts receivable. The average collection period is
calculated by dividing the average balance of accounts receivable by net credit sales per day. The lower the better
always works for avg. collection period as there is no benchmark.
Average collection period = Accounts receivable / (Annual Sales/365)
Average collection
period
ACI
GSK
2014
56.42
53.07
2015
63.74
66.71
2016
72.30
58.75
2017
78.45
54.48
Average Collection Period
100
72.3
56.42
63.74
53.07
66.71
58.75
2014
2015
2016
50
78.45
54.48
0
Interpretation: Average collection period 78.45 days
means on and average ACI needs 78.45 days to collect it’s
ACI
2017
GSK
receivable during 2017
Average collection period 54.48 days means on and average GSK needs 54.48 days to collect it’s
receivable during 2017
Time series analysis: The average collection period of ACI in 2014 was 56.42 days. But day by day it was
increased. In 2017 the period was 78.45. But on the other hand GSK’s average time period in 2014 was 53.07
days. But from 2015-17 it was gradually decreasing.
Cross section analysis: without 2015 in every year ACI’s average collection period is higher than GSK that
means ACI's management is not well enough to collect money from their debtors and also GSK's collection days
has been increased in every year which indicates in future that might have face difficulty to operate daily expenses.
23
Net Working Capital Turnover: This ratio measures how firm is using NWC to generate sales, it
shows a portion of investment of firm in current asset. It is positive for NWC oriented firm, and could be negative
for capital oriented firm
Net Working Capital Turnover= Sales/ Net Working Capital
NWC Turnover
ACI
GSK
2014
-8.55
3.83
2015
-65.12
3.29
2016
-12.48
3.41
2017
-12.07
3.64
Interpretation: NWC turnover -12.07 times means Tk. 1
investment of ACI in NCW decrease the revenue by TK.
12.07
NWC Turnover
20.00
0.00
-20.00
-40.00
-60.00
-80.00
3.83
-8.55
3.29
3.41
3.64
-65.12
-12.48
-12.07
2014
2015
2016
2017
ACI
-8.55
-65.12
-12.48
-12.07
GSK
3.83
3.29
3.41
3.64
ACI
GSK
NWC turnover 3.64 times means Tk. 1 investment of GSK
in NCW decrease the revenue by TK. 3.64
Time series analysis: ACI’s net working capital turnover is negative, it means they are more capital oriented
firm. From the 2014 to 2017 the turnover of ACI was negatively increased. But GSK’s turnover ratio is quiet
constant.
Cross section analysis: Here GSK’s turnover is very high than ACI’s turnover. GSK always in a positive
and constant but ACI increased negatively day by day. It means GSK is more NWC oriented and ACI is more
capital oriented.
24
Fixed Asset Turnover: This ratio measures how efficiently fixed assets are being utilized to generate
sales.
The higher the value is, the better it is for the firm.
Fixed Asset Turnover = Sales / Fixed Assets
Fixed Asset Turnover
ACI
GSK
2014
2.84
12.43
2015
2.27
10.88
2016
2.26
8.37
2017
2.24
8.69
Fixed Asset Turnover
15.00
12.43
10.88
10.00
5.00
Interpretation: Fixed asset turnover 2.84 times means Tk. 1
investment of ACI’s fix asset generates Tk. 2.84 of revenue
8.37
8.69
2.84
2.27
2.26
2.24
2014
2015
2016
2017
0.00
ACI
GSK
Fixed asset turnover 12.43 times means Tk. 1 investment of
GSK’s fix asset generates Tk. 12.43 of revenue
Time series analysis: The fixed asset turnover of ACI is very much similar from 2014 to 2017. The highest
turnover of ACI is in 2014. On the other hand GSK’s turnover is very high than the ACI. Highest turnover of
GSK was in 2014 which was 12.43. Then it decreased till 2016, in 2017 it became 8.69
Cross section analysis: In fixed asset turnover ratio GSK is far better performance than ACI. The turnover
ratio of GSK is very high than the ACI fixed asset turnover in all those 4 years.
25
Total Asset Turnover:
This ratio measures how efficiently total assets are being utilized to generate
sales. This ratio gives the value of amount of sales or revenue generated from the sale of each unit of total assets.
The higher the value is, the better it is for the firm.
