TABLE OF CONTENT

Introduction to GSK……………………………………………………………...1

Mission Statement of GSK………………………………………….……...1

Vision of the GSK……………………………………………………...…..1

Financial Ratio Analysis

Introduction ……………………………………………………………………….2

How to analyze business using financial ratios……………………………..…..2

What You Should Know Before Getting Started ………………………………..3

Purpose of Financial Ratio Analysis………………………………………..…...3

Why use Financial Ratio Analysis? ..................................................................3

Balance Sheet of GSK………………………………………………………...…..4

Income Statement of GSK……………………………………………………..…5

Basic Tools of Financial Analysis

Trend Analysis………………………………………………………………....…6

GSK Common Size Analysis Income Statement……………………….……6

GSK Common Size Analysis of Balance Sheet………………………….…..7

1. Common Size Analysis…………………………………………………….…..8

GSK Common Size Analysis Income Statement ……………………….…...8

GSK Common Size Analysis of Balance Sheet …………………………..….9

2. Ratio Analysis

Liquidity Ratios……………………………………………………….…..10Operating / Activity Ratios…………………………………………….….11Solvency Ratios………………………………………………….………..12Investment Ratios………………………………………………….……...12Profitability Ratios……………………………………………….….…….13

References……………………………………………………………….….……14

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Introduction to GSK

GlaxoSmithKline is a British multinational pharmaceutical, biologics, vaccines, and consumer Health Company and it is the world fourth world largest company. The company established in 2000 by the merger of Gloxo-Wellcome plc and SmithKline Beecham plc. GSK has products for major diseases such as asthma, cancer, virus control, infection, mental health, diabetes and digestive conditions. It also has a large consumer healthcare division that produces oral health care and nutritional products, drinks and over the counter medicines, including Sensodyne, Boost and Horlicks.

Mission Statement of GSK

GlaxoSmithKline’s quest is to improve the quality of human life by enabling people to DO MORE, FEEL BETTER, LIVE LONGER. At GSK, their mission acts as an underlying principle to whatever they do. They follow a legacy of great science and innovative healthcare that provides people around the world with healthier and fulfilled lives, every single day.

Vision of the GSK

At GSK, they perform in unison, by following their value system and ethical guidelines as a source of guidance and inspiration, which help them to achieve their vision. Every member of GSK plays a vital role in improving quality of life. GSK’s growth and development can be attributing to the contribution of the skills, talent and ideas of its people.

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Financial Ratio Analysis

Introduction

A sustainable business and mission requires effective planning and financial management. Ratio analysis is a useful management tool that will improve your understanding of financial results and trends over time, and provide key indicators of organizational performance. Managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed. Funders may use ratio analysis to measure your results against other organizations or make judgments concerning management effectiveness and mission impact.

How to analyze business using financial ratios

Ratios are use to evaluate the performance of a business and identify potential problems. Each ratio informs about factors such as the earning power, solvency, efficiency, and debt load of your business. They are use to measure the relationship between two or more components of the financial statements and have greater meaning when the results are compare to industry standards for businesses of similar size and activity.

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What You Should Know Before Getting Started

• The Purpose of Financial Ratio Analysis

• Why Use Financial Ratio Analysis?

• Basic Tools of Financial Analysis

Trend Analysis Common-Size Analysis Component Percentage Ratio Analysis

Purpose of Financial Ratio Analysis

A sustainable business and mission requires effective planning and financial management. Ratio analysis is a useful management tool that will improve your understanding of financial results and trends over time, and provide key indicators of organizational performance. Managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be form. Funders may use ratio analysis to measure your results against other organizations or make judgments concerning management effectiveness and mission impact.

Why use Financial Ratio Analysis?

Financial ratio analysis can be use in two different but equally useful ways. You can use them to examine the current performance of your company in comparison to past periods, from the prior quarter two years ago. Frequently, this can help you identify problems that need fixing. Even better, it can direct your attention to potential problems that can be avoided. In addition, you can use these ratios to compare the performance of your company against that of your competitors or other members of your industry.

