FORECASTING & FINANCIAL STATEMENT ANALYSISOF

FINANCIAL STATEMENT ANALYSISFIN 4218TOPICS: FROECASTING & ANALYSIS OF FINANCIAL STATEMENT

SUBMITTED TO:Muhammad Enamul HaqueAssistant ProfessorUnited International UniversitySchool of Business

SUBMITTED BY:

NAMEID

MD. Jahangir Alam111 101 196

Riad Chowdhury111 101 122

Shayan Ahmed111 093 135

Mahin Ahmed111 101 119

MD. Muzahid Baksh111 101 208

SEC ABBA

Date of submission: January 15, 2014

United International UniversityFALL 2014Letter of Transmittal15-Jan-2014Muhammad Enamul HaqueAssistant ProfessorCourse Instructor- FIN 4218United International UniversitySubject: A term paper on financial statement analysis & forecasting of Pharmaceutical [listed] industry in Bangladesh.Dear Sir,We are submitting herewith our report entitled A term paper on financial statement analysis & forecasting of Pharmaceutical [listed] industry in Bangladesh. For that purpose we choose Ranata Ltd. The main objective of this report is to get a set of concepts on financial statement, its interpretation & the forecasting of financial performance of Renata Ltd.This is a comparative analysis about the financial statement analysis & the forecasting the performance of the company. Actually we have enjoyed more in preparing this term paper. Our 5 members have worked hard to prepare this report. Though we have put our best efforts yet it is very likely that the paper may have some mistakes and omissions that are unintentional.We hope that this report will merit your approval.Respectfully yoursOn behalf of the team

.Mahin AhmedID: 111101119Sec: A

ACKNOWLEDGMENT

We give thanks to the Almighty for giving us the understanding, knowledge and wisdom during the course of our study.We convey our gratitude to our honorable faculty Mr. Muhammad Enamul Haque, course instructor- FIN-4218 in United International University. His guidance and cooperation helped us immensely to prepare this analytical report. We are especially grateful to our course teacher in this regard as this type of practical work creates opportunity to get familiar with the real business world. He always guided us to finish this task successfully. Without his help it was quite impossible to finish this project properly in time. To prepare the term paper we need to collect necessary information from different sources. We have also collected some common data from another group that was suggested to avoid unnecessary hassle. They all deserve high level of gratefulness from us and we are cordially offering the same from our part.

Table of Contents

COMPANY PROFILE- 1 -History- 1 -Financial data- 1 -Production facilities- 2 -Partnerships- 2 -Export markets- 2 -FINANCIAL STATEMENT ANALYSIS & CONCEPTUAL FRAMEWORK- 3 -FINANCIAL STATEMENT & RATIO ANALYSIS- 4 -Importance and Advantages of Ratio Analysis- 5 -1. Analyzing Financial Statements- 5 -2. Judging Efficiency- 5 -3. Locating Weakness- 5 -4. Formulating Plans- 5 -5. Comparing Performance- 5 -RENETA LIMITED: FINANCIAL TREND- 6 -RATIO ANALYSIS & INTERPRETATIONS- 7 -1. SHORT TERM LIQUIDITY RATIO- 7 -CURRENT RATIO- 7 -QUICK RATIO- 7 -CASH RATIO- 7 -DEFENSIVE INTERVAL (DAY)- 7 -2. LONG TERM SOLVENCY RATIO- 9 -DEBT/ASSET- 9 -DEBT/EQUITY- 9 -CFO TO DEBT- 9 -3. BUSINESS PROFITABILITY RATIO- 10 -RETURN ON NOA- 10 -NET BORROWING COST [NBC]- 10 -RENATA LIMITED FINANCIAL PERFORMANCE- 11 -ROCE:- 12 -4. PAYOUT & RETENTION RATIO- 13 -DIVIDEND PAYOUT- 13 -RETENTION RATIO- 13 -5. SHAREHOLDER PROFITABILITY- 13 -6. GROWTH RATIO- 14 -GROWTH RATE OF CSE- 14 -NET INVESTMENT RATE- 14 -GROWTH RATE IN OPERATING INCOME- 14 -GROWTH IN NOA- 14 -7. INCOME STATEMENT RATIO- 17 -Operating Profit Margin (Pm)- 17 -Sales Pm- 17 -Net (Comprehensive) Income Profit Margin- 17 -Expense Ratio- 17 -8. BALANCE SHEET RATIO- 20 -Operating Asset Composition Ratio:- 20 -Operating liability composition ratio:- 21 -Operating liability leverage ratio:- 21 -Financial Leverage Ratio:- 22 -Capitalization Ratio:- 23 -9. TURNOVER DRIVERS- 24 -Account Receivable turnover- 24 -Days in Account Receivable- 24 -Days in Accounts payable- 24 -Inventory turnover- 24 -Days in Inventory- 24 -PPE turnover- 24 -Asset turnover (ATO)- 24 -Forecasting the Performance of Renata Ltd. in the Next Period- 27 -CONCLUSION- 29 -APPENDIX 1- 31 -RATIO ANALYSIS SUMMARY- 31 -APPENDIX-2- 34 -APPENDIX- 3- 35 -THE REFORMULATED CASH FLOW STATEMENT- 35 -APPENDIX- 4- 35 -Reformulated Comprehensive Income Statement- 35 -APPENDIX- 5- 36 -REFORMULATED BALANCE SHEET- 36 -