Total Asset Turnover = Sales / Total Assets
Total Asset Turnover
ACI
GSK
2014
1.17
1.43
2015
1.01
1.20
2016
1.01
1.17
2017
1.01
1.09
Total Asset Turnover
2.00
1.50
Time series analysis: The total asset turnover of aci is
constant from 2015 to 2017. In 2014 the turnover rate is in
the top which is 1.17. On the other side GSK’s turnover
ratio is continuously decreasing from 2014 to 2017. In 2014
1.00
1.43
1.17
0.50
1.20
1.17
1.09
1.01
1.01
1.01
2015
2016
2017
ACI
GSK
0.00
2014
GSK had the high turnover ratio and 2017 was the low.
Cross section analysis: here we can see that GSK’s total asset turnover ratio is always high from the ACI. It is
easily noticeable that the turnover ratio of GSK is decreasing but always high from ACI.
Recommendation:
After seeing asset ratios we see GSK is using their both asset better than ACI. ACI should have a look on their
asset management, as they are not used efficiently to generate sales. So, they need to increase their sales as
increase in sales will increase inventory turnover as cost of goods sold will go up. Besides it will increase the rest
asset turnover as it’s directly related.
26
Profitability Ratio:
A class of money related measurements that are utilized to survey a business' capacity to create profit when
contrasted with its costs and other applicable expenses caused amid a particular timeframe. A profitability ratio
is a measure of profitability, which is a way to measure a company's performance. Profitability is simply the
capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs
and expenses related to earning the income.
Net Profit Margin: The net profit margin measures the percentage of each sales dollar remaining after all
costs and expenses, Including interest, taxes and preferred stock dividends have been deducted. The higher the
firms net profit margin, the better.
Net Profit Margin= (Earnings Available for Common Stockholders / Sales)*100
Profit Margin
ACI
GSK
2014
1.86%
11.50%
2015
2016
8.91% 2.17%
12.41% 10.26%
2017
0.73%
9.85%
Net Profit Margin
15
11.5
12.41
1.86
8.91
2.17
2014
2015
2016
ACI
GSK
10.26
9.85
10
Interpretation: In the above figure we can see that in the year 2017
5
the Net Profit Margin ratios of ACI and GSK are 0.73 and 9.85
0
respectively. This implies that ACI and GSK generated profit of Tk.
0.73 and Tk. 9.85 respectively out of each Tk. 100 of revenue.
0.73
2017
Time Series Analysis: The Net Profit Margin of ACI was 1.86% in 2014. It increased to 8.91% in 2015. The
ration then decreased to 2.17% in 2016 and the again dropped to 0.73% in the year 2017. The Net Profit Margin
of GSK in 2014 was 11.50%. It increased to 12.41% in 2015 and then decreased to 10.26% in 2016. The ration
in 2016-17 was 9.85%. It implies their both net profit margin is decreasing which is not a good sign.
27
Cross Sectional Analysis: Here we can see that ACI's Net Profit Margin decreased from 2014-2015 from 1.86%
to 8.91% whereas in case of GSK it also increased from 11.50% to 12.41%., but it decreased again during 2016
to 2017. From the chart we can clearly see that GSK Net Profit Margin is higher than that of ACI among all these
years
Return on Assets (ROA):
The return on total asset, often called the return on investment (ROA)
measures the overall effectiveness of management in generating profits with its available assets. The higher the
firm’s return on total assets, the better it is.
ROA = Net Income after Tax / Total Asset
ROA
ACI
GSK
2014
2.18%
16.44%
2015
9.00%
14.94%
2016
2017
2.21% 0.74%
11.95% 10.72%
ROA
20.00%
16.44%
15.00%
9.00%
10.00%
Interpretation: ROA .74% means out of Tk. 100 of
investment in total asset ACI generates Tk .74 of net profit
5.00%
14.94%
2.18%
11.95%
2.21%
10.72%
0.74%
0.00%
2014
ROA 10.72% means out of Tk. 100 of investment in total
2015
ACI
2016
2017
GSK
asset ACI generates Tk 10.72 of net profit
Time Series Analysis: The ROA of ACI in 2014 was 2.18%. The rate increased to 9% in 2015. The rate decreased
to 2.21% in 2016 and then dropped to 0.74% in 2017. The ROA of GSK in 2014 was 16.44% which decreased to
14.94% in 2015. The rate further decreased to 11.95% in 2016 which ultimately reached to the lowest rate of
10.72% in 2017. So, both firms are not in good condition as ROA is decreasing.
