Financial Analysis Of GlaxoSmithKline Plc: Ratios And Evaluations

Profitability Ratios

Financial data of GSK is analysed by computing the appropriate ratios depicted in the table below.

The financial strength and weaknesses of the company is evaluated by computing relevant ratios relating to the efficiency gearing, profitability and liquidity position.

Profitability position of GSK is assessed by computing relevant ratios such as net profit margin and return on equity. Net profit margin evaluates company’s ability to generate net income on its total turnover (Abbas and Siregar 2021). Net profit margin of GSK improved by 3% in 2019, as it increased from 13% in 2018 to 16% in 2019. Increase in net profit margin implies that the company has produced higher net income from its sales. Return on equity on other hand indicates how the company utilised its assets to produce income (Palepu et al. 2020). It is clearly evident from the above table that return on equity declined from 110% in 2018 to 29% in 2019. Such significant decline in return on equity implies that GSK has utilized their investors wealth to produce income (Husna and Satria 2019).

Efficiency of GSK in managing its assets is assessed by calculating ratios such as inventory days and receivable days. Inventory days has increased in 2019 to 183 days approx. from 144 days in 2018. Increase in inventory days is not considered to be desirable because it implies that the time taken by the company to clear off or sell their inventories have increased (Osadchy et al. 2018). This in turn is indicative of the fact that company might face issues of cash flow in the future. In addition to this, receivable days shows the time taken by the company to collect is money from the customer sit sold goods on credit (Fridson and Alvarez 2022). It is suggested by the figure that receivable days of GSK has increased 78 days approx. in 2019 from 76 days in 2018. This shows that the credit policy of the company is not so effectively designed to collects its receivables as the receivable days are increasing.

Liquidity of GSK is assessed by calculating current and quick ratio for a time period of two years. Current ratio has increased from 0.75 in 2018 to 0.81 in 2019 and increase in this particular ratio is attributable to increase in the current assets capability to meet the near-term obligations. Increase in current ratio indicates that current assets owned by the company are more capable of clear the dues falling in near term (Pattiruhu and Paais 2020). Quick ratio implies the ability of quick assets to meet the liabilities of near term. It is evident from the calculated figure that quick ratio has increased to 0.56 in 2019 compared to 0.51 in 2018. Increase in quick ratio shows that the company’s quick assets to pay off the short-term dues has increased.  

Gearing or solvency position of GSK helps in assessing the financial leverage that shows the proportion of borrowings and investors wealth in the capital of the company. Financial leverage of the company is evaluated by calculating debt ratio and interest cover. Debt ratio has reduced substantially to 207% in 2019 from 536% in 2018 and reduction in this particular ratio indicates that financial leverage of GSK has reduced. Such reduction is attributable to increase in shareholder’s equity by significant amount. Interest cover assesses the company’s ability to make payment of interest on its outstanding borrowings. The figure of interest cover of GSK shows that the value has increased from 6.87 in 2018 to 7.63 in 2019. It is an important ratio which the lender uses to measure the credibility or credit worthiness of the company. Higher values of interest cover are desirable as it indicates that the interest expense can be borne by the company various times over. On other hand, when the interest cover is low, there is a possibility of making default in paying interest by the company. The increasing ability of the company to meet the interest expense is evident from increasing amount of earnings before interest and taxes (Husna and Satria 2019). Therefore, the overall financial leverage of the company has improved in year 2019.

Efficiency Ratios

The prospect of investing in a company can be assessed investor’s ratio such as earnings per share (EPS) and dividend per share (DPS). EPS has increased to 1.06 in 2019 from 0.82 in 2018. EPS is considered to be an important indicator by the investor when investing in any company. Higher value of EPS indicates that investors earn higher amount of net income on per stocks held by them and vice versa. Increase in EPS is considered desirable as it indicates that the company is profitable to invest in and more profits can be distributed to shareholders (Rao 2021). DPS is another metric which investors relies upon to make investment decisions and it indicates the amount of dividend declared on stocks held by them (Easton et al. 2018). DPS has remained constant at 0.80 for both the years 2018 and 2019. Increasing dividend value indicates positive investment prospect as it signifies that the future earnings of the company will increase.  