Executive SummaryDirector in its report mentioned that the year 2012 was extremely challenging for Renata Limited. Adverse developments on the macroeconomic front as well as slowdown in the industries that they operate in severely constrained their growth. The combined effect of currency depreciation, higher borrowing costs, and collapse of the poultry industry reduced their overall bottom-line growth by approximately Taka 280 million. As a result, net profit and sales grew modestly at 14.36% and 17.67%, respectively. Furthermore, there are unmistakable signs of slowdown and structural change in the pharmaceutical industry.They continue to believe that the most effective way to ensure sustained growth is by expanding their exports. Although accessing foreign markets has proved difficult for all Bangladeshi pharmaceutical companies including Renata, there are signs of progress. By accessing institutional markets, they have been able to raise their short-term growth prospects. In 2012, their exports grew by 89% largely due to new institutional business. In addition, 88 dossiers in 14 countries were filed, while 57 approvals from previous filings were received. Finally, it added several products to the development pipeline for accessing the EU markets.After reviewing the financial statement of RENATA & careful analysis of the selected ratios we have found some intuitive understanding.We first focus on the firms short term liquidity ratio. In includes current ratio, quick ratio, cash ratio & defensive intervals in days. To meet up the short term obligations, the firm had good financial back up in 2012. Again its defensive interval ratio is quite constant over the operational period- it managed the capital expenditure with its cash about 100 days in 2012.Then we calculate its ability to meet long term obligation. The firm was quite constant in the last 3 years in making long term debt payment.As the present economic condition is quite reverse for the company, its business profitability ratio is quite unpleasant for its shareholders. Its net borrowing cost was higher than ever with low return on NOA in 2012.Although it has been passing troublesome situation, it increases its dividend in the year 2012 thanks to the free cash flow of the firm in that year. But as it paid a large amount of tax & operating cost in the year, ROCE is still quit low & continue to decrease at an alarming rate.The growth rate of the firm was constant through the years. As ROCE was low in 2012 the growth rate of CSE was also quite low comparing to the previous years. The firms operating profit margin, sales profit margin, net CI profit margin & expense ratio was also remain the same as earlier years.By analyzing balance sheet ratio we found that the firm makes huge investment on its PPE, it keeps large amount of money in tax provision & other liabilities. In 2012, operating liabilities had eaten up only 18% of NOA. We can easily judge on this matter by reviewing the chart that shows the firm periodically lowering the ratio & keep the RNOA constant over its operational life. It financed operating assets from equity & its capitalization ratio was quite high in 2012 as it had greater NFO.In anticipation of this evolution, Renata has been working for several years to develop their nron-antibiotics portfolio. While inroads into chronic care products have been limited, they have made considerable progress in over-the-counter (OTC) products. In 2012, their OTC portfolio grew by an impressive 35% and now constitutes nearly 25% of their overall product portfolio compared to 14% only five years ago.

