Financial Performance of Pharmaceutical Companies 155Return on assets = EBIT/Assets
Return on equity = Net income/Equity
Stock market performance
Dividend yield = Cash dividends/Market price per share
Annual common stock return = (Pricet – Pricet–1 + Divt)/Pricet–1
M/B ratio = (Market price/share)/(Book value per share)
DuPont Analysis
ROE = Profit margin × Asset turnover × LeverageIn the chapter on financial statements I pointed out that the value of a firm is the present value of free cash
flows up till infinity since the firm is a going concern. The value of the company increases if cash flow in-
creases or discount rate decreases. Each of the free cash flow components is driven by a set of financial variables.
Mapping variables on to the free cash flow component helps us understand how a company can increase value.
Component Driver
NOPAT + Depreciation Sales growth
Gross profit margin
Growth in pre-tax income
Expenses
Tax rate
Capital expenditure Asset turnover
Growth in assets
∆ Net working capital Days’ inventory
Days’ receivable
Days’ payable
The weighted average cost of capital, the discount rate, itself is a function of leverage, growth in debt and
the cost of debt. The cost of debt depends on credit rating, which in turn depends on, among other things,
interest coverage. Increasing sales growth, profit margin, pre-tax income and decreasing expenses increases
NOPAT. The effective tax rate is usually not influenced by the company. A company can, however, reduce
taxes by careful planning. Likewise increasing payables and decreasing inventory/receivables improves the
working capital position and hence cash flow position.
Capital expenditure largely depends on asset turnover and the requirements of the industry to stay
competitive. A company with higher asset turn can generate a certain level of sales for lower investment.
Obviously this is a desirable situation. Increasing asset turnover leads to lower capital expenditure, a higher
cash flow and hence firm value. To start with let’s evaluate each company in terms of growth in total assets,
long-term debt, stockholders equity, sales, operating profit, and pre tax income. The growth rates (percent)
are given here:
Glaxo Ranbaxy Cipla Sun DRLVariable 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
(Net) Sales growth in percent 18.3 6 23.55 6.92 39.2 18 13.67 32.6 110.3 15
Total assets 30.93 11.36 4.63 5.81 31.64 23.57 21.82 8.23 58.09 16.77
Debt (long term) –45 4.9 –45 196 –7 N.A. –75.8 N.A. 317 N.A.
Equity (net worth) 42 9.4 –1 3.3 26 N.A. 27 N.A. 20.3 N.A.
PBT 38 0 4.7 –7 35 N.A. 61 N.A. 163 N.A.
PAT 37 –8 –2 –6.8 31.5 N.A. 63 N.A. 140 N.A.