The Shire Plc. Ratio Analysis

Task

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 of the company

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 ration is calculated as follows:

formula

Details

2008(million$)

2009(million$)

Current asset 1570 1044
Current liabilities 703 1020
Current ratio 2.2334 1.023

The company in 2008 was able to meet its short-term financial obligations better than in 2009.

Acid Ratio

formula

Details

2008(million$)

2009(million$)

Current asset 14233 22010
Current liabilities 13425 17640
Current ratio 1.0601 1.247

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:

formula

Details

2008(million$)

2009(million$)

Total debt 708 912
Total assets 3933 4617
Debt to total assets 0.18002 0.1975
formula

Details

2008(million$)

2009(million$)

EBIT

256 643

Interest Expense

139 39.8

Interest Cover

1.842 16.16

Considering the above rations the company favorable debt coverage and the interest cover is adequate.

Activity Ratios

formula

Details

2008(million$)

2009(million$)

Inventory*365 638750 597140
Cost of sales 6598 5775
Average inventory period 96.80 103.40
formula

Details

2008(million$)

2009(million$)

sales 3022 3007
Total assets 3933 4617
Asset Turnover 0.76 0.65

Profitability Ratios

formula

Details

2008(million$)

2009(million$)

Net Profit 156 419
Sales 3022 3007
Net Profit Ratio 0.05% 13.93%
formula

Details

2008(million$)

2009(million$)

Net Profit less preferred divided 156 419
Average common Shareholders’ Equity 1327 1912
Rate of Return On common stock equity 0.1175 0.4594
formula

Details

2008(million$)

2009(million$)

Net Profit

156 419

Weighted Average

5.95 13.05

Basic Earnings per Share

26.2 32.1

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.

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