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COMPANY PROFILERenata Limited [formerly Pfizer Laboratories Limited], also known as Renata, is one of the top ten (in terms of revenue) pharmaceutical manufacturers in Bangladesh. Renata is engaged in the manufacture and marketing of human pharmaceutical and animal health products. The company also manufactures animal therapeutics and nutrition products. Renata currently employs about 2300 people in its head office in Mirpur, Dhaka and its two production facilities in Mirpur, Dhaka and Rajendrapur, Dhaka.

TypeLimited Company

IndustryPharmaceutical

Founded1993

HeadquartersMirpur, Dhaka, Bangladesh

Key peopleSyed S Kaiser Kabir - CEO

Websitewww.renata-ltd.com

HistoryThe company began its operations as Pfizer (Bangladesh) Limited in 1972. For the next two decades it continued as a subsidiary of Pfizer Corporation. However, by the late 1990s the focus of Pfizer had shifted from formulations to research. In accordance with this transformation, Pfizer divested its interests in many countries, including Bangladesh. Specifically, in 1993 Pfizer transferred the ownership of its Bangladesh operations to local shareholders, and the name of the company was changed to Renata Limited. At present, Renata manufactures about 300 generic pharmaceutical products including hormones, contraceptives, anti-cancer drugs, oral preparations, cephalosporin, parenteral preparations as well as other conventional drugs. In addition, they also offer about 95 animal therapeutics and nutrition products.Financial dataRenata is a publicly traded company on the Dhaka Stock Exchange (ticker: RENATA). In 2009, the companys annual turnover was about US $56 million, with an annual growth of about 35%.Production facilitiesRecently, Renata Limited has received the UK MHRA approval for its Potent Product Facility. This facility currently manufactures hormone, steroid and cytotoxic drugs, and is exporting prednisolone to the UK. The company also operates four other manufacturing units the original Pfizer facility for general products, a UNICEF-approved SFF (Sachet Filling Facility), a Cephalosporin facility, and a Penicillin facility.PartnershipsRecently, GAIN (The Global Alliance for Improved Nutrition) provided US$ 2.9 million to Renata Limited and BRAC, one of the biggest NGOs in the developing world, to build and operate an innovative business model to produce and deliver multi-nutrient powders to vulnerable infants in Bangladesh. Export marketsAs of the third quarter of 2010, Renata exports its products to the UK, Afghanistan, Cambodia, Hong Kong, the Philippines, Jordan, Sri Lanka, Vietnam, Myanmar, Kenya, Belize, Nepal, Malaysia, and Guyana, with registration ongoing in 23 other countries.

FINANCIAL STATEMENT ANALYSIS & CONCEPTUAL FRAMEWORKFinancial statement analysis is the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques.Financial statement analysis consists of 1) reformulating reported financial statements, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted financial statements. The first two steps are often dropped in practice, meaning that financial ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental company valuation.Potential and existing investors, creditors or lenders and other stakeholders often rely on financial statements in making decision to a business entity. We can know why financial statements are actually prepared from the IASB Conceptual Framework. The company prepares financial statements to provide financial information about the reporting business entity. The existing Framework also identified in addition to the addressees listed above, employees, customers, suppliers, governments and the other interested group.

FINANCIAL STATEMENT & RATIO ANALYSISRatio analysis is a useful way of gaining a "snapshot" picture of a company. These ratios can be analyzed to identify the company's strengths and weaknesses and useful insights can be gained through the process. There are two primary ways to use financial ratios:1. Compare a ratio's value over several periods of time (trend analysis or time-series analysis). If we see a deteriorating trend in any ratio's values over several quarters or years, we can investigate to find the cause.2. Compare the company's ratios to the industry average (cross-sectional analysis). A single ratio value by itself usually means nothing - we need a standard, or benchmark, to compare it to. This benchmark is usually the industry average (i.e., the ratio's average value for all firms in the industry).To evaluate & forecast the performance of RENATA ltd. we have focused on nine different base point:The ratio is calculated & elaborated in Appendix 1

Importance and Advantages of Ratio Analysis Ratio analysis is an important tool for analyzing the company's financial performance. The following are the important advantages of the accounting ratios.1. Analyzing Financial StatementsRatio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors, management. Bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.2. Judging EfficiencyAccounting ratios are important for judging the company's efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.3. Locating WeaknessAccounting ratios can also be used in locating weakness of the company's operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them.4. Formulating PlansAlthough accounting ratios are used to analyze the company's past financial performance, they can also be used to establish future trends of its financial performance. As a result, they help formulate the company's future plans.5. Comparing PerformanceIt is essential for a company to know how well it is performing over the years and as compared to the other firms of the similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison.

