Financial Performance Evaluation For AstraZeneca Plc

Rationale of the Report

The main purpose of this assessment is to analyze the financial statement of a company which is engaged in the business of Pharmaceutical Company. The assessment would be analyzing the financial performance of the business on the basis of key financial ratios of the company and the same is computed for a period of five years. The company has also undertaken an investment for which an investment appraisal is to be undertaken. The business would also be analyzing the ability of the business to acquire another company.

AstraZeneca plc is engaged in the business of Pharmaceutical business and the company is Anglo-swedish in nature and is also considered to be a multinational company. The headquarter of the company is situated in Cambridge and the business expends extensively on Research and Development and the activities of the business is mainly carried out in three sites which are Cambridge, Gaithersbury and Maryland (Astrazeneca.com. 2018). The company is known to produce the best medicines for serious diseases. The company was formed through a merger agreement between companies Astra AB and Zeneca Group. The profit of the business for the year 2017 is shown to be $ 2,868 million and the same is shown to have significantly improved over the years. This shows that the business is growing in terms of generation of profits of the business.

The main findings of the assessment is to effectively analyze the financial situation of the AstraZeneca plc and also conduct investment appraisal techniques for deciding whether the project which the management wants to invest in is worth making investment or not.

The assessment includes details analysis of the financial performance of the business for which is to be evaluated with the help of key financial ratios which are included in section 2 of the assessment. The section 3 of the assessment would be considering the investment which the company is considering and the same will be evaluated on the basis of investment appraisal techniques like NPV and IRR approach. The section 4 would be containing an analysis of the option whether the company can acquire a business of a anther company or not. The last section which is section 5 would be stating the conclusion of the analysis which is conducted in he earlier sections.

The current financial performance of the business of AstraZeneca plc is analyzed on the basis of the key financial ratios which are computed for the period of five years and the same is shown in the table which is shown below:

Profitability Ratios

The above tables which are shown above, depicts the key areas of the business which are liquidity, solvency, profitability and gearing ratios. The profitability ratio table shows gross profit margin and net profit ratio of the business. Both the estimates are considered to be important indicators for overall success of the business (Delen, Kuzey and Uyar 2013). The gross profit ratio shows 80.28% for the year 2017 which depicts that the profitability of the business has fallen slightly in comparison to previous year’s estimate. Similarly, the net profit ratio has also decreased from previous year’s analysis which suggest that the overall profitability of AstraZeneca plc has reduced significantly. The main reason which can be suggested for the fall in the profitability of the business is due to fall in the sales of the business in comparison to previous year. In a similar situation, the main competitor of AstraZeneca plc which is Pfizer has experienced an increase in the profitability of the business (Ongore and Kusa 2013).  

Background of the Company

The liquidity ratios of a business reveal the ability of the business to meet the current obligations of the business effectively. In case of AstraZeneca plc, both the current ratios and quick ratio of the business shows fall in the estimates in comparison to estimates which was computed for previous year (Weygandt, Kimmel and Kieso 2015). The below graph shows current ratio of the business for a period of five years. 

The above chart represents the current ratio for AstraZeneca plc for a period of five years and the estimates for the current year shows that improvement is need to be made to the current ratio of the business or the business might face financial crisis in future.

The efficiency ratios are computed with a view point of determining whether the business is efficient or not in terms of different activities which are carried out by the business. The efficiency ratio which is computed for the business covers the inventory turnover ratio and receivable turnover ratio. The inventory turnover ratio also shows a slight fall in the estimate and the same is shown to be 1.423 which was 1,768 in 2016. This suggest that the inventory management policy of the business has been changed and the same is also not that much efficient in nature. The receivable turnover ratio reveals the efficiency of the debtor management policy of the business and the same also shows similar results as per inventory turnover ratio. The management need improve the overall efficiency of the business. 

The graph which is depicted above shows the receivable turnover ratio and the estimate of 2016 is shown to be higher than the estimate of 2017. Therefore, the management needs to make changes in the business structure and ensure that the overall efficiency level of the business is maintained.

The gearing ratio are computed in order to estimate the total debt which the business has included in the capital structure of the company. The gearing ratio which is computed for the business of AstraZeneca plc are Debt to equity ratio and debt ratio of the business. Both the ratios which are computed evaluates whether the business is using any portion off debt capital in the capital mix of the business.  

The above figure shows increase in debt to equity ratio of the business which signifies use of more debt capital in the management of the company. The use of more debts in the business also signifies that the overall level of risks in the business is also on the rise. The competitors of like Pfizer and Johnson and Johnson does not use such portion of debt capital in their capital mix.

The ratios which are computed in the above tables reflect different areas of performance for a business. The different areas which are shown in the table and discussion above are profitability, efficiency, liquidity and gearing of the business. The profitability of the business has fallen which is mainly due to the fall in the sales and also rise in the costs of the business and due to which the net profit of the business has reduced. The liquidity ratio which is presented by current ratio also shows slight fall which needs to be considered by the management of the business. The efficiency ratio is depicted receivable turnover ratio and the same reveals that the business needs to maintain the efficiency and also make amendments to the policy of the debtors of the business (Weil, Schipper and Francis 2013). The gearing ratio is shown by debt to equity ratio of the business and the same shows that there has been an increase in the debts of the business and therefore there has been change in the capital structure of the business.

Main Findings

There are a variety of tools which are available to a business for measuring the financial performance of a business and ratio analysis is one to the tool which is available to a business. The estimates which are computed in ratio analysis are based on the values which are provided in the financial statements but it is to be remembered that ratio analysis does not considers the effect of inflation on such estimates and thus are not efficient tools for measuring the performance of the business. In addition to this, there are also certain seasonal factors which can distort ratio analysis and therefore the same needs to be considered before relying on ratios solely. Moreover, ratio analysis does not work effectively for small businesses in comparison to larger businesses.