Cross Sectional Analysis: In case of GSK, the ROA decreased during 2014 to 2017. On the other hand, ACI
ROA was less than the GSK in 2014 to 2017, even though they increase in 2015 but it is still lower than the GSK
at present. It shows that the business operation is not fully utilizing their total assets to generate enough sales. The
ROA of ACI was well below 10.72% which means company was inefficient to use their assets to generate high
profit
28
Return on Equity (ROE):
This ratio indicates how profitable a company is by comparing its net income to its total shareholders' equity.
The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the
company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and
the better return is to investors.
Return on Equity (ROE) = Net Profit ÷ Total Equity
ROE
ACI
GSK
2014
2015
11.21% 27.80%
36.68% 31.92%
2016
9.74%
24.93%
2017
3.73%
25.45%
Interpretation: ROE 3.73% means out of Tk. 100 of
investment of shareholder ACI generates Tk 3.73 of net
profit
Chart Title
40.00%
30.00%
20.00%
10.00%
0.00%
36.68%
31.92%
24.93%
11.21%
27.80%
9.74%
2014
2015
2016
ACI
25.45%
3.73%
2017
GSK
ROE 25.45% means out of Tk. 100 of investment of shareholder GSK generates Tk 25.45 of net profit
Time Series Analysis: The ROE of ACI in the year 2014 was 11.21% which increased to 27.80% in 2015. The
ROE again decreased to 9.74% in 2016 and then again decreased to 3.73% in the year 2017 the worst of all the
previous three years. GSK’s ROE in 2014 was 36.68%. It decreased to a small amount to 31.92% in 2015 it
dropped to 24.93% in 2016. In 2017 the ROE of Crown Cement increased in a small amount which is 25.45%.
Cross Sectional Analysis: Here we can clearly see that GSK ROE is in a better position than ACI. Even though
both the companies faced fluctuating ROE during 2014 to 2017 GSK's ROE was much higher. Even though ACI's
ROE increased in 2015, it was still less than GSK. Therefore, GSK has a higher return on the stockholder’s equity
than ACI. The stockholder’s of ACI might not want to invest further in their company if the returns don’t improve.
It shows that ACI managers are unable to use their overall equity to generate enough returns. If things continue
to stay like this then ACI’s potential stockholders would choose any other company that gives higher return in
comparison to ACI.
29
Recommendation:
We saw PM, ROA and ROE of ACI is much lower than GSK all those years, all those ratios depends on the net
income which is most diluted. So to increase those ratios ACI has to do better in all the sectors like increasing
sales, decreasing cost and so on.
Market Ratios:
These ratios give understanding into how investors believe that the firm is doing in terms of risk and return. These
ratios also reflect common stockholders’ assessment of all aspects of the firm’s past and expected future
performance.
Price Earnings Ratio:
The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings.
P/E Ratio = Market Price per Share / EPS
PE Ratio
ACI
GSK
2014
5.39
22.03
2015
38.76
26.09
2016
23.37
28.72
2017
32.41
27.97
Interpretation: ACI’s P/E ratio 32.41 implies that the market
price is 32.41 times higher than the earning per share.
GSK’s P/E ratio 27.97 implies that the market price is 27.97
P/E Ratio
50.00
40.00
30.00
20.00
10.00
0.00
38.76
22.03
5.39
2014
times higher than the earning per share
28.72
26.09
23.37
2015
2016
ACI
GSK
32.41
27.97
2017
Time Series Analysis: The Price Earnings ratio of ACI in
2014 was 5.39 which increased to 38.75 in 2015. The rate further decreased to 23.37 in 2016 and then increased
to 32.41 in 2017. The Price Earnings ratio of GSK in 2014 was 22.03 which increased to 26.09 in 2015. The rate
further increased to 28.72 in 2016. However, in 2017 the rate decreased to 27.97.