From the overall analysis of different relevant financial ratios, it can be concluded that in the year 2019, efficiency of GSK in managing and utilizing its assets has reduced. Liquidity position of GSK has improved due to increasing availability of quick and current assets in managing its dues of short term. Gearing position of the company has also improved in the current year due to improved interest cover and debt ratio. The overall financial performance of GSK has remained promising for the investors as indicated by relevant ratios value.

GlaxoSmithKline Plc is a global healthcare company that operates with the objective of bringing high quality and needed healthcare products. The company operates across ninety-five countries and have over 90000 employees and they work with the leading experts so that their existing capabilities can be complemented. In addition to this, GSK has a world class network of twelve manufacturing units across nine countries. Furthermore, the company operating in different economies ranging from developed, emerging to middle income countries and therefore the diversified operations of the company make it multinational (Gsk.com 2022).

The accounting policies adopted by GSK in relation to foreign currency transaction is that the transactions are recorded at the exchange rate ruling on the date of transaction. Any assets and liabilities relating to foreign currency are translated at the exchange rate on the balance sheet date. The accounting policies tends to reduce the exposure of foreign currency translation by denominating the borrowings in the currencies of cash flow and principal assets that are primarily denominated in Euros, sterling and US dollars (Gsk.com 2022). Market risk exposure is managed by using derivative financial instruments such as interest rate swaps, foreign currency swap, options and foreign exchange forward contracts. Any changes in the derivatives fair value selected as cash flow hedges is recognized in the comprehensive income. In addition to this, change in the derivative fair value that is hedged is recognized in the income statement and such derivative instrument not being classified as hedge accounting is recognised immediately in the income statement (Kananto 2019). In year 2019, certain swaps and forward contract in relation to foreign exchange are designated as net investment hedge and cash flow.

Liquidity Ratios

The policy of transfer pricing of GSK is based on the principle of arm’s length that is in line with the guideline of OECD. Due to the worldwide operation of the company might result in conflicting claims by the tax authorities that results in taxation of profits in different individual countries of operation and consequently, there can be the issue of double taxation. Transfer prices are supported with economic analysis and the alignment with the guidelines of OECD ensures that the profits in different territories are recognized by referring to the value generated by the activities performed therein (De Mooij and Liu 2020). Therefore, such accounting principle impacts the transfer pricing on sales in a way that the company pay only fair share of taxes.

GSK commits to operate at highest corporate governance standard by complying with the provisions of UK corporate governance code by emphasizing increasingly on environmental, social and governance (ESG) value to the overall company’s performance. It is considered by the board that the organization applies and complies with all the principles of the governance code which the financial reporting council maintains. The trust priority of GSK and progress against its commitments is overseen by the board committee reflecting the most important sustainable and responsible area of business growth (Frc.org.uk 2022). In addition to this, they have the oversight of the interest and views of the external and internal stakeholders on the issues that could severely impact the reputation and business of GSK. Some of the committees which has been established by the board committees includes corporate responsibility, science, separation and transformation, corporate governance and nomination, remuneration and audit and risk committees (Elmagrhi et al. 2018). The improved corporate governance performance of the company can be identified from separate functions of different board committees. For instance, audit and risk committee functions by continuing to balance the work between long term perspectives and current issues. In order to enhance the oversight further, such committee would work by focusing more on materials issue. Function of corporate social responsibility committee lies in bringing the perspectives of external stakeholders into the discussion of committees by provoking quality debate. Corporate governance and nomination continue function to create optimal composition for new board of GSK by focusing on transition plan delivery. Furthermore, the company also maintains acknowledged leadership in the issues relating to ESG and the commitment of addressing the sustainability and environmental issues impacting the performance of company. Such issues include global health, pricing and access, diversity and inclusion and working with care and integrity. The board completely focuses on how the company operates by having a clear ESG agenda (Frc.org.uk 2022).