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Balance Sheet of GSK

GlaxoSmithKline Pakistan Ltd.Balance Sheet

Year Ended 2011 & 20122012 2011

Non-current assetsFixed assets 5,784,694 4,771,175Intangible- goodwill 955,742 955,742Long term loans to employees 81,959 82,005Long term deposits 16,761 11,780

6,839,156 5,820,702Current AssetsStores and spares 170,501 159,268Stock in trade 5080220 5,602,526Trade debt 350,362 343,404Loan and advances 243,070 163,378Trade deposit and prepayment 92,542 54,657interest accrued 12,205 30,372Refund due to government 40,759 17,104other receivables 438,674 319,800Taxation-payment less provisions 660,092 600,742Investments 198,118 196,706cash and bank balances 2,117,626 2,128,926

9,404,169 9,616,883Total Assets 16,243,325 15,437,585

Share Capital and ReservesShare Capital 2,631,960 2,392,691Reserves 8,839,631 8,715,881

11,471,591 11,108,572Non-current LiabilitiesStaff retirement benefits 50,381 19,706Deferred taxation 570,298 428,296

620,679 448,002Current LiabilitiesTrade and other payables 3,950,339 3,663,772Provisions 200,716 217,239

4,151,055 3,881,011Total Liabilities 4,771,734 4,329,013Total Liabilities & Shareholder Equity 16,243,325 15,437,585

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Income Statement of GSK

GlaxoSmithKline Pakistan Ltd.Profit & Loss StatementYear Ended 2011 & 2012

2012 2011

Net Sales 23,149,964

21,750,147

Cost of Sales 17,068,949

15,931,728

Gross Profit 6,081,015

5,818,419

Selling, marketing and distribution Expense 3,046,675

2,790,373

Administrative Expense 771,322

1,022,493

Other operating expense 192,617

194,066

Other operating income 289,207

461,927

operating profit 2,359,608

2,273,414

Financial Charges 47,512

36,526

Profit before taxation 2,312,096

2,236,888

Taxation 992,000

1,095,972

Profit after taxation 1,320,096

1,140,916

Other Comprehensive IncomeFair value gain on available for sale investment

Reversal of deficit on revolution of available for sale investments - 128

Differed taxation - 45

Total Comprehensive income 1,320,096

1,140,999

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Basic Tools of Financial Analysis

1. TREND ANALYSIS (Horizontal) Trend analysis is one of the tools for the analysis of the company’s monetary statements for the investment purposes. Investors use this analysis tool a lot in order to determine the financial position of the business. In a trend analysis, the financial statements of the company are comparing with each other for the several years after converting them in the percentage.

GSK Trend Analysis

Trend PercentageIncome Statement Analysis 2012 2011 2010

2012 2011 2010 Trend%

Trend %

Trend%

Net Sales 23,149,964

21,750,147

18,916,191 6.4 15 12.9

Cost of Sales 17,068,949

15,931,728

14,063,242 7.1 13.3 12.4

Gross Profit 6,081,015 5,818,419 4,852,949 4.5 19.9 14.4Selling, marketing and distribution Expense 3,046,675 2,790,373 2,301,516 9.2 21.8 18.1

Administrative Expense 771,322 1,022,493 826,236 (24.6) 22.8 (2.9)

Other operating expense 192,617 194,066 171,143 (0.7) 13.4 12.5

Other operating income 289,207 461,927 397,696 (37.4) 16.2 (14.2

)operating profit 2,359,608 2,273,414 1,951,750 3.8 16.5 11.5

Financial Charges 47,512 36,526 20,026 30.1 82.4 (55.6)

Profit before taxation 2,312,096 2,236,888 1,931,724 3.4 15.8 13.2Taxation 992,000 1,095,972 874,341 (9.5) 25.3 31.4Profit after taxation 1,320,096 1,140,916 1,057,383 15.7 7.9 1.6

Other Comprehensive IncomeFair value gain on available for sale investment 3,544 _ _

Reversal of deficit on revaluation of available for sale investments

- 128 _ _

Differed taxation - 45 1,240 _ -96 (77)

Total Comprehensive income 1,320,096 1,140,999 1,059,687 16 8 0.8

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Earnings per share 5.02 4.33 4.42 16 -2 (2.6)

Interpretation and Recommendation on Trend Analysis of Income Statement:As per the trend analysis by comparing the trend percentage between 2012 and 201, the GSK net income increased by twice of the last year, which shows the firm, is in the best position as per its profitability.