The investment appraisal techniques are used by businesses for the purpose of estimating a viability of an investment which the business is planning to undertake. In general conditions, three methods are preferred by businesses for estimating the worth of the investment which are NPV analysis, IRR analysis and Payback period.

There are a number of investment appraisal techniques which are available to a business out of which Net Present Value (NPV) is most preferred by businesses as they effectively show how much future earnings can the business anticipated for the future. NPV takes into account the timings of earnings of an investment and also the impact on the cash inflows of the business for a period of future (Dixon et al. 2013). The approach of NPV considers the present value of the initial cash outflow which the business needs to incur in order to start the project and also consider the cash inflows which can be generated by the business. There is a fixed time period which is considered for the analysis and there is also a discounting factor which is used to convert future estimated cash inflows into present value of the business. In todays scenario, NPV analysis is considered to be the most appropriate approach which is applied by businesses.

IRR is also one of the investment appraisal technique which can be used by businesses for the purpose of identifying the net worth of the business (Elmer et al. 2015). A business should always aim for a higher IRR and the same is also considered to be favourable from the point of view of the business (Azzheurova and Bessonova 2015). In case, the results of IRR are shown to be low and the NPV of the project shows favourable result than investment decision would be taken considering both. The problem which is associated with IRR is that the estimate is not applicable in all the case and is certainly not a useful tool in case of long term project.

As per the plan of the business of AstraZeneca plc who are looking to make an investment which is estimated to be within the range of 20 million to 30 million. The business anticipates that the investment would be made for a period of 10 years and the tax and interest is ignored in the computation process (Gotze, Northcott and Schuster 2016). The table which is shown below depicts the NPV and IRR of the project which is computed considering certain assumptions:

Structure of the Report

The above table effectively shows the computation of NPV and IRR of the project which is being considered by the management of AstraZeneca plc for the purpose of making investments. The NPV is computed considering that the business would be able to generate $ 8,000,000 each year as cash inflows for the business and the discount rate is considered to be 12%. The NPV is shown to be positive and the IRR which is computed is shown too be comparatively high and therefore, it can be said that the is project is worth making investment in considering the requirements of the business (Weijermars 2013). The implication of the investment proposal is in favor and therefore the management should proceed with the investment project.

The company is planning to acquire another business which is identified to Blackmores ltd. The company wants to acquire the business in order to expand the range of operations of the business and also obtain exclusive rights to sell the products of Blackmores ltd in the market.

Blackmores ltd is one of the leading pharmaceutical businesses which has its main operations in Australia. The company has open branch companies in many countries and the products of the company is very much popular among the consumers and therefore, it can be said that the business enjoys brand loyalty. The company is highly regarded for the medical products which is offered by the business. The main purpose of acquiring this company is to obtain the synergy effect to give a boost to the business of AstraZeneca plc. In addition to this, the business also wants to expand the operational structure of the business and also the range of product of the company.

The main motive of AstraZeneca plc is to gain synergy effect from the merger and acquisition proposal which is available for the business. Synergy effect is the advantage which business receives when they merge with other business and it is in a way that the whole of operational structure of the business enhances.

The business has always followed the policy of taking more debt capital in the capital structure of the business and the management has the option of using debt capital for the purpose of financing the acquisition process which is being considered by the management of AstraZeneca plc. Alternatively the business can also issue shares to the new shareholders and also shareholders of Blackmores ltd for raising capital needs of the business.

The merger needs to be taken place after considering the market situation and all those factors which can affect the merger and acquisition process. There is also a risk which is related to the merger or acquisition not being able to generate the desired effect for the business. This would lead to losses to the business. The takeover plan which is being prepared by the business might be facing a situation of hostile environment.

The management should go forward with the takeover or acquisition plan however, consent is to be taken from the management of Blackmores ltd. The takeover would be hostile in nature if mutual agreement is not established between the companies. Therefore, the management should move forward with the acquisition plan as the same would help the business of AstraZeneca plc to get synergy effect and also thereby increase the overall revenue of the business. It can also be stated that if the merger is completed the operational efficiency of the business would enhance and further contribute to the financial performance of the business.

Conclusion 

The discussion which is stated in the report above shows that the business of AstraZeneca plc is moderately performing in the market and there is lot of scope of improvement in the business. The financial ratio analysis reveals that the business needs to improve in liquidity, efficiency and profitability aspect of the business. The investment project which the management of AstraZeneca plc is considering is favorable in nature judging the NPV and IRR analysis and therefore the management should proceed with the same. The business is also considering acquiring some business which a good idea for the business as this is will definitely improve the financial performance of the business.  

Reference

Astrazeneca.com. (2018). Shareholder information. [online] Available at: https://www.astrazeneca.com/investor-relations/shareholder-information.html [Accessed 13 Dec. 2018].

Azzheurova, K.E. and Bessonova, E.A., 2015. Development of methods for analysis and assessment of the efficiency of regional investment projects seeking state support. Mediterranean Journal of Social Sciences, 6(5), p.362.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Dixon, J.A., Carpenter, R.A., Fallon, L.A., Sherman, P.B. and Manipomoke, S., 2013. Economic analysis of the environmental impacts of development projects. Routledge.

Elmer, T., Worall, M., Wu, S. and Riffat, S.B., 2015. Emission and economic performance assessment of a solid oxide fuel cell micro-combined heat and power system in a domestic building. Applied Thermal Engineering, 90, pp.1082-1089.

Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.

Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), pp.237-252.

Weijermars, R., 2013. Economic appraisal of shale gas plays in Continental Europe. Applied Energy, 106, pp.100-115.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Computation of NPV and IRR of the Investment Project

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