RENETA LIMITED: FINANCIAL TREND

Financial highlights are summarized in Appendix-2

RATIO ANALYSIS & INTERPRETATIONS1. SHORT TERM LIQUIDITY RATIO20122011201020092008

CURRENT RATIOCA/CL1.150.7281.1151.171.15

QUICK RATIOCASH+RECEIVABLES/CL0.410.230.350.350.36

CASH RATIOCASH/CL0.120.040.10.10.09

DEFENSIVE INTERVAL (DAY)365*(CASH+RECEIVABLES)/CAP. EXP.1007593127168

Short term creditors- suppliers, short-term paper holders, & long term lenders of debt that is shortly to mature are concerned with the firms ability to have enough cash to repay in the near future. The long term lender is also interested in short term liquidity because if the firm cant survive the short term, there is no long term. In 2012, RENATAs short term loan was BDT 1,812,605,178; -25% than the previous year. In the year 2011, its short term loan amount was BDT 2,402,992,758; 113% higher than the earlier year. So from this trend we can forecast that in 2013 the company will again use its credit limit higher than 2012. In last 3 years we can see that its current ratio, quick ratio & cash ratio was quite constant & from its short term loan trend indicates that the firm is quite good in meeting its short term obligation as it enjoys the favor of good relationship with Eastern Bank Limited, The Hong Kong Shanghai Banking Corporation Limited, City Bank Limited, Standard Chartered Bank Limited, Citibank N. A., Bank Asia Limited, Agrani Bank Limited.Defensive Interval: This ratio measures the liquidity available to meet capital expenditures without further borrowing. Multiplying by 365 yields the number of days expenditures can be maintained out of near cash resources. As we showed earlier that the firm maintains its short term loan obligation quite efficiently, it managed the capital expenditure with its cash about 100 days in 2012, 75 days in 2011, 93 days in 2010, 127 days in 2009 & 168 days in 2008. It is not quite amazing because it borrowed much in 2011 & 2010 comparing to other years.

2. LONG TERM SOLVENCY RATIO20122011201020092008

DEBT/ASSETTOTAL DEBT/TOTAL ASSETS33%31%22%21%26%

DEBT/EQUITYTOTAL DEBT/TOTAL EQUITY63%61%38%36%50%

CFO TO DEBTCF from OPERATION/TOTAL DEBT34%37%70%95%26%

Long term debt holders watch the firms immediate liquidity, but they are primarily concerned with its ability to meet its obligations in the more distance future. RENATAs debt to asset ratio & debt to equity ratio in 2012 is quite high comparing to previous year due to the inclusion of non-convertible bond & hold long term loan totaled BDT 1,358,333,333.As it had enough equity to cover the debt amount its debt to equity ratio was quite constant over the year.CFO to Debt ratio: CFO to Debt ratio measures the cash flow relative to total debt repayments to be made, not just the current repayment. In 2012 it used its 34% cash flow from operation to meet up the debt, it were 37% in 2011 [quite constant]. We can see from the above table RENATA was quite efficient in repaying its debt by using operating cash flows in the year of 2010 & 2009. As in those years, 2010 & 2009, its operating cash flows was higher than its proportional debt amount. But in the year 2011 it again raises its debt by borrowing long term basis making it difficult for the firm to meet up the amount using its operating cash flows. Thus RENATA proportionally retires its long term loan in the year 2012 & 2013 & making the CFO to Debt ratio lower in 2008, 2011 & 2012.3. BUSINESS PROFITABILITY RATIO20122011201020092008

