Professional Documents
Culture Documents
Management of risk has always been an integral part of any business and it
has gained momentum in recent years due to globalization and
liberalization. One of the most important areas in day-to-day
management of a firm is to deal with the management of the
working capital, which is defined as all the short-term assets used
in daily operations. These consist primarily of cash, marketable
securities, accounts receivable, and inventory. The balances in
these accounts can be highly volatile as they respond quickly to
changes in the firm’s operating environment. The effective
management of working capital requires both medium-term
planning and immediate reactions to the fast changes taking in the
present business environment. Working capital management is the
functional area of finance that covers all the current accounts of
the firm. It is concerned with the adequacy of current assets as
well the level of risk posed by current liabilities. It is a discipline
that seeks proper policies for managing current assets and
liabilities and practical techniques for maximizing the benefits from
managing working capital. This paper addresses these issues by
over viewing the conceptual and theoretical bases for liquidity, risk
and profitability analysis of Square Pharmaceuticals Limited by
identifying specific problems for common-pool resources, outlining
alternative methodologies for their measurement. This paper
highlights how Square Pharmaceuticals Limited has achieved
adequate liquidity, risk minimization and profit maximization.
Introduction
The effective management of working capital requires both medium-term
planning and immediate reactions to the fast changes taking in the
present business environment. Working capital management is the
functional area of finance that covers all the current accounts of the firm.
It is concerned with the adequacy of current assets as well the level of
risk posed by current liabilities. It is a discipline that seeks proper policies
for managing current assets and liabilities and practical techniques for
maximizing the benefits from managing working capital. The firm’s
policies for managing working capital should be designed to achieve
Page 1
three goals, viz. adequate liquidity, minimization of risk, and
maximization of the profitability.
Page 2
● To assess the correlation between liquidity and profitability
Page 3
various natures. It is an attribute that signifies the capacity to meet
financial obligations as and when required. The study was based on the
financial statements data of Square Pharmaceuticals Limited for the
period (2003-2004 to 2007- 2008) covering various aspects of operating
performance. Data of earlier periods were also used for studying the
relationship between liquidity and profitability. This report is based on
mainly secondary data. Initially, the work is started with data those were
available at Company’s Annual Report and company’s news letter.
Moreover, it becomes helpful to gather some more information from the
website of the company.
Later on, the work progressed through some depth interviews of good
range professionals trying to heat some expected area of the study. We
collect the necessary information over phone because of time constrains.
Then we analyze those data from many angles, in different aspect and
present the information in different segment according to their category,
in compact way. We highlight different important things, which we found
during our survey. After doing all of those we submit the report to the
proper authority.
● Short of time
Page 4
This is our truthful declaration that the report is prepared on both
secondary data and primary data as well. But in some cases, we found
the problem of shortage of necessary data and that cases we will take
hypothetical data, so there is a little chance of misappropriation.
Adequate liquidity
Page 5
Minimization of Risk
Maximizing Profitability
Profitability is the relationship between profits and capital, i.e. the static
resources set aside to rearm those profits, if profitability exceeds the cost
of the firm’s capital that is the weighted average cost of firm’s equity and
borrowed money, and it can call it successful. The investment of excess
cash, minimization of inventories, speedy collection of receivables, and
elimination of unnecessary and costly short-term financing all contribute
to the maximization the profitability.
Conservative policy
Aggressive policy, and
Moderate policy.
Conservative Policy
Page 6
In the case of conservative policy, a firm will hold a relatively high
proportion of working capital total assets to pay safe. As the rate of
return on current assets is normally less than the rate of return on lower
profitability but at t he same time firms it will signify lower risk of failure
to meet the current obligations.
Aggressive Policy
Here, the firm opts for a lower level of working capital thereby investing
in current assets at a lower proportion to total assets. When a firm adopts
this policy, the profitability is high but at high risk in meeting the current
obligations on an achieving the desired level of turnover.
Moderate Policy
1. Profitability and
Effective credit management and better control over the inventory are
required to control the cost of working capital. It is only if a firm is
profitable that in the long run it will receive in cash more than it pays out.
This is more clearly imaginable in the case of a trading business which
buys and sells mostly on cash basis. If such a firm makes loses it is
paying out in cash more than it receives from sales. It can only sustain its
Page 7
cash balances by injections of capital or by selling fixed assets, processes
which cannot be continued for a long time.