Trend Percentage

Balance sheet analysis 2012 2011 2010

2012 2011 2010 Trend %

Trend %

Trend%

Non-current assetsFixed assets 5,784,694 4,771,175 4,189,996 21 14 9.4Intangible- goodwill 955,742 955,742 955,742 0 0 (0.03)Long term loans to employees 81,959 82,005 73,590 (0) 11 20Long term deposits 16,761 11,780 11,871 42 -1 (3.4)

6,839,156 5,820,702 5,231,199 17.5 11.3 4.0Current AssetsStores and spares 170,501 159,268 150,632 7 6 6Stock in trade 5,080,220 5,602,526 4,312,535 -9 30 (5)Trade debt 350,362 343,404 295,762 2 16 (77)Loan and advances 243,070 163,378 144,267 49 13 52.1Trade deposit and prepayment 92,542 54,657 96,234 69 (43.2) (9.4)interest accrued 12,205 30,372 19,443 (60) 56 (13.6)Refund due to government 40,759 17,104 17,534 1.38 (2) 4.8other receivables 438,674 319,800 290,056 37 10 1.6Taxation-payment less provisions 660,092 600,742 623,410 10 (4) 76.6

investments 198,118 196,706 901,955 1 (78) 39.7cash and bank balances 2,117,626 2,128,926 2,808,772 (1) (24) 36.8

9,404,169 9,616,883 9,660,600 (2.2) (0.5) 2.7Total Assets 16,243,325 15,437,585 14,891,799 5.2 3.6 3.1

Share Capital and ReservesShare Capital 2,631,960 2,392,691 1,964,118 10 22 15Reserves 8,839,631 8,715,881 8,835,696 1 (1) (0.5)

11,471,591 11,108,572 10,799,814 3.3 2.9 1.9Non-current LiabilitiesStaff retirement benefits 50,381 19,706 115,240 156 (83) 58.1Deferred taxation 570,298 428,296 416,452 33 3 (0.2)

620,679 448,002 531,692 38.5 (15.7) 8.3Current LiabilitiesTrade and other payables 3,950,339 3,663,772 3,429,292 8 7 10.5Provisions 200,716 217,239 131,001 (8) 66 Nil

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4,151,055 3,881,011 3,560,293 7 9 6.3Contingencies and Commitments _ _ _

Total Liabilities 4,771,734 4,329,013 4,091,985 10.2 6 6.6Total Liabilities & SHE 16,243,325 15,437,585 14,891,799 5.2 3.7 3.2

Interpretation and Recommendation on Trend Analysis of Balance Sheet:GSK balance sheet trend analysis indicates the increase of 1% in the accounting equation, which shows quite good position of the company the company.2. Common Size Analysis Common Size Analysis is a company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company. Formatting financial statements in this way reduces the bias that can occur when analyzing companies of differing sizes. It also allows for the analysis of a company over various time periods, revealing, for example, what percentage of sales is cost of goods sold and how that value has changed over time.Common Size Balance Sheet: A common size balance sheet expresses each item on the balance sheet as a percentage of total assets. Common Size Income Statement: A common size income statement expresses each income statement category as a percentage of total sales revenues.

GSK Common Size Analysis

COMMON SIZE Income Statement Analysis

2012 2011Net % 2012

Net %

2011

Net%

2010Net Sales 23,149,964 21,750,147 100 100 100Cost of Sales 17,068,949 15,931,728 73.7 73 74.3Gross Profit 6,081,015 5,818,419 26.3 27 25.7Selling, marketing and distribution Expense 3,046,675 2,790,373 13.2 13

12.2

Administrative Expense 771,322 1,022,493 3.3 5 4.4Other operating expense 192,617 194,066 0.8 1 0.9Other operating income 289,207 461,927 1.2 2 2.1operating profit 2,359,608 2,273,414 10.2 10 10.3Financial Charges 47,512 36,526 0.2 0 0.1Profit before taxation 2,312,096 2,236,888 10 10 10.2Taxation 992,000 1,095,972 4.3 5 4.6Profit after taxation 1,320,096 1,140,916 5.7 5 5.6

Other Comprehensive IncomeFair value gain on available for sale investmentReversal of deficit on revolution of available for sale investments - 128 -

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Differed taxation - 45 -

Total Comprehensive income 1320096 1140999 6 5

Interpretation and Recommendation on Common-Size Income Statement Analysis:The net income of GSK is increase by 1% as per common size financial analysis by decrease in 1% of gross profit and some changes in expenses including decrease in administrative expense and taxation, which is beneficial for the firm.