RETURN ON NOAOI/.5*(END NOA+BEG. NOA)28%31%35%34%33%

NET BORROWING COST [NBC]NFE/.5*(END NFO+BEG. NFO)14%12%13%13%15%

The separation of operating & financing activities in the income statement identifies profit flows from the two activities. The corresponding stocks in the balance sheet identify the net assets or obligations put in place to generate the profit flows for the two activities.RNOA: Return on Net Operating Asset is sometimes called return on invested capital [ROIC]. RENATAs RNOA was quite constant over the corresponding years. We can forecast that it will done well in 2013 but not quite satisfying. Due to adverse developments on the macroeconomic front and a slowdown in industry growth due to the lack of blockbuster products in the market and fewer drug discoveries globally, 2012 was an extremely challenging year for Renata Limited.NBC: As RENATA has net financial obligation greater than net financial assets it paid net interest expense & thus the rate of return on financing activities is called the net borrowing cost. The firms net borrowing cost was quite constant. But the firm becomes very cautious about the present political situation & higher borrowing cost comparing to the year 2011 & 2012. If it is the case, the firm will face difficulty in maintaining its ongoing projects & thus the profit will harm severely. Again taka devaluation strengthen this cost as we have mentioned earlier.RENATA LIMITED FINANCIAL PERFORMANCEFINANCIAL PERFORMANCE20122011201020092008

Number of shares28,241,87522,593,50018,074,80014,459,84011,567,870

Earning per share (Taka)43.8338.5130.1921.3715.34

Dividend per share (Taka)8.508.508.508.507.50

Dividend payout %19.3917.6618.0420.3720.03

Effective Dividend Rate %1.150.710.660.710.96

Price Earning ratio - PER16.8725.0327.4828.8720.80

Market price per share on 31 December739.501,205.001,294.271,205.15778.92

Price/Equity Ratio (Times)73.95120.50129.43120.5277.89

Return on Shareholder's Fund %24.4127.4828.6927.3426.06

Current Ratio - (Times)1.150.731.111.171.15

Net operating cash flow per share (Taka)38.5039.8434.7933.249.63

Net asset value per share (Taka)179.54175.21131.5297.7073.56

RENATA continuously increases its number of shares. Its EPS was 43.83TK in 2012, quite larger than the previous years. Due to the low level of financial obligation in the year 2011 & 2012, it somehow managed to offer higher than ever EPS in the year 2012. From the Reformulated Cash Slow Statement [Appendix- 3] we can have an intuitive understand:

From the free cash flow chart we can easily see that was doing quite good in 2012, as it had a large amount of free cash. From that free cash flow the firm paid out its financial obligation [as we see 25% reduction of short term loan in the year 2012] & dividends.As the present bearish share market hurts more or less all industries, & pharmaceutical industries are not exceptional. RENATAs share price drops drastically from ~1205TK to ~740TK in 2012. Thats why the firms price to equity ratio is also low hurting return to shareholders fund a lot [only ~24% in 2012, whereas in 2011 the return was ~27%].ROCE: The reformulated statement yields the comprehensive rate of return on common equity, ROCE, the profitability of the owners investment for the period. ROCE is also growth in equity from business activities. Return on common stockholders' equity, commonly known as return on equity, measures a company's ability to generate a return on the investment of common stockholders. ROE is the ratio of net income to average common equity. Investors use ROE in combination with other financial ratios to analyze and compare different companies in an industry. ROE rises and falls with net income. A combination of higher revenues and lower costs usually results in higher net income. Top-line revenue growth may lead to higher net income, as long as costs remain the same as a percentage of revenue. If costs increase at the same pace as revenues, the additional revenue dollars will not flow through to the bottom line. Management also could maintain profit margins by restructuring operations and cutting costs, especially in a period of declining revenues. Conversely, a combination of falling revenues and rising costs could mean lower net income and even losses. Comprehensive income in the year 2012 & 2011 was quite good [BDT 1,247,275 & BDT 1,090,634 respectively] comparing to the previous year [2010= 851,428; 2009= 603,524; 2008= 433,146]. So, decreasing ROCE would be the result of increasing the number of share in the recent years.

