Financial Ratio Analysis of Abbott Laboratories (JINCEY JOSE & SHRADDHA BHATT)

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Financial Ratio Analysis of Abbott Laboratories (JINCEY JOSE & SHRADDHA BHATT)

  1. 1. Financial Ratio Analysis of Abbott Laboratories Presented by: Jincey Jose (A009) Shraddha Bhatt (A024)
  2. 2. Contents • About ABBOTT Laboratories • SWOT analysis • Competitors • Annual Balance Sheet (2011-2013) • Financial statement analysis • Financial ratio analysis • Conclusion • Reference
  3. 3. About ABBOTT laboratories • Headquartered in Mumbai • Founded in 1888, by a young Chicago based physician, Dr.Wallace Calvin Abbott • 150 countries • 35 distribution points, over 4,500 stockists and 150,000 retail outlets • The current market capitalisation stands at Rs.3,625.98 crore. • Sales of Rs.471.81 crore and a Net Profit of Rs 53.46 crore for the quarter ended Dec 2013.
  4. 4. The Six Pillars of Abbott • One Team • Agile • Results • Mutual Respect • Trust • Shape the market
  5. 5. SWOT Analysis • Increasing obsolesce of technology • Broad-based medical innovation • Dependent upon mature products • Available only in certain countries. • Collaborating with Syngene • Strong employee force of 90,000 Strength Weakness Threat Opportu- nities
  6. 6. Major Competitors • Sun Pharma • Dr Reddy’s Labs • Cipla • Lupin • Ranbaxy Labs
  7. 7. Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 ASSETS Cash And Cash Equivalents 3,475,000,000 10,802,000,000 6,812,820,000 Short Term Investments 4,623,000,000 4,372,000,000 1,284,539,000 Net Receivables 6,514,000,000 10,599,000,000 10,384,460,000 Inventory 2,693,000,000 3,793,000,000 3,284,249,000 Other Current Assets 1,942,000,000 1,757,000,000 2,002,706,000 Total Current Assets 19,247,000,000 31,323,000,000 23,768,774,000 Long Term Investments 119,000,000 274,000,000 378,225,000 Property Plant and Equipment 5,971,000,000 8,063,000,000 7,873,955,000 Goodwill 9,772,000,000 15,774,000,000 15,705,380,000 Intangible Assets 5,735,000,000 8,588,000,000 9,989,636,000 Accumulated Amortization - - - Other Assets - - - Deferred Long Term Asset Charges 2,109,000,000 3,213,000,000 2,560,923,000 ANNUAL BALANCE SHEET ( 2011 , 2012 & 2013)
  8. 8. LIABILITIES Accounts Payable 5,948,000,000 10,889,000,000 12,105,473,000 Short/Current Long Term Debt 3,173,000,000 2,391,000,000 3,374,755,000 Other Current Liabilities 386,000,000 - - Total Current Liabilities 9,507,000,000 13,280,000,000 15,480,228,000 Long Term Debt 3,388,000,000 18,085,000,000 12,039,822,000 Other Liabilities 4,791,000,000 9,057,000,000 8,230,698,000 Deferred Long Term Liability Charges - - - Minority Interest 96,000,000 92,000,000 86,312,000 Negative Goodwill - - - Total Liabilities 17,782,000,000 40,514,000,000 35,837,060,000
  9. 9. STOCKHOLDERS' EQUITY Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 12,048,000,000 11,755,000,000 9,817,134,000 Retained Earnings 21,979,000,000 24,151,000,000 20,907,362,000 Treasury Stock -6,844,000,000 -5,591,000,000 -3,687,478,000 Capital Surplus - - - Other Stockholder Equity -2,012,000,000 -3,594,000,000 -2,597,185,000 Total Stockholder Equity 25,171,000,000 26,721,000,000 24,439,833,000 Net Tangible Assets 9,664,000,000 2,359,000,000 -1,255,183,000
  10. 10. Financial Statement Analysis • Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information, by using different accounting tools and techniques. It consists of :- • 1) reformulating reported financial statements • 2) analysis and adjustments of measurement errors • 3) financial ratio analysis on the basis of reformulated and adjusted financial statements.
  11. 11. Financial Ratio Analysis • Ratio Analysis is a technique of analysis and interpretation of financial statements. It is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performances and current financial condition can be determined. • Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%.