Current Ratio
It is the relationship between the current assets and current liabilities and
shows the proportion of current assets available per unit of current
liability. It is worked out using the following formula—
Current Assets
Current Ratio =
Current Liabilitie s
A worthwhile target for the current ratio is 2:1. Firms with inventories
which are easily realized, such as food retailers can manage with
significantly lower ratios, but there is no excuse of going mush below
unless, a firm sees liquid investments as a sound home for its resources.
The current ratio cannot be judge except in relation to the needs of a
particular commercial situation. Anything between 1:1 and 4:1 could be
acceptable. Comparison must be made with industry norms and those
competitors whom one respects. In the absence of other data, 2:1 is not
unreasonable.
Quick Ratio
The quick ratio establishes the relationship between quick or liquid assets
and current liabilities. Quick assets mean current assets excluding
inventory. The exclusion of inventory is for the reason that it is not easily
and readily convertible into cash. A high quick ratio is an indication that
the firm has liquidity and easiness to meet the current obligations. On the
other hand, if the quick ratio is low, it is a clear indicator of illiquidity. The
Page 8
quick ratio is a more rigorous and penetrating test of the liquidity position
when compared to the current ratio. It is calculated as follows—
Quick Assets
Quick Ratio =
Current Liabilitie s
Profitability Ratios
EBIT
Pr ofiability =
Capital Employed
Many a time, when gauging how well business is going, the observers
and analysts look solely at profitability. If course, profit is a major
consideration, being in an unprofitable business is a personal tragedy for
the owners, managers and other stakeholders. Nevertheless, poor or
below average profitability situations can be changed, but, not unless
effective working capital management practice are established. It is
because, through the firm is profitable, but illiquidity persists for a long
time may leads to insolvency and may lead to closure of the firm. Based
on these theoretical backgrounds, a modest attempt has been made to
study the liquidity, profitability and risk trade-off of Square
Pharmaceuticals Limited, a popular pharmaceutical industry in
Bangladesh.
Page 9
OVERVIEW OF SQUARE PHARMACEUTICALS GROUP
In 1964, the Company was turned into a Private Limited Company. After
the independence of Bangladesh, 1975 was quite a significant year for
Square as it established a technical collaboration with Janssen
Pharmaceuticals of Belgium; a subsidiary of Johnson & Johnson, USA. In
its relentless quest for higher technology, Square signed a technological
collaboration agreement with F. Hoffman-La Roche & Co. Ltd in 1982.
1985 was another historical year for Square as the Company gained the
market leadership for the first time in Bangladesh pharmaceuticals
market and since then it has been maintaining its position as the leading
pharmaceutical Company of the country. In 1987, Square became the
first Bangladeshi company to export its product abroad.
The Company stepped into a new era when it was transformed into a
Public Limited Company in 1991 and subsequently it was publicly listed at
both the stock exchanges in the year 1995. Square Pharmaceutical Ltd
has been successfully retaining its market leader position in Bangladesh
for the last consecutive 22 years and its current market share is
approximately 16%.
Page
10
CORPORATE INFORMATION
Corporate Focus:-
Our vision, our mission and our objectives are to emphasize on the
quality of product, process and services leading to growth of the
company imbibed with good governance.
Corporate Governance:-
Executive Management
Page
11
deficiencies with appreciation for exceptional performance. These
operations are carried out by the Executive Management through series
of committees, sub-committees, ad-hock committees, standing
committees assisting the line management.
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.
Page
12
1958 and converted into a public limited company in 1991. The sales
turnover of SPL was more than Taka 7.5 Billion (US$ 107.91 million) with
about 16.92% market share (April 2006– March 2007) having a growth
rate of about 23.17%.
Page
13
VISION, MISSION, AND OBJECTIVES
Vision Mission
Our objectives are to conduct Our vision, our mission and our
transparent business operation objectives are to emphasize on
based on market mechanism within the quality of product, process
the legal & social frame work with and services leading to growth
aims to attain the mission reflected of the company imbibed with
by our vision good governance practices.
Page
14
CHRONOLOGY SINCE INCEPTION
Page
15
1974 Technical Collaboration with Janssen Pharmaceutica, Belgium, a
: subsidiary of Johnson and Johnson International, USA.