The business societal expectations have always remained high and GSK operates as a responsible entity by increasing scrutiny on the environmental and social impact of the operations. At the same time, trust in the business have continued to be driven down by the long-term socio-economic trends. The long-term issues such as global health inequalities and climate change is addressed by the organization by finding collaborative solutions by partnering with the non-profit organizations and policymakers. Progress on sustainable development goals of UN might have slowed down due to recent economic and political challenges. The principal risk at GSK in the current year is environmental sustainability that also includes climatic change and the principal risk management is the overall accountability of the board (Okike 2019). For accounting environmental sustainability, a dedicated framework of internal control is in place along with the enterprise risk management plan. ESG strategy of the company is focused on tackling the environmental, social and governance barriers. In the current year, the company had step changed sustainability action that includes sourcing 100% electricity from renewable sources by 2025 and maintaining substantial investment in on site solar power. GSK intends to make enhanced disclosure of their sustainability report and it also includes climate related financial disclosures. Such disclosures are consistent with the recommended disclosures of TCFD (Task Force on Climate-related Financial Disclosures). It is since 2019 that reporting on disclosures concerning climate related financials is done by adhering to the TCFD recommendations (Olojede and Erin 2021). The environmental sustainability progress and principal risk is overseen against the environmental target by the board level (Corporate level responsibility) CRC.

Gearing Ratios

The consolidated financial statements of the group are prepared according to the requirements of IFRS (International financial reporting standards) which IASB issues, which is in conformation with the Companies Act 2006 requirements. Preparation of the financial statements of the group by adhering to IFRS gives a fair and true view of the liabilities, assets, profit and financial position of the group. GSK applied various standards of IFRS in preparing its accounts such as IFRS 9 Financial Instruments, IFRS 4 Insurance contracts, IFRS 16 Lease, IFRS 7 Financial instruments disclosures, IFRS 2 Share based payments, IFRS 15 revenue recognition, IFRS 3 Business combination, IFRS 13 Fair value measurements. In each of the three business under IFRS 9, the group has portfolios and the standard permits the adoption of simplified approach to compute expected credit losses (Altaj and Alokdeh 2019).

GSK applies IFRS 9 that requires them how to measure and classify financial liabilities and financial assets along with some contracts to sell and buy. Financial liability and financial assets are required by the entity to recognize in the balance sheet when it becomes party to instruments contractual provisions. IFRS 9 is applied by GSK when it issues insurance contracts and holds reinsurance contracts. GSK also adheres to the requirement of IFRS 16 and the standard requires the entity to recognise all the liabilities and assets arising from lease and thereby assist in representing the lease transaction in a faithful manner. Standard IFRS 7 financial instruments require the entity to make the disclosure of any financial instruments that is of great significance to the entity alongside the nature and extent of risks that arises from such instruments in both quantitative and qualitative terms. Further, GSK recognizes all the share-based payments in its financial statements according to IFRS 2 requirements. In addition to this, recognition also includes transactions with other parties and employees settled in assets, cash or equity instruments of the entity. GSK also adopts IFRS 15 revenue from contracts, when they are required to report the information about timing, nature, amount and uncertainty of cash flow and revenue arising from contracts with customers. Recognition of revenue as per this standard requires the entity to follow few steps. IFRS 3 business combination assist GSK in measuring non-controlling interest either at the proportionate share of acquire net assets or ta fair value. It allows the entity to choose the accounting policy on the basic of transaction to measure non-controlling interest. Accounting of business combination is done by entity using the method of acquisition where the liabilities and assets at the date of acquisition are required to be measured at the fair value. The last IFRS that needs to be discussed is IFRS 13 that defines fair value by setting out the framework for fair value measurement. It is required by the entity to define fair value as the price that would be paid to transfer liability between the participants of market or the price received by selling assets at the date of measurements.

Investor Ratios

Therefore, from the above discussion, it is observed that GSK applied a wide range of accounting standards under IFRS for the treatment of different transactions.