Cross Sectional Analysis: Generally, the lower P/E ratio is expected by the investors. ACI’s P/E was lower than
GSK’s for 2 years and GSK’s P/E was lower than ACI’s for 2 years. The management of both companies might
30
face problems as their ratio increased in 2017. The stockholders might not want to invest further if the ratio
increases again
Book Value per Share of Common Stock: Book value per common share is a measure used by
owners of common shares in a firm to determine the level of safety associated with each individual share after all
debts are paid accordingly.
Book Value per share of common stock = Common stock equity / No. of shares of common
stock outstanding
Book value per Share
ACI
GSK
2014
2015
2016
2017
$108.00 $254.00 $220.72 $228.63
$187.11 $216.15 $214.65 $218.35
$300.00
$200.00
Time Series Analysis: The Book value per share of ACI in
Book value per share
$254.00
$220.72
$228.63
$187.11
$218.35
$216.15
$214.65
$108.00
$100.00
2014 was Tk.107.99 which increased to Tk.254 in 2015. In
2016 it increased to Tk.220.71 and to Tk.228.62 in 2017. The
Book value per share of GSK in 2014 was Tk.187.10 which
$0.00
2014
2015
ACI
2016
GSK
2017
increased to Tk.216.14 in 2015. The value further increased in
2016 to Tk.214.65 and then to Tk.218.35 in 2017.
Cross Sectional Analysis: For both companies, value of the ratio increased as their common stockholders’ equity
increased over times. It indicates their safety level has also increased. This case occurred more for ACI than GSK.
So ACI’s Book Value per Share is better than GSK.
31
Market/Book Ratio: Market to book ratio is just a comparison of market value with the book value of the
firm. In other words, it suggests how much investors are paying against each dollar of book value in the balance
sheet. Also known as price to book value, this ratio tries to establish a relationship between the book values
expressed in the balance sheet and the actual market price of the stock.
Market/Book Ratio = Market Price per share of common stock / Book value per share of
common stock
M/B ratio
ACI
GSK
2014
3.61
8.08
2015
2.21
8.33
2016
2.34
7.16
2017
1.52
7.12
Interpretation: M/B ratio of ACI 1.52 times implies that
market price of the share is 1.52 times higher compare to book
value of the share
M/B Ratio
10.00
5.00
8.08
3.61
8.33
7.16
7.12
2.21
2.34
1.52
2015
2016
2017
ACI
GSK
0.00
2014
M/B ratio of GSK 7.12 times implies that market price of the
share is 7.12 times higher compare to book value of the share
Time Series Analysis: The Market/Book ratio of ACI in 2014 was 3.61 which decreased to 2.21 in 2015. The
ratio increased to 2.34 in 2016 and then decrease to 1.52 in 2017. It fluctuated in the last for years. The M/B ratio
of GSK in 2014 was 8.08 which increased to 8.33 in 2015. The ratio then again decreased to 7.16 in 2016 and
2017 it decreased to 7.12. The ratio here
Cross Sectional Analysis: Both ACI’s and GSK’s ratios were greater than 1. It means that their stock price was
overvalued. GSK’s ratio was always higher than ACI’s ratios. It is not a good sign for either of the company’s
investors. Management might get questioned for not working for the stockholders’ benefit in this case. Having
overvalued stock price can bring danger for the firm. Stock values can fall all of a sudden and that can discourage
a lot of investors.
Recommendation:
We saw that M/B and P/E ratio for both companies are going down though the book value per share went up, So
we can say demand for the share of these two firms are decreasing. So to increase it, they have to do better in
their performance of profitability ratio because it attracts people and make market ratio higher.
32
Pro-forma Statements
Growth Rate for ACI
Sales growth rate for ACI is calculated from 3 years (2014-2017) of revenue using average growth rate method,
21.54%
51.89%
17.74%
From this four years of growth rate we took an average value of growth rate to calculate the pro-forma income
statement and balance sheet. The average growth rate is 0.30
We have forecasted the growth rates for the years 2018- 2020.
Dividend payout ratio was 41.77%
In the pro-forma income statement we have changed all the items with the average growth rate
(0.30) since they are all directly related with sales except “Financial Expense” “Finance Income”, and
“Depreciation” as these particular item works as plug variable.
In the pro-forma balance sheet we have changed all the asset by multiplying with the average growth rate (0.30)
assuming they are all directly related with sales and in the liability side we only changed the current liabilities
with the average growth rate since only current liabilities are related with sales directly and all the other liabilities
will stay constant since they are not directly related with sales. Increment to retain earnings was added to the
ending balance of retain earnings.
