Financial Accounting Report Policy on Stock Prices

Question: Discuss about the Financial Accounting Report for Policy on Stock Prices. Answer: Introduction The report studies the impact of profitability of the two companies on investor performance indicators selected in this report. The two companies are AstraZeneca Plc and GlaxoSmithKline Plc, which are one of the big non-financial companies. Both of these companies are listed on the London stock exchange and both are pharmaceutical companies. Some analysis would be done in the following sections relating to these companies that would help to understand their profitability and their performance indicator analysis as well (Warren, Reeve and Duchac 2013). Moreover, profitability between the two companies would be compared on investor performance ratios between the two companies. Balance Sheet cum Income Statement of the Two Companies AstraZeneca Plc and GlaxoSmithKline Plc from 2011 to 2014 AstraZeneca GlaxoSmithKline 2014 2013 2012 2011 2014 2013 2012 2011 Net Sales 26095 25711 27973 33591 23006 26505 26431 27387 COGS 5842 5261 6026 5393 7323 8585 7925 7332 Operating Profit 2137 3712 8148 12795 3597 7028 7392 7807 Gross Profit 20253 20450 21947 28198 15683 17920 18506 20055 Operating Expenses 787 595 970 777 12086 10892 11145 12248 Preferred Dividends 0 482 323 312 0 0 0 0 Current Assets 16697 20335 19048 23506 14678 15227 13692 16167 Current Liabilities 17330 16051 13903 15752 13295 13677 13815 15010 Total Assets 58595 55899 53534 52830 40651 42086 41475 41080 Total Liabilities 38949 32646 29588 29358 33715 34274 35665 33048 Shareholder's Equity 19646 23253 23946 23472 4936 7812 5810 8032 Net Income 1249 3267 7646 12367 2756 5436 4565 5261 Weighted Average Share Common Outstanding Shares 1263 1257 1261 1361 2404 2416 2456 2514 Price Per Share 32.185 29.78 29.09 29.75 13.76 16.1 13.55 14.65 Annual Dividends per share 280 280 280 280 800 800 740 750 The balance sheet and income statement of both the companies have combined for the relevance of the calculation of profitability and key performance indicators. Nevertheless, after looking at the balance sheet and income statement, it can be deciphered that the both the pharmaceutical industries show same level of values across years but 2014 shows a dip in values. This may be due to the change in culture and strategies. Profitability Analysis of the Companies Profitability analysis means the analysis of the profit earning capacity of the companies based on the recent results (Grant 2015). The discussion of profitability of these companies would be analyzed in a systemized way. However, the best ways to analyze the profitability are effectively recorded by net profit margin, gross profit margin, operating profit margin and return on assets. Profitability Ratios Formula Net Profit Margin Net Income/Net Sales Operating Profit Margin Net Income - COGS -operating expenses/ Net Sales ROA (Return on Assets) Net Income/ Average Total Assets Gross Profit Margin Net Income-COGS/ Net Sales Table 1 Profitability Ratios AstraZeneca Plc It is a British-Swedish pharmaceutical company. It has its headquarters in London, in the United Kingdom. It is also a multinational company and the seventh largest pharmaceutical company in the world measured by the sales of prescription drugs, in the year 2012. This company has its operations across 100 countries (Astrazeneca.co.uk 2016). It has manifested its strong existence in market by working on drugs aligned with respiratory, inflammation, autoimmune, cardiovascular, metabolic, infection, and oncology and neuroscience diseases. Having partners all across the world, AstraZeneca has a wide global reach. The brief description of its profitability is discussed as follows: Profitability Ratios 2014 2013 2012 2011 Net Profit Margin 4.79% 12.71% 27.33% 36.82% Operating Profit Margin 8.19% 14.44% 29.13% 38.09% ROA (Return on Assets) 2.182% 5.971% 14.37% 23.81% Gross Profit Margin 77.61% 79.54% 78.46% 83.95% Table 2 Profitability Ratios of AstraZeneca from 2011 to 2014 The profits examined on each of the profitability ratio has been declining drastically such that the net profit margin declined from 36.8 2% in 2011 to 4.79% in 2014. However, it followed the same pattern in sales, revenue, and the assets converted into sales (Leuz 2012). Nevertheless, its earnings forecasts are depleting which may be not good for the company as the investor would not want to invest in a company fallowing a declining trend over the years. GlaxoSmithKline Plc It is a pharmaceutical company of British origin. It has its headquarter in London. It is also a multinational company. This company was established in the year 2000. GSK was the fifth largest pharmaceutical company in the year 2015 (Gsk.com 2016). The profitability of the company can be analysed on the help of ratios taken into consideration. Profitability Ratios 2014 2013 2012 2011 Net Profit Margin 11.98% 20.51% 17.27% 19.21% Operating Profit Margin 15.64% 26.52% 27.97% 28.51% ROA (Return on Assets) 6.662% 13.011% 11.059% 