Introduction
This paper looks at financial standing of Shire plc., United Kingdom; the company is the pharmaceutical industry. The paper will evaluate the financial performance of the company for the last two years (2008 and 2009); it will concentrate on liquidity ratios, coverage ratios, activity ratios, and profitability ratios.
Brief History
Shire plc. commonly referred to as SHP, is an international pharmaceutical company with its head quarters in the United Kingdom; it has been in the fiancé competitive industry for more than three decades (since 1986) and still growing stronger in the domestic and international arena. The company has Irish origin buts its main operational base is in the United Kingdom, it was registered in the London stock exchange in 1996. The company specializes in different pharmaceutical and medical areas however, its major base is in gastrointestinal (GI) diseases hyperactivity disorder (ADHD), and human genetic therapies (HGT); its accounts are audited by Deloitte, London.
To remain competitive, the company operates an effectively managed accounting department that ensures that the company complies with international accounting reporting standards. The company’s chair is Matthew Emmens while the chief Executive officer is Angus Russell. According to the company’s website, the company has slightly fewer than 4,000 members of staffs.
Liquidity Ratios
Current ratio
The ratio is calculated as follows:
Current ratio = Current assets / Current liabilities
The company in 2008 was able to meet its short-term financial obligations better than in 2009.
Acid ratio
Acid test ratio = Cash, securities, & receivables / Current liabilities
The company in 2008 was able to meet its short-term financial obligations better than in 2009.
Coverage Ratios
Debt-to-total assets
It is calculated as:
Debt-to-total assets = Total debt / Total assets and equities
Interest earned = Earnings Before Interest and Taxes / Interest charges
Considering the above rations the company favorable debt coverage and the interest cover is adequate.
Activity Ratios
Inventory Turnover = Cost of Goods Sold / Average Inventory
Asset turnover = Net sales / Average total assets
Profitability Ratios
Profit margin on sales = Net income / Net sales
Rate of return on common stock equity = (Net income – preferred dividends) / Average common stock stockholders’ equity
Earnings per share = (Net income – preferred dividends) / Weighted shares outstanding
Overall results and findings of the analysis
SHP current ratio for 2008 and 2009 shows a company that has sound financial standing; this means that the company can meet its short-term financial obligation when they fall due, however, when comparing the results of the two years, the company seems to be having an increasing current liability that is not proportional to the increase in current assets. SHP’s gross profit percentage, operating profit percentages and net profit percentage, ROE and ROCE is on the increase, the company use of resources is improving with time although in 2008, the company made a loss.
In 2007, the world experienced a global financial crisis that can explain the poor performance of the company. The same was the case in operating profit ratio and gross profit ratio. The loss made the company work-hard and reverses the trend in 2008 although its assets were reducing. This shows a company whose management has realized the need for an effective management of resources. The fact that when assets are reducing profits are increasing is a clear indication that inefficiency and those assets not bringing benefit to the company are being faced out.
I would not hesitate investing in Shire Plc. because it has a strong financial standing; its assets can cover its liabilities and for the last five years, the company has paid dividends. According to the company’s management report, the company is diversifying its operation to other countries, thus future incomes to shareholders are likely to increase. The competence of the management and their nature of taking well-calculated risks gives the company a competitive advantage.