  12. 12. Ratio Analysis Liquidity Ratio Profitability Ratio Turnover Ratio Leverage Ratio Classification of Ratio Analysis
  13. 13. Liquidity Ratio • It indicates the short-term position of the organization and also indicates the efficiency with which the working capital is being used. Liquidity Ratio Current Ratio Quick Ratio
  14. 14. Current Ratio • The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. • Current ratio= Current Assets Current Liabilities • Standard Ideal value: 2:1
  15. 15. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Current assets 19,247 31,323 23,76 9 22,318 23,314 Current Liabilities 9,507 13,280 15,48 0 17,262 13,049 Current Ratio Comparison to Industry Abbott Laborat ories 2.02 2.36 1.54 1.29 1.79 Industry Health Care 1.69 1.64 1.73 1.7 1.72 Current Ratio
  16. 16. Calculation & Interpretation Year Calculation Ratio Interpretation 2011 23,769 15,480 1.54 Unsatisfactory 2012 31323 13,280 2.36 Satisfactory 2013 19,247 9,507 2.02 Satisfactory Interpretation: •As compared to Industry Health Care, the current ratio for years 2012 and 2013 are good. •A high current ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of cash and a low current ratio indicates that a firm may have difficulty meeting current obligations. •A too high current ratio signifies the availability of idle cash and inefficient usage of current assets or short term financing facilities.
  17. 17. Quick Ratio • The Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. • Quick Assets = Current Assets – (Inventory + Prepaid Expenses) • Quick ratio = Total quick assets Current liabilities • Standard Ideal value: - 1:1
  18. 18. Quick Ratio Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Cash and cash equivalents 3,475 10,802 6,813 3,648 8,809 Investments, primarily bank time deposits and U.S. treasury bills 4,623 4,372 1,285 1,803 1,123 Restricted funds , primarily U.S. Treasury Bills. – – – 1,872 – Trade receivables less allowances 3,986 7,613 7,684 7,184 6,542 Total quick Assets 12,084 22,787 15,781 14,508 16,474 Current liabilities 9,507 13,280 15,480 17,262 13,049 Quick Ratio, Comparison to Industry Abbott Laboratories 1.27 1.72 1.02 0.84 1.26 Industry Health Care 1.19 1.17 1.27 1.21 1.2
  19. 19. Calculation and Interpretation Year Calculation Ratio Interpretation 2011 12,084 9,507 1.27 Good 2012 22787 13,280 1.72 Good 2013 15781 15,480 1.02 Satisfactory Interpretation: •As compared to Industry Health Care, the Quick ratio for years 2011, 2012 & 2013 are good. •The greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets) and if less than 1 cannot currently fully pay back its current liabilities.
  20. 20. Profitability Ratio • Profitability ratios measure the company's ability to generate profitable sales from its resources (assets). Profitability Ratio Gross Profit Ratio Net Profit Ratio Operating Ratio
  21. 21. Gross Profit Ratio • The gross profit ratio indicates the relation between production cost and sales. • It measures company's manufacturing and distribution efficiency during the production process. • Gross Profit Ratio = Gross Profit *100 Net Sales
  22. 22. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Gross profit 11,808 24,754 23,311 20,502 17,555 Net sales 21,848 39,874 38,851 35,167 30,765 Gross profit margin ratio 54.05% 62.08% 60.00% 58.30% 57.06% Gross Profit Ratio
  23. 23. Calculation & Interpretation Year Calculation Ratio 2011 100 23,311 38,851 60% 2012 100 24,754 39,874 62.08% 2013 100 11,808 21,848 54.05% Interpretation: •The gross profit margin improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013. •A high gross profit margin indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. • A low margin indicates that the business is unable to control its production cost.
  24. 24. Net Profit Ratio • The net profit ratio indicates that portion of sales available to the owners after the consideration of all types of expenses and costs either operating or non operating or normal or abnormal • FORMULAE Net Profit Ratio = Net Profit after Taxes *100 Net Sales
  25. 25. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Net earnings 2,576 5,963 4,728 4,626 5,746 Net sales 21,848 39,874 38,851 35,167 30,765 Net Profit Margin, Comparison to Industry Abbott Laboratorie s 11.79% 14.95% 12.17% 13.15% 18.68 % Industry Health Care 16.84% 15.92% 15.50% 14.38% 20.14 % Net profit ratio
  26. 26. Calculation & Interpretation Year Calculation Ratio 2011 100 4,728 38,851 12.17% 2012 100 5,963 39,874 14.95% 2013 100 2,576 21,848 11.79% Interpretation: •Net profit margin improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013. •The Net Profit Ratio of Abbott Laboratories is less as compared to the Industry Health Care. •A high ratio indicates the efficient management of the affairs of business.