2004 Secured the top position for the best published accounts and
: report for 2003 in the manufacturing category for transparency
and excellence in corporate reporting.
Page
16
Liquidity Position of Square Pharmaceuticals Limited
Page
17
2,097,590 thousands to 1,744,758 thousands, whereas, the current
liabilities is increased by 35.43% during the same periods. As a result, the
current ratio has declined from 1.66 in 2004-2005 to 1.52 in 2008-2009
and quick ratio has reached 0.66 in 2008-2009 from 1.08 in 2004-2005.
Page
18
Figure-2: Current Ratio and Quick Ratio of Square Pharmaceuticals
Limited
Page
19
Above figure-1 shows the components of working capital and figure-2
shows the movement of current ratio and quick ratio. It is worth noted
that the current ratios were almost consisted during the study period,
although the current ratios of 2006-2007 and 2007-2008 were decreased
in compare to the previous year, but in 2005-2006 and 2008-2009 were
increased in compare to the previous year. In case of quick ratios it
decreased in 2008-2009 in compare to the 2004-2005 (1.08 to 0.66) but
it increased in compare to the pervious year 2007-2008 (0.40 to 0.66).
Page
20
Liquidity and Profitability Analysis of Square Pharmaceuticals
Limited
Liquidity and profitability are two contradictory term, though one cannot
be effective without other. But excess of one may slowdown of the other.
Management should maintain adequate liquidity and profitability. For the
Page
21
measurement of the liquidity and profitability position of Square
Pharmaceuticals Limited we use the different indicator shown in the
following table. Current assets, total assets, and current assets to total
assets ratio has been used for liquidity indicator, and return on capital
employed has been used for measuring the profitability indicator.
6∑D 2
Correlatio n Coefficien t (r) = 1 −
n(n 2 −1)
6 ×4
Correlatio n Coefficien t (r) = 1 −
5(5 2 −1)
= 0.80
Rank correlation coefficient during the study period was 0.80, indicating
moderate degree of positive correlation between two variables, viz.
liquidity and profitability.
Page
22
2007 4,411,83 12,703,1 8,417,0 1,709,3 34.7 4 20.3 5 -1 1
- 6 27 41 06 3 1
2008
2008 3,843,51 13,251,2 9,949,3 2,368,4 29.0 5 23.8 4 1 1
- 3 43 98 37 0 0
2009
∑D 2
=4
r
t= × n −2
1−r2
0.80
t= × 5 −2
1 − 0.80 2
= 2.31
H0: there is statistical relationship between the two variables, viz. liquidity
and profitability, and
The table value of ‘r’ at 5 percent level of significance for 4= (n-1) degree
of freedom is 2.776, where as, the calculated value is 2.31 Since the
computed value is less than the table value, the null hypothesis H0 is
accepted and concludes that there is a linear relationship between
liquidity and profitability.
Page
23
Figure: Rank Correlation between CTTR and ROCE of Square
Pharmaceuticals Limited
Page
24
Risk versus Profitability
In order to analyze the trade-off between risk and profitability, the risk
analysis of working capital management has been done to assets the
extent of current assets maintained by Square Pharmaceuticals Limited,
adequate enough to meet the current obligations and also to support the
Page
25
given level of operation. Enterprises are said to follow and aggressive
approach when the current assets are financed only by short-term
sources and a conservative approach when current assets are financed
by both short-term and long-term sources. The risk faced by a firm can be
measure with the following formula:
( Ej + Lj ) − Aj
Rk =
Cj
Where,
6∑38
Correlatio n Coefficien t (r) = 1 −
5(5 2 −1)
Value of t:
Page
26
r
t= × n −2
1−r2
− 0.90
t= × 5 −2
1 − −0.90 2
= − 3.58 or / t / = 3.58
The correlation coefficient (r) for ranked data of risk and profitability is
worked out as -0.90 indicates that there is an aggressive association
between two variables, viz. risk and profitability. It’s a common theorem
that risk and profitability are positively correlated, but in our study, it is
Page
27
found that the correlation coefficient r is negative, means that risk and
profitability are negatively correlated.
Since the calculated value of t is greater than the tabulated value, null
hypothesis is rejected and concludes that there is negative relationship
between two variables and Square Pharmaceuticals Limited has made a
negative impact on its profitability that means, if risk is increased then
the profitability of the company would be decreased.
Figure:
Page
28
Page
29