12.775% Gross Profit Margin 68.17% 67.61% 70.02% 73.23% Table 3 Profitability Ratios of GlaxoSmithKline from 2011 to 2014 The GlaxoSmithKline another non-financial company and of the competitors of AstraZeneca, even shows a declining trend just like its competitor. The ratios show declining trend but not on a drastic scale. The net profit margin of the company was 19.21% in 2011, which had come down to 11.98% in 2014. The trend is followed by conversion of assets into sales; costs of goods sold as well as rise in operating expenses. Investors Key Performance Indicator (KPI) Analysis on the Companies The key performance indicator (KPI) analysis of investor performance is measured to study the effectiveness of the organization against its objectives. However, choosing correct investor performance indicator is very essential for the organization as it is need to transfer business objectives to measured goals (Barth 2015). The organization is examined on the efficiency of each department for example; IPI useful for finance would be different from IPI useful for the sales department (Mahajan, Naurial and Singh 2014). These assessments very often tend to identify the potential improvements. Hence, performance indicators are often associated with initiatives forrevenue, cost and conversions (Krause and Arora 2010). The indicators that constitute important for investors to evaluate performance are given as: KPIs Formula Debt/Equity Ratio Total Liabilities/ Shareholder's Equity Current Ratio Current Assets/ Current Liabilities E.P.S (Earnings Per Share) Net Income- Preferred Dividends/Weighted Average Share Common Outstanding Shares Dividend Yield Annual Dividends per share/ Price per share Table 4 Key Performance Indicators (KPIs) AstraZeneca Plc The KPIs of AstraZeneca is essentially based on the reputation and government objectives involved in the key areas. The global quality team of this company is one of the largest company based on quality performance. However, the company ensures trends that are data driven as well as designs and delivers a powerful application on each manufacturing site (Baguley and Winter 2012). The company globally has achieved success because evaluating on KPIs factors and the performance can be shown with the help of ratios. KPIs 2014 2013 2012 2011 Debt/Equity Ratio 1.982541 1.403948 1.235613 1.2507669 Current Ratio 0.963474 1.266899 1.370064 1.492255 E.P.S 0.988915 2.215593 5.807296 8.8574578 Dividend Yield 8.699705 9.402283 9.625301 9.4117647 Table 5 KPIs of AstraZeneca from 2011 to 2014 Each KPI shows different level of indication in the organization. The leverage ratio shows that the debt in the organization is increasing from 1.25:1 to 1.98:1 in 2011 and 2014 respectively, which is surpassing the favorable debt position which is 1:1 (Bodie 2013). However, depicting that debt is accumulating. The current ratio is showing a falling trend depicting fall in current assets or the issue of not meeting its short-term debt. The two areas where the investor will have maximum attention would be E.P.S and Dividend Yield. The dividend yield of the remains consistent across all years but E.P.S has declined to larger extent constituting only 0.98% in 2014 against 8.85% in 2011. GlaxoSmithKline Plc GSK company is experiencing a shift in its cultural environment whether is relevant to leadership, people, partnership, process, business or customer results. The changes are mainly manifested due to the drive for change experienced by many organizations. However, in order to define the problem of its key indicators, The company has created a strategy for every group whether it is business partners, stakeholders, employees or society. The RD of GSK is creating a vital environment for sustaining competitive advantage (Mehmood 2012). KPIs 2014 2013 2012 2011 Debt/Equity Ratio 6.830429 4.387353 6.138554 4.114542 Current Ratio 1.104024 1.113329 0.991097 1.077082 E.P.S 1.146423 2.25 1.858713 2.092681 Dividend Yield 58.13953 49.68944 54.61255 51.19454 Table 6 KPIs of GlaxoSmithKline from 2011 to 2014 According to the Key Performance Indicators, the companys debt position is at its worst because of the accumulated long-term debt which has been increasing since 2011 and has reached to 6.83:1 in 2014. However, the current position of the company is considerably low depicting though it is able to pay off its short-term but still the debt burden is increasing on the company. However, the E.P.S value is fluctuating amongst the years but the dividend yield based on the share prices has increased due to change in its cultural environment (Ali, Sharif and Jan 2015). Comparison and Contrast of Profitability between the Companies AstraZeneca Plc and GlaxoSmithKline Plc said to be renown competitors are struggling on maintain profitability of the organizations. According to the annual reports of 2011 to 2014 in both the companies, generating profits had been as issue because the debt of the company is accumulating due non-financial company (Dunne 2015). On the other hand, the general profitability