Calculating EFN (External financing needed):
For the year 2018
EFN= $2,194,658,578.86
For the year 2019
EFN= $19,222,411,286.01
For the year 2020
EFN= $41,144,001,824.13
We have assumed ACI is using full capacity. Positive EFN are indicating short fall of financing from its equity
or liabilities to maintain its asset.
33
Growth Rate for GSK
Sales growth rate for GSK is calculated from 3 years (2014-2017) of revenue using average growth rate method,
-6.80%
-6.19%
8.16%
From this four years of growth rate we took an average value of growth rate to calculate the pro-forma income
statement and balance sheet. The average growth rate is -0.016
We have forecasted the growth rates for the years 2018- 2020.
Dividend payout ratio in 2017 was 89.99%
In the pro-forma income statement we have changed all the items with the average growth rate (-0.016) since
they are all directly related with sales except financial expenses in interest expense” and depreciation” as they
work as plug variable.
In the pro-forma balance sheet we have changed all the asset by multiplying with the average growth rate (0.016) since they are all directly related with sales and in the liability side we only changed current liabilities with
the average growth rate since only current liabilities are only related with our sales and all the other liabilities will
stay constant since they are not directly related with sales. Addition to retain earnings was added with existing
retain earning s
Calculating EFN (External financing needed):
For the year 2018
EFN= -$162,808,952.18
For the year 2019
EFN= -$322,986,131.66
For the year 2020
EFN= -480,717,362.17
We assume the company company’s fix asset is working at 100% capacity.
34
Increase in debt and equity in the way where Debt to Equity Ratio stay
constant:
GSK’s EFN for all these years are negative so it doesn’t need external financing. On the other hard ACI needs
external financing considering debt to equity ratio constant ACI needs
For the year 2018
Debt: $1,758,448,102.63
Equity: $436,210,476.23
For the year 2019
Debt: $15,401,763,618.01 Equity $3,820,647,668.00
For the year 2020
Debt: $32,966,217,451.36 Equity: $8,177,784,372.77
Cash Flow from Asset
CFFA for the ACI
CFFA for the year 2018= -10,630,935,036.69
,
CFFA for the year 2019= -14,246,166,093.2
CFFA for the year 2020= -18,960,002,454.18
CFFA for the GSK
CFFA for the year 2018= 659,906,255.24
CFFA for the year 2019= 648,190,495.85
CFFA for the year 2020= 636,663,413.16
CFFA involves three major components: Operating cash flow, Capital Spending and change in net working
capital. We calculated cash flow of the firms from assets for both of the firms using this three components. OCF
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comes by summing firms EBIT and depreciation together and then by deducting Income tax is from it. We added
depreciation as it is a noncash and don’t count interest expense as it is part of firms financing. As OCF from all
years are showing positive value that means the firm has enough cash flow to cover its expenses. Next, through
net capital spending, we calculate inflows and outflows of cash from its fixed asset. As ACI has negative value it
means this firm has bought more asset compare to it has sold. Besides GSK has positive value that means the firm
has sold more assets than purchased. Change in net working capital simply means Changes of firms’ current asset
from current liabilities. And from all this amount we can count if the firm is accruing enough cash flow after all
its capital spending and working capital spend that it can distribute to its creditors and shareholders.
Weighted average cost of capital (WACC)
Cost of Equity
The cost of equity is the rate of return required by the company’s ordinary shareholders in order for that investor
to bear the risk of holding that company’s shares. The return consists both of dividend and capital gains. The
returns are expected future returns, not historical returns. There are two formulae commonly used to determine
cost of equity. The first is the dividend growth model and the other formula is the capital asset pricing model. We
have used the capital asset pricing model. To calculate WACC, firstly we have calculated the cost of equity. To
find the cost of equity, we have considered 91 days Treasury bill rate of 2019 that is available in Bangladesh Bank
website. Then we calculated the Beta for both ACI and GSK. We calculated the beta by finding the slope of the
return of the respective companies and the market returns. We have calculated the market return on basis of
average percentage change of ten years DSE Index. After finding the market return we found all the values and
easily calculated cost of equity for both
Using the formula, Re: Rf+ β(Rm-Rf). The Re for ACI is .17 or 17% and the Re for GSK is .15 or 15%
ACI
Beta (β)
Rm
Rf
Re:
1.22
0.15
0.03
0.17
Re: Rf+ β(Rm-Rf)
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GSK
1.02
0.15
0.03
0.15
Cost of Debt
Cost of debt is the overall average rate an organization pays on all its obligations. It consists of bonds and bank
loans. Cost of debt usually appears as an annual percentage. To find the cost of debt, we have found that
Bangladesh does not have any active bond market. Therefore, instead of considering the bond market’s value we
did it by dividing interest expense by EBIT of each company. So now we can see that the Rd of ACI is 67% and
Rd of GSK is 0.13% as this company does not have much long term debt.