4. PAYOUT & RETENTION RATIO20122011201020092008

DIVIDEND PAYOUTDIVIDENDS/CI11%10%10%10%11%

RETENTION RATIO1-DIVIDEND PAYOUT RATIO89%90%90%90%89%

5. SHAREHOLDER PROFITABILITY20122011201020092008

ROCECI/.5*(END CSE+BEG. CSE)28%31%33%31%29%

Interpretation based on above discussion we can summarize the dividend payout & retention ratio in the above chart. As its business operation is quite constant over the previous years we can get similar results in each year. Among all difficulties the firm is trying to satisfy its shareholders by planning for a quite handsome amount of dividend in 2012 & 2013.

6. GROWTH RATIO20122011201020092008

GROWTH RATE OF CSEROCE+NET INVESTMENT RATE32%35%37%36%34%

NET INVESTMENT RATENET TRANSACTION WITH SH/BEG. BV CSE4%4%4%5%5%

GROWTH RATE IN OPERATING INCOMECHANGE IN OPERATING INCOME(AFTER TAX)/PRIOR PERIODS OI26.52%30.16%35.36%32.18%33.31%

GROWTH IN NOACHANGE IN NET OPERATING ASSETS/BEGINNING NOA27.40%56.69%21.52%21.52%47.46%

Growth rate of CSE: The growth in shareholders equity is simply the change from beginning to ending balances. Growth ratios explain this growth as a rate of growth. The part of the growth rate resulting from transactions with shareholders is the NIR. RENATAs net investment rate was 4% in 2012 [quite similar comparing to the previous years.] because net cash investment made by the shareholders was positive all over the years.NET INVESTMENT RATE: Both Return on Common Equity & Net Investment Rate in 2012 was quite low comparing to the other years. Some, economic factors affect corporate profits, which influence stock prices and equity returns. Revenues depend on consumer and business spending, which vary with interest rates, employment and global economic conditions. Operating and non-operating expenses depend on interest rates, labor wage rates and commodity prices. Economic growth and low inflation usually mean positive equity returns, while recessions and high interest rates mean flat or negative returns. We have mentioned earlier that the firms borrowing cost over the year was high comparing to the previous years, & devaluation of taka was the key factors for that decreased growth rate of CSE [2012~32%; 2011~35%; 2010~37%]. As the ROCE was quite low in 2012, the growth rate of CSE was unsatisfactory for the share holders point of view.GROWTH RATE IN OI: If we observe the trend of the pattern of changing operating income, we can clearly define the scenario. In the year 2012 the growth rate in operating income was lower than previous years. This decreasing result would easily be estimated from the previous years income statements. In 2012 the firm paid taxes amounted BDT 474,449,485; 35% higher than the previous year [2011~351,117,807; 2010~278,175,022; 2009~219,505,643 & 2008~176,774,164]. Due to this the firm encounter decreasing growth in operating income (after tax) in 2012.GROWTH RATE IN SALES: Decreasing growth in sales also cause the operating profit to decline. As the firm reported that the adverse developments on the macroeconomic front as well as slowdown in the industries that they operate in severely constrained their growth. The combined effect of currency depreciation, higher borrowing costs, and collapse of the poultry industry reduced our overall bottom-line growth by approximately Taka 280 million. As a result, net profit and sales grew modestly at 14.36% and 17.67%, respectively. Furthermore, there are unmistakable signs of slowdown and structural change in the pharmaceutical industry. The most plausible explanation for this downward drift is the lack of blockbuster products in the market. With new drug discoveries becoming fewer and far between globally, generic companies in Bangladesh have had to generate growth by relying on their existing products portfolio.There has also been a major structural shift in the Bangladesh pharmaceutical market. For decades, antibiotics delivered both growth and volumes in the Industry. The share of antibiotics in the pharmaceutical industry has been falling over the last five years. The weakening of the antibiotic segment also explains to a large extent the weakening of the pharmaceutical market in Bangladesh. With national health and hygiene programs gaining momentum, antibiotic use is likely to erode further continuing this downward trend.In anticipation of this evolution, Renata has been working for several years to develop our non-antibiotics portfolio. While inroads into chronic care products have been limited, we have made considerable progress in over-the-counter (OTC) products. In 2012, our OTC portfolio grew by an impressive 35% and now constitutes nearly 25% of our overall product portfolio compared to 14% only five years ago.GROWTH RATE IN NOA: The firm periodically pay off its operating obligations. RENATAs total OA in 2012 was BDT 10,049,877,139 [2011~BDT 8,031,385,844; 2010~BDT 5,289,005,545; 2009~BDT 4,019,707,455 & 2008~BDT 3,285,642,893] & total OL was BDT 1,503,752,637 [2011~1,323,449,647; 2010~1,007,881,438; 2009~845,703,106 & 2008~673,822,495]. It paid 56% of its total OL in 2012 causing lower growth in NOA [2012~27%; 2011~57%].