position of GSK shows a better trend than AstraZeneca. There was some downward trend also for GSK, but it was balanced by revue generating in the organization that helped in incurring less of operating expenses. However, the other factor that outlines the brief of this problem is the Crestor crunch faced by AstraZeneca which turned out to be expensive but helped in recovery of GSK (Ficenec 2016). According to the profitability, ratios depicted in Figure 1 (a), (b), (c) and (d) a comparison has been made between the companies. Figure 1 (a) Net Profit Margin of AstraZeneca Plc and GlaxoSmithKline Plc Figure 1 (c) Operating Profit Margin of AstraZeneca Plc and GlaxoSmithKline Plc Figure 1 (d) ROA of AstraZeneca Plc and GlaxoSmithKline Plc However, after comparing the data, the investor should invest in GlaxoSmithKline as the profit margins of the company are better than AstraZeneca Plc. Moreover, the company shows a decreasing trend depicting decrease in revenue and sales of the company from 2011 to 2014. Comparison and Contrast of Key Performance Indicators between the Companies The investors performance ratio has been assumed to be dependent on the leverage ratio, liquidity ratio, valuation ratio and profit margin for both the companies (Delen, Kuzey and Uyar 2013). However, when investigated on investor performance debt, earning per share and dividend given to the shareholders gives an idea to the investor regarding the organizations functionality. Nevertheless, both the companies show a high ratio on long-term as well as short-term debt. Thus, the companies had a decreasing rate of return on assets from the period of 2011 to 2014. Hence, the position relating to the investment performance is almost same for both GSK and AstraZeneca. Therefore, the analysis for investors investment wants to deal with debt on the first followed by dividend yield (Damodaran 2012). Conversely, if the debts grow on increasing in accompany, the profitability as well as dividend payout and yield will too get affected. This makes it vital for the management to assess the situatio n and take necessary measures for rectification (Bhattacharyya 2012). According to the Key Performance Indicators (KPIs), ratios depicted in Figure 2, 3, 4 and Figure 5, a comparison has been made between the companies. Figure 2 Solvency position of AstraZeneca Plc and GlaxoSmithKline Plc Figure 4 Earnings per share of AstraZeneca Plc and GlaxoSmithKline Plc Figure 5 Dividend Yields of AstraZeneca Plc and GlaxoSmithKline Plc However, after comparing on the key performance indicators current ratio, debt-to-equity ratio, EPS and Dividend yield. It can be said that though the GlaxoSmithKline Plcs indicators are declining from 2011 but the company has been showing a consistency. Nevertheless, AstraZeneca Plc has fallen drastically as a result no investor would be interested to invest in the company. Conclusion The assignment can be summarized based on the investment to take place. The profitability and Key Performance Indicators are the basic factors that help the investor to carry out investment practices in the organization. However, the assignment deals with these factors to be assessed on AstraZeneca Plc and GlaxoSmithKline Plc, the two British organizations that are based on profitability Pharmaceutical organizations. The result based on profitability highlighted that the organizations are facing a decreasing trend due to the changes in the current environment. Nevertheless, on profitability factor, the investor will invest in GSK. On the other hand, on KPIs, the investor will invest in AstraZeneca Plc. Recommendations It is highly recommended for the management of both the companies to assess the general pharmaceutical market relating to cultural changes in the environment relating to their sphere of activity and efficiently identifying the reasons for poor market performance. Consequently, changing environment will give investors a warning regarding the investment in the pharmaceutical company. Moreover, both the companies are undervalued and are working flat to return to growth. According to the investment criteria, investment in pharmaceutical sector, especially in these two countries show the traits of classic contrarian value investments. However, it is advised that when one of the companies undertakes RD, then that is the time investor should think of investment. Nevertheless, AstraZeneca Plc and GlaxoSmithKline Plc is trying hard, but as per internal and external factors, AstraZeneca GlaxoSmithKline is performing better and AstraZenecas Competitor is taking the lead. However, Glaxo has 258 products, which are under development and will be marketed by 2020 whereas Astra has 222 new products and expects to be marketed by 2018. Both the companies are in competition and are expected to grow together with a close-knit competition (Hargreaves 2015). The investors are advocated to see other factors as well before investment. References Ali, A., Sharif, I. and Jan, F.A., 2015. 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