  27. 27. Operating Profit Ratio • This ratio indicates the percentage of net sales, which is absorbed by the operating cost. • This ratio excludes the non-operating expenses such as administrative expenses , selling and distribution expenses. • Operating Profit Ratio = 100 Operating earnings Net sales
  28. 28. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Operating earnings 2,629 8,085 5,752 6,088 6,236 Net sales 21,848 39,874 38,851 35,167 30,765 Operating Profit Margin, Comparison to Industry Abbott Laboratorie s 12.03% 20.28% 14.81% 17.31% 20.27% Industry Health Care 19.78% 21.20% 21.07% 20.08% 22.02% Operating Profit Ratio
  29. 29. Calculation & Interpretation Year Calculation Ratio 2011 100 5,752 38,851 14.81% 2012 100 8,085 39,874 20.28% 2013 100 2,629 21,848 12.03% Interpretation: •Operating profit margin improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013. •Operating Profit Ratio of years 2011, 2012and 2013 are less than the Industry Health Care. • A higher value of operating margin ratio is favourable which indicates that more proportion of revenue is converted to operating income.
  30. 30. TURNOVER GROUP • Ratios computed under this group indicate the efficiency of the organization to use the various kinds of assets by converting them in the form of sales. Turnover Ratio Inventory Turnover Ratio Working Capital Turnover Ratio
  31. 31. Inventory Turnover Ratio • A ratio showing how many times a company's inventory is sold and replaced over a period. • A high inventory turnover ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. • Inventory or Stock Turnover Ratio = Cost of Goods Sold Avg. Inventory
  32. 32. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Net sales 21,848 39,874 38,851 35,167 30,765 Inventories 2,693 3,792 3,284 3,189 3,265 Inventory Turnover, Comparison to Industry Abbott Laboratories 8.11 10.51 11.83 11.03 9.42 Industry Health Care 9.43 9.59 10.41 10.36 8.31 Inventory Turnover Ratio:
  33. 33. Calculation & Interpretation Year Calculation Ratio 2011 38,851 3,284 11.83 2012 39,874 3,792 10.51 2013 21,848 2,693 8.11 Interpretation: •The ITR of the company declined from year 2011 to 2012 and from 2012 to 2013. •As compared to the Industry Health Care the Inventory Turnover Ratio of Abbott Laboratories is good for year 2011 and 2012 and declined in year 2013. •A low turnover rate: overstocking or deficiencies in the product line or marketing effort . •A high turnover rate: inadequate inventory levels, leading to a loss in business as the inventory is too low. This often can result in stock shortages
  34. 34. Working Capital Turnover Ratio • A measurement comparing the depletion of working capital to the generation of sales over a given period. • A high working capital turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in the working capital. • Working Capital Turnover Ratio= Net Sales Working Capital
  35. 35. Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Current assets 19,247 31,323 23,769 22,318 23,314 Less: Current liabilities 9,507 13,280 15,480 17,262 13,049 Working capital 9,740 18,042 8,289 5,055 10,264 Net sales 21,848 39,874 38,851 35,167 30,765 Working Capital Turnover, Comparison to Industry Abbott Laboratorie s 2.24 2.21 4.69 6.96 3 Industry 3.64 4.07 3.74 3.74 3.38 Working Capital Turnover Ratio
  36. 36. Calculation & Interpretation Interpretation: • Working capital turnover deteriorated from 2011 to 2012 but then slightly improved from 2012 to 2013. • As compared to Industry Health Care working Capital turnover for the year 2011 is good and less for the years 2012 and 2013. • A high turnover ratio- management is being extremely efficient in using a firm's short-term assets and liabilities to support sales. • A low ratio- business is investing in too many accounts receivable and inventory assets to support its sales, which could eventually lead to an excessive amount of bad debts and obsolete inventory. Year Calculation Ratio 2011 38,851 8,289 4.69 2012 39,874 18,042 2.21 2013 21,848 9,740 2.24
  37. 37. Solvency Group • Ratios computed under this group indicate the long-term financial prospects of the company. The shareholders debenture holders and other lenders of long-term finance/ term loan may be basically under this group. Solvency group Debt-equity Ratio Proprietary Ratio Interest Coverage Ratio