7. INCOME STATEMENT RATIO20122011201020092008

Operating Profit Margin (Pm)OI (after tax) / sales16%17%17%15%14%

Sales PmOI (after tax) from sales / sales22%21%22%26%14%

Net (Comprehensive) Income Profit Margincomprehensive income / sales16%17%0%0%0%

Expense Ratioexpense / sales36%35%35%37%36%

Operating Profit MarginOperating profit margin identifies the operating profitability per dollar of sales. As each operating item is divided through by sales revenue, the common-size number indicates the proportion of each dollar of sales the item represents. Thus, the number for an operating expense is the percentage of sales that is absorbed by the expense, & the number for operating income is the percentage of sales that ends up in profit.We can easily get intuitive understanding from the above OPM chart that shows the trend of operating profit. After the year 2008, RENATA made some inclusion in its product portfolio. The resulting effect illustrates the picture above that it was quite good in making profit by absorbing the operating expenses through the year 2008~14% to 2011~17%. But as we have mentioned earlier that it faces some trouble the year 2012 in boosting up the sales, it reported only 16% OPM. Again both the cost of sales [2012~ 3,619,613,644; 2011~3,099,355,955; 2010~ 2,405,361,976; 2009~ 1,820,496,777 & 2008~ 1,526,514,685] & administrative expenses [2012~ 1,890,859,261; 2011~ 1,712,148,104; 2010~1,378,630,620; 2009~1,118,768,795; 2008~845,169,923] were quite high in 2012 comparing to previous years. That was another reason for that low OPM.SALES PROFIT MARGINThis ratio is a good indicator of the firms operating efficiency. It also stresses how much the firm generates profit from sales after adjusting payments.After inclusion of new products in their portfolio in 2009, they had boosted up their sales as well as their profit. But the firm faces some difficulties for example- economic health, market stability, marketing effort behind the company's product line, pricing, and payment options available to the customer, raw materials cost, political unrest and global supply issues are the common factors that affect cost of goods sold. A change in materials price is a surefire way of affecting sales profit margin. Thats why the firms SPM were boosted up from 14% in 2008 to 26% in 2009 & as the firm faced such problems its SPM were 22% in 2012.NET CI PROFIT MARGIN:NET CI Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. Basically, it is the amount of profit [comprehensive income] generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings. Positive net comprehensive income profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price.The firm is very consistent over its fiscal years. Although the present economic downturn causes the industry severely, it somehow manages itself quite well. The investors may find the firm less risky as RENATA shows its consistency over the year 16% in 2012; 17% in 2011 and so forth.Expense RatioExpense ratio calculate the percentage of sales revenue that is absorbed by expenses. For RENATA, cost of sales absorb 35% to 37% all over its operating life.The trend forecasts that its expense ratio will rise in the upcoming fiscal year. But we can say that it will remain similar in the next year not a quite big shift will result for sure.