COMMON SIZE

Balance sheet analysis2012 2011 Net % 2012 Net % 2011 Net % 2010

Non-current assetsFixed assets 5,784,694 4,771,175 36 31 80Intangible- goodwill 955,742 955,742 6 6 18.2Long term loans to employees 81,959 82,005 1 1 1.4Long term deposits 16,761 11,780 0 0 0.2

6,839,156 5,820,702 42.1 38 35.1Current AssetsStores and spares 170,501 159,268 1 1 1.5Stock in trade 5080220 5,602,526 31 36 44.6Trade debt 350,362 343,404 2 2 3Loan and advances 243,070 163,378 1 1 1.4Trade deposit and prepayment 92,542 54,657 1 0 0.9interest accrued 12,205 30,372 0 0 0.2Refund due to government 40,759 17,104 0 0 0.1other receivables 438,674 319,800 3 2 3Taxation-payment less provisions

660,092 600,742 4 4 6.4

investments 198,118 196,706 1 1 9.3cash and bank balances 2,117,626 2,128,926 13 14 29

9,404,169 9,616,883 58 62 64.9Total Assets 16,243,325 15,437,585 100 100 100

Share Capital and ReservesShare Capital 2,631,960 2,392,691 16 15 18.1Reserves 8,839,631 8,715,881 54 56 81.9

11,471,591 11,108,572 70.6 72 72.5Non-current LiabilitiesStaff retirement benefits 50,381 19,706 0 0 21.6Deferred taxation 570,298 428,296 4 3 78.3

620,679 448,002 4 3 3.6Current Liabilities

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Trade and other payables 3,950,339 3,663,772 24 24 96.3Provisions 200,716 217,239 1 1 3.7

4,151,055 3,881,011 26 25 23.9Total Liabilities 4,771,734 4,329,013 29 28 27.4

Total Liabilities & Shareholder Equity

16,243,325 15,437,585 100 100 100

Interpretation and Recommendation on Common-Size Income Statement Analysis:As per common size of the year 2012 with the comparison of the year 2011 the current assets increased up to 4% from 38% to 42% and liabilities also increased from 28% to 29% . The change in assets is 4 times more than liabilities so GSK is in position.

3. Ratio Analysis

Types of Ratio

There are four main types of ratios, which use to analyze financial performance of a company.

1. Liquidity Ratio2. Efficiency Ratio/ Operating Ratio3. Solvency Ratio4. Profitability Ratio

GSK Ratio Analysis

FORMULA CALCULATION RATIO RECOMMENDATIONLiquidity Ratios

1. Current Ratio

Current Assets / Current

Liabilities

9,404,169 / 4,151,055 2.3

Current Ratio shows the financial strength of the company. It measures the short-term debt paying ability. There are 2.3 in current assets to pay Rs. 1 in current liabilities, which are good enough.

2. Quick Ratio

Quick Assets/ Current

Liabilities

*Quick Assets= C.A-Inventories

4,153,448 / 4,151,055

*Q.A= 9,404,169-(170,501+ 5,080,220)

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The quick ratio tests whether a business can meet its obligations even if adverse conditions occur. There is 1 in current assets to pay Rs. 1 in current liabilities; quick ratios between 0.5 and 1 are consider satisfactory.

3. Cash Ratio Cash / Current Liabilities

2,117,626 / 4,151,055 0.50

Cash ratio measure the immediate amount of cash available to satisfy short-term liabilities. In general 0.5:1 or higher is preferred so cash ratio i.e. 0.5 is not bad in firm but firm have to improve its cash ratio.

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Activity/ Operating Ratios

4.Working Capital Turnover

Net Sales /Working Capital

23,149,964 / 5,253,000 4.4

W.C ratio is a measurement comparing the depletion of working capital to the generation of sales over a period. Working capital 4.4 shows the company effectively using its working capital to generate sales.

5. Inventory Turnover

COGS /Average Inventory

17,068,949 / 5,506,257.5 3.1

Inventory turnover 3.1 indicates that how quickly inventory sells.

6.

No. of days to sell Inventory

365 /Inventory Turnover

365 / 3.1 118

It indicates that in 118 days inventory sells.

7.Receivable Turnover

Sales /Average

Receivable23149964/

350362 66.07

8.

No. of days in Receivable

365 /Receivable Turnover

365/66.07 5

9. Payable Turnover

Purchases /Average Payable

17068949/1388309 12.29

10.No. of days in Payable

365 /Payable

Turnover365/12.29 29

11.Cash Conversion Cycle

No. of days in receivable +

No. of days in Inventory –

No. of days in Payable

118+5-29 94

12.Fixed Asset Turnover

Net Sales /Avrg. Fixed

Assets

23149964 /5784694 4

It measures a company’s ability to generate net sales from fixed-asset investment. Fixed asset turnover 4 shows that company has been more effective in using the investment in fixed-assets to generate revenues.