All the financial statements of GSK have been prepared by adhering to different IFRS requirements by making assumptions and estimates affecting the amount of liabilities, assets, expenses and revenue.  Under IFRS 3, business of GSK is required to consider the estimated amount of contingent at the acquisition time and the liability is required to be updated to the fair value latest estimated at the end of each subsequent period (Gsk.com 2022). In the current year, the company implemented interest rate benchmark reform under phase 2 where amendments to different standards were made such as IFRS 7, IAS 39, IFRS 4, IFRS 16 and IFRS 9. IFRS 9 provides for the adoption of simplified approach to compute the expected credit loss. Hence, in accordance with IFRS 9, estimates loss have been computed by the group using provision matrix by applying lifetime historical credit loss (Beerbaum et al. 2019). Financial instruments within receivable, trade and other non-current assets falls within scope of IFRS 9. For the put option, the entity did not recognize the liability arising out of it on the balance sheet according to the requirements of IFRS. Recognition of dividend under IFRS is only done when they are declared and paid. Amount that is received under Insurance contracts are held at surrender value of cash with profit and loss movements. In addition to this, under such contracts by complying with IFRS 9, non-current assets exclude amount relating to derivative financial instruments, deferred tax assets, amount receivables and pension assets. As per IFRS 3, accounting of business combination is done using the method of acquisition. Measurement of identifiable liabilities, assets and contingent liabilities are done at fair value at the date of acquisition (Ifrs.org 2022). At each balance sheet date, contingent consideration liabilities are reassessed in terms of its fair value. Excess of the fair value of contingent liabilities, liabilities and net assets, on transferring of consideration, such excess amount is recorded as goodwill. ViiV Healthcare Shionogi contingent consideration liability valuation was done by applying IFRS and the treatment of such valuation is consistent and reasonable with the standard (Gsk.com 2022). The accounting treatment in relation to lease in done by following IFRS 16, where the right to use assets under the lease arrangements is recognized by the group in the consolidated financial position statement (Gsk.com 2022). In addition to this, the corresponding liability arising from the lease on part of lessor is recognized as obligation to lease.

Although, the group presented and disclosed the fact that impairment review of the intangible assets is consistent and reasonable with IFRS requirements, the future forecast of the consumer healthcare products performance was challenged by audit. Furthermore, it is disclosed in the financial report of the group that the disclosures related to taxation and the estimates relating to uncertain tax positions have been done according to accounting policies and treatment of IFRS. Therefore, from the overall analysis of different IFRS standards adopted by the group, it is inferred that GSK complies with the relevant and applicable accounting standards to treat their different accounting transactions.

References list:

Abbas, D. and Siregar, I.G., 2021. Integrity Of Financial Statements And The Factors. Journal of Accounting Science, 5(1), pp.18-28.

Altaji, F. and Alokdeh, S., 2019. The impact of the implementation of international financial reporting standards no. 15 on improving the quality of accounting information. Management Science Letters, 9(13), pp.2369-2382.

Beerbaum, D., Piechocki, M. and Puaschunder, J.M., 2019. ACCOUNTING REPORTING COMPLEXITY MEASURED BEHAVIORALLY. Internal Auditing & Risk Management, 14(4).

De Mooij, R. and Liu, L., 2020. At a cost: The real effects of transfer pricing regulations. IMF Economic Review, 68(1), pp.268-306.

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Elmagrhi, M.H., Ntim, C.G., Wang, Y., Abdou, H.A. and Zalata, A.M., 2020. Corporate governance disclosure index–executive pay nexus: The moderating effect of governance mechanisms. European Management Review, 17(1), pp.121-152.

Frc.org.uk, 2022. Available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF (Accessed: 27 April 2022).

Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner’s guide. John Wiley & Sons.

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Kananto, S., 2019, February. The Influences of Tax, Bonus Mechanism, Leverage and Company Size Through Company Decision on Transfer Pricing. In 5th Annual International Conference on Accounting Research (AICAR 2018) (pp. 207-212). Atlantis Press.

 Okike 2019. Corporate governance in the United Kingdom. Corporate Governance in Commonwealth Countries (S. 337–365). https://www. researchgate. net/publication/332694263_Corporate_Governance_in_the_United_Kingdom.

Olojede, P. and Erin, O., 2021. Corporate governance mechanisms and creative accounting practices: the role of accounting regulation. International Journal of Disclosure and Governance, 18(3), pp.207-222.

Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and Yumashev, A.V., 2018. Financial statements of a company as an information base for decision-making in a transforming economy.

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