GSK
ACI
EBIT
Interest Expense
Tax Rate (t)
Rd
Rd(1-t)
EBIT
Interest Expense
Tax Rate (t)
Rd
Rd(1-t)
$3,245,074,690.00
$2,175,086,651.00
0.57
0.67
0.29
$884,891,000.00
$1,187,000.00
0.29
0.001341408
0.000947455
Calculation of WACC:
WACC (Weighted Average Cost of Capital) is the overall return the firm must earn on its existing assets to
maintain the value of its stock (Stephen A. Ross, 2012-13).
For calculating the WACC, the weight of debt, cost of debt, weight of equity and cost of equity are required. In
case, there is the effect of tax on the cost of debt, it needs to be adjusted by deducting the amount of tax
appropriately.
Here for calculating the WACC of ACI, we calculated the cost of equity and found its value to be 17% and the
cost of debt to be 67%. We found that the weights of debt and equity are 80% and 20%. Then by adding the
amount found by multiplying the cost of equity by the weight of equity to the amount found by multiplying the
after tax cost of debt by the weight of debt, WACC has been calculated. Therefore, the WACC of ACI turned out
to be 26%.
For calculating the WACC of GSK, the cost of equity 15% was multiplied by the weight of equity which was
42%. The required weight of debt which was found to be 58% was multiplied by the cost of debt .09% (before
deducting the taxable amount cost of debt was .13%). Then these two calculated values were added to find the
WACC of GSK which turned out to be .06%.
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WACC of ACI
Equity
Debt
V=E+D
We=(E/V)
Wd=(D/V)
WACC of GSK
$11,020,393,747.00
Equity
$44,425,321,102.00
Debt
$55,445,714,849.00
V=E+D
0.20
We=(E/V)
0.80
Wd=(D/V)
WACC= We*Re + Wd*Rd*(1-T)
WACC of ACI
$2,630,350,000.00
$3,613,468,000.00
$6,243,818,000.00
0.42
0.58
WACC of GSK
0.26
0.06
Assumptions:
WACC has a straight forward interpretation. Calculating the values of equity and debt are quite simple. The
challenging and complicated task is calculating the cost of equity and cost of debt. This is because these values
are calculated basing on the assumption made basing on the data that has been forecasted. As we have calculated
the WACC of 2017 and that has been forecasted, the WACC may be differ from the actual rate in future. In the
CAPM method, the cost of equity is calculated basing on the historical data. Here, we assumed that the future
return would be similar to the return found if it followed the same trend of the past.
The complication faced in calculating the risk free rate is that it can only be compared to the government bonds
having the same time span as the duration of the debt. If the time span is between or longer the rate, the risk free
rate has to be calculated by basing on assumptions. Higher risk premium is not considered in case the debt
increases. This is because higher the debt, the longer will be the maturity of the risk premium.
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Valuation
Value of the company is measured by using the “variable growth formula”.
Free cash flow model is one of the most useful and significant way to evaluate a firm’s value. We have considered
this process as it is preferable to use for estimating the value of a large public company, and ACI and GSK are
two giant multinational companies and cement industries of Bangladesh. Free cash flow mainly involves cash
flows of future and then evaluating firm’s Total value discounting them at the appropriate weighted average cost.
Through this method it’s easy to determine whether the future cash flows are worth more or less than today’s
stock price.
Calculation
Firm’s weighted average cost, growth rate, CFFA, duration of cash flows, number of share and value of debt etc.
are necessary to calculate firms value and that have been calculated in previous sections.