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13.Total Asset Turnover

Net Sales /Average Total

Assets

23,149,964 / 15,840,455 1.46

It measures a company’s ability to generate net sales from asset investment. 1.46 shows that company has been use its assets to quite efficiently generate sale

Solvency Ratios

14.

Financial Leverage Ratio or Debt to equity Ratio

Total Debt / S.H.E

4,771,734/ 11,471,591 0.415

It indicates the proportion of equity and debt the company is using to finance its assets.

15. Equity Ratio

Total S.H.E / Total Assets

11,471,591/ 16,243,325 0.706

It measure how much shareholders would receive in the event of company-wide liquidation. 0.706 indicates the average position of ratio shareholder may receive.

16. Debt Ratio

Total Liabilities / Total Assets

4,771,734 / 16,243,325 0.293

It indicates the proportion of debt a company has relative to its assets. Debt ratio is less than 1 i.e. 0.293 shows company has more assets than debt.

17.Interest Coverage Ratio

Operating Income / Interest Charges

2,359,608 / 47,512 49.7

Interest Coverage Ratio is the indicator of company’s ability to meet its interest payment obligations. GSK is effectively able to meet its interest payment obligation by the ratio of 49.7

Investment Ratios

18.Earnings Per Share (E.P.S.)

Net income/Number of

shares outstanding

1320096/263196 5.02

The portion of a company’s profit allocated to each outstanding share of common stock. GSK has Rs. E.P.S.

19.Price – Earnings Ratio

Market price per share /

E.P.S73.3 / 5 14.66

Price earnings ratio is the measure of investor’s expectations about the company’s future prospects. GSK p/e ratio explain that an investor is willing to pay Rs.14.66 for Rs.1 of current earnings.

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20. Price to book ratio

Common S.H.E/

No. of shares outstanding

2,631,960 / 500,000,000 0.0

Book value per share is the recorded value of net assets underlying each share of common stock.

21. Dividend Yield

Dividend per share / Market

price per share

4 / 73.3 0.054

Dividend expressed as a rate of return on the market price of the stock i.e. 0.054.

Profitability Ratios

22. Return on asset

EBIT /(Avrg. Total Assets)*100

(2,359,608 / 15,840,455)*100 14.89

ROA indicates that how profitable company’s assets are generating profit. GSK 14.89% get return from its assets.

23.

Return on equity or Return on net worth

(Net Income /Avrg.

S.H.E.)*100

(1,320,096 / 11,290,081.5)*100 11.6

ROE indicates company’s profitability by measuring how much profit generated with the money invested by common stock owners. GSK generated about 11.6% of profit as per S.H.E.

24.

Return on sales or Net profit margin

(Net Income /Net

Sales)*100

(1,320,096 / 23,149,964)*100 5.7

The indicator of management’s ability to control cost. GSK has 5.7% profit margin and that is good enough.

25. Gross Margin

(Gross Profit /Net

Sales)*100

(6,081,015 / 23,149,964)*100 26.3

It shows the measure of the profitability of the company’s product.

26. Operating Margin

(Operating Income / Net Sales)*100

(2,359,608 / 23, 149,964)*100 10.19

It indicates the measure of the profitability from operating profit, which is 10.19% of GSK.

27. EBIT Ratio

(EBIT / Net Sales)*100

(2,359,608 / 23, 149,964)*100 10.19

EBIT ratio shows the profitability of the company before paying interest and tax, which is good for GSK i.e. 10.19%.

28. Earnings Pre Tax

(Pre Tax Profit / Net Sales)*100

(2,312,096 / 23,149,964)*100 10

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References:

GSK_Annual_Report_2012. Books:

Accounting The Basis for Business Decisions by Meigs & Meigs 9th Edition Accounting The Basis for Business Decisions by Meigs Williams Haka Bettner 11 th

Edition Financial Reporting & Analysis by Charles H. Gibson 12th Edition Analysis and use of Financial Statements by G.I.White, A.C.Sondhi, Dov Fried 3 rd

Edition https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf http://www.investopedia.com/terms/c/commonsizefinancialstatement.asp http://www.readyratios.com/reference/analysis/trend_analysis.html http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-

statement-analysis/trend-analysis

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