  38. 38. Debt-equity Ratio • Debt-equity ratio indicates the state of shareholders or owners in the organization. • It indicates the cushion available to the creditors on liquidation of the organization. • Debt- equity Ratio = Total debt Total shareholders' equity • Standard Ideal value: - 2:1
  39. 39. Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Short-term borrowings 3,164 2,082 2,348 4,350 4,978 Current portion of long- term debt 9 309 1,027 2,045 211 Long-term debt, excluding current portion 3,388 18,085 12,040 12,524 11,266 Total debt 6,561 20,476 15,415 18,918 16,456 Total Abbott shareholders' investment 25,171 26,721 24,440 22,388 22,856 Debt to Equity, Comparison to Industry Abbott Laboratories1 0.26 0.77 0.63 0.85 0.72 Industry, Health Care 0.46 0.48 0.46 0.43 0.42 Debt-equity Ratio
  40. 40. Calculation & Interpretation Year Calculation Ratio 2011 =15,415 / 24,440 0.63 2012 =20,476 /26,721 0.77 2013 = 6561/25171 0.26 Interpretation: •Debt-to-equity ratio deteriorated from 2011 to 2012 but then improved from 2012 to 2013 exceeding 2011 level. •As compared to Industry Health Care, Debt-to-equity ratio of the company was good for years 2011 & 2012 and deteriorated for year 2013. •A low Debt- equity ratio is considered good according to creditors view as it is secure. •A high Debt- equity ratio is considered risky according to creditors view as it gives lesser margin of safety on liquidity of company.
  41. 41. Proprietary Ratio • This ratio indicates the extent to which the owner funds are sunk in different kinds of assets. • The proprietary ratio shows the contribution of stockholders’ in total capital of the company. • Best Ratio considered as 33% • Proprietary Ratio = Total Shareholders Fund Total Asset
  42. 42. Year 2013 2012 2011 Total Assets 42953 67235 60276 Total Abbott shareholders' investment 25171 26721 24440 Proprietary Ratio 0.58 0.39 0.40 Proprietary Ratio
  43. 43. Calculation & Interpretation Interpretation: •The proprietary ratio for Abbott Laboratories improved in 2013 as compared to 2012 and 2011. • The higher the ratio dependency on external sources and loans for working capital will be less and financial condition will be sound. • A low ratio indicates that the company is already heavily depending on debts for its operations. Year Calculation Ratio 2011 24440/ 60276 0.40 2012 26721/ 67235 039 2013 25171/ 42953 0.58
  44. 44. Interest Coverage Ratio • This ratio indicates protection available to the lenders of long-term capital in the form of funds available to pay the interest charges i.e. profits. • It means how easily a company can pay interest on outstanding debt. • Interest Coverage = Earning Before Interest& Tax Ratio Interest expense
  45. 45. Interest Coverage Ratio Years Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Selected Financial Data (USD $ in millions) Net earnings 2,576 5,963 4,728 4,626 5,746 Add: Interest expense 157 592 530 553 520 Add: Income tax expense (benefit) 138 300 470 1,087 1,448 Earnings before interest and tax (EBIT) 2,871 6,855 5,729 6,266 7,713 Interest Coverage, Comparison to Industry Abbott Laboratories1 18.29 11.57 10.81 11.33 14.84 Industry, Health Care 15.43 14.51 15.23 14.01 19.04
  46. 46. Calculation & Interpretation Year Calculation Ratio 2011 5,729/530 10.81 2012 6,855/592 11.57 2013 2,871/157 18.29 Interpretation: Interest coverage ratio improved from 2011 to 2012 and from 2012 to 2013. As compared to Industry Health Care Interest Coverage Ratio of company is good for year 2013 and satisfactory for year 2011 and 2012. The lower the ratio, the more the company is burdened by debt expense. The higher the ratio the more secure the lender is in the payment of the interest regularly.
  47. 47. Conclusion As per year 2013- • The current and quick ratios are good. • The Gross Profit Ratio ,Net Profit Ratio and Operating Profit Ratio has deteriorated. • The Inventory Turnover Ratio has declined while Working Capital Turnover Ratio has slightly improved. • The Debt-Equity Ratio, Proprietary Ratio and Interest Coverage Ratio has improved.
  48. 48. Reference • www.moneycontrol.com • www.investopedia.com • www.researchandmarkets.com • www.abbott.com • www.abbott.co.in • A Textbook of Financial Accounting by A. K. Singhal and H. J. Ghosh Roy
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