At first, we have used the constant growth rate valuation model to calculate the value of cash flows from the end
of 2020 to infinity.
Value of CFFA2021→infinity
(Here, average growth of cash flow from 2014 to 2017 is used for GSK and ACI)
After that, we calculated all the cash flow from 2021 to infinity and the we discount all the cash flow to the present
value of 2017 and added to find the total value of the firm (Vc). Than Vs the total value of common stockholders’
equity has been calculated by deducting the total debt value of firm from the total value. (Vs= Vc-Vd)
Than we determined the share price on basis of firm’s value, that is calculated dividing the total common
stockholder’s equity by the total number of common stock holder outstanding.
WACC
Growth Rate of CFFA
Estimated Growth
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ACI
GSK
0.26
0.62
0.10
0.06
0.03
For ACI
ACI
2018
2019
2020
2021-infinity
CFFA
Present Value of CFFA
Value of the firm
Value of total Equity
Price per Share
-$10,630,935,036.69
-$8,405,004,315.31
-$14,246,166,093.20
-$8,904,939,153.75
-$18,960,002,454.18
-$9,369,961,763.26
$86,942,495,290.92
$42,966,653,535.36
$16,286,748,303.04
-$5,646,856,776.96
-$117.15
CFFA
Present Value of CFFA
Value of the firm
Value of total Equity
Price per Share
-$10,630,935,036.69
-$8,405,004,315.31
Using Estimated Growth Rate ( g<wacc)
-$14,246,166,093.20
-$8,904,939,153.75
-$18,960,002,454.18
-$9,369,961,763.26
$126,527,327,989.61
$62,529,328,682.05
$35,849,423,449.73
$13,915,818,369.73
$288.70
Note: Here we see that all the forecasted cash flow of ACI on 2018, 2019, 2020 are negative, from the financial
statement we found cash flows of 2015, 2016 were also negative, It happened because we know CFFA= OCF –
NCS – NWC, though the OFC was positive in all those years but the sum of NCS and NWC exceeded OCF. The
reason behind that is the firm might be going for expansion. So, they needed huge investment in NCS and NWC
but OCF wasn’t enough to cover that. Therefore coming CFFA was negative. Also, as the firm is growing at a
high rate so the growth rate of CFFA exceeded WACC so future value of firm from 2021 to infinity should have
been negative but the negative cash flow of 2019 offsets that. But it doesn’t increase firm value that much so the
overall equity becomes negative as for investment the firm had huge borrowing and we are comparing firm’s
value only with the cash flow coming from asset but value of the firm is not only cash coming from asset, it
includes asset value too. So, the overall equity becomes negative which laid to negative share price.
The reason behind investment is to generate cash inflow in future. So, when the management of ACI reach their
forecasted expansion, their investment will go down means NCS and NWC. So, in future the CFFA will become
positive but we can’t predict the day as we don’t know the internal information. So, we calculated a growth rate
(g=10%) of CFFA which is less than WACC and it leads us to positive share price
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For GSK
GSK
CFFA
Present Value of CFFA
Value of the firm
Value of total Equity
Price per Share
2018
2019
2020
2021-infinity
$659,906,255.24
$620,668,075.47
$648,190,495.85
$573,399,069.89
$636,663,413.16
$529,713,914.49
$17,298,964,090.58
$14,393,008,606.49
$16,116,789,666.33
$16,113,501,666.33
$1,337.61
Comparison on whether undervalued or overvalued
Share price for both of the company is overvalued. As both of the company is selling it’s stock at a high price
than its actual value. GSK’s valued stock price is only BDT.1337.61 whereas its selling price was BDT.1553.8
and for ACI, the market price of the stock was BDT. 347.8 and its valued price is negative even the price which
is calculated by estimated growth rate is also less than market price. So both of the company is in very good
position according to their share price. But in contrast, GSK is financially less risky and highly strength than ACI
so investors may consider more investing in GSK. In overall sense, both of the company is suitable preferable for
investors to invest considering their market price.
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Reference
http://www.aci-bd.com/financials/annual-report https://www.gsk.com/en-gb/contactus/worldwide/bangladesh https://lankabd.com/Company/OverviewV2?symbol=ACI
https://lankabd.com/Company/OverviewV2?symbol=GLAXOSMITH
http://lankabd.com/dse/stock-
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Appendix
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