The values are determined based on Reformulated Comprehensive Income Statement [Elaborated in Appendix-4].Later in this section we will discuss the balance sheet ratio to forecast the firm more accurately. For that reason we need Reformulated Balance Sheet [Elaborated in Appendix-5]. Here we only present the summarized chart:

8. BALANCE SHEET RATIO

Operating Asset Composition Ratio: The operating assets ratio can be used as part of an analysis to eliminate those company assets that are not contributing to operations. For example, if a rival company has a low operating assets ratio, a competitor could use the rival's ratio as the basis for an internal review to see how many assets should be eliminated in order to arrive at a similar ratio. The result of these actions would be a reduced investment in assets, with the terminated assets being converted into cash.There are several issues to be aware of when using the operating assets ratio: Which assets are not considered to assist in generating revenues is a subjective decision, since some assets could be considered reserve capacity. Some assets, such as overdue receivables, are simply a part of doing business, and are unlikely to be eliminated on an ongoing basis.From the above chart we can see the major assets that are essential in operation. RENATA made major investment in its property plant & equipment in 2010(48%) & continue investing on this particular item in the recent time [2012~42%; 2011~47%].

Operating liability composition ratio: Operating liability composition ratio signifies the major operating liability items in the balance sheet that the firm finds vital to reinvestigate. From the total operating liability the major liability items would be provision for taxation, provision & other liabilities. The firm is quite sincere in making the tax payment regularly. After the year 2008, the firm periodically paid off its trade payables & so we see a big change in the trade payables account in the balance sheet. From this trend we can forecast that the firm will keep provision in taxation in the upcoming year.Operating liability leverage ratio: The operating liability composition ratio reveal which liabilities have contributed to the operating liability leverage. The operating liability leverage ratio gives an indication of how the investment in net operating assets has been reduced by operating liabilities. It is called a leverage ratio because it can lever up the return on net operating assets with a lower denominator. Operating liabilities lever the profitability of operations, which is RNOA. RNOA is operating income relative to net operating assets, and net operating assets are operating assets minus operating liabilities. So, the more operating liabilities a firm has relative to operating assets, the higher its RNOA, assuming no effect on operating income in the numerator.In 2012, operating liabilities had eaten up only 18% of NOA. We can easily judge on this matter by reviewing the chart that shows the firm periodically lowering the ratio & keep the RNOA constant over its operational life.Using operating liabilities to lever the rate of return from operations may not come for free, however; there may be a numerator effect on operating income. Suppliers provide what nominally may be interest-free credit, but presumably charge for that credit with higher prices for the goods and services supplied. This is the reason why operating liabilities are inextricably a part of operations rather than the financing of operations.

Financial Leverage Ratio: The FLEV measure excludes operating liabilities but includes (as a net against financing debt) financial assets. If financial assets are greater than financial liabilities, FLEV is negative. This analysis breaks shareholder profitability, ROCE, down into that which is due to operations and that which is due to financing. Financial leverage levers the ROCE over RNOA, with the leverage effect determined by the amount of financial leverage (FLEV) and the spread between RNOA and the borrowing rate.Financial leverage is the degree to which NOA are financed by common equity. The firm increased its share capital after 2008 [115,678,700]. The share capital was increased by 25% through the year 2012, 2011, 2010 & 2009. In 2011, the firm uses 61% of its share capital to finance in OA. The invested amount was 59% in 2012 & it will continue same portion in the next fiscal year.Capitalization Ratio: The capitalization ratio compares total debt to total capitalization (capital structure). The capitalization ratio reflects the extent to which a company is operating on its equity.Capitalization ratio is also known as the financial leverage ratio. It tells the investors about the extent to which the company is using its equity to support its operations and growth. This ratio helps in the assessment of risk. The companies with high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future. RENATAs capitalization ratio through the years was quite high [2012~169%; 2011~169%; 2010~144%; 2009~144% & 2008~157%] that indicates that the firm is financing itself with more debt [especially short term] than equity. It will increase its capitalization ratio in the FY-13.

9. TURNOVER DRIVERS20122011201020092008

Account Receivable turnoversales / Account Receivable(net)9.110.1810.6411.348.98

Days in Account Receivable365 / Account Receivable turnover40.1135.85534.30531.35740.646

Days in Accounts payable365* Accounts Payable / Purchase4.1555.9084.8185.59330.392

Inventory turnoverCost of goods sold / Inventory1.8221.9551.8561.6931.591

Days in Inventory365 / Inventory turnover200.329186.701196.659215.594229.415

PPE turnoverSales / PPE net1.79711.72351.98492.79363.0458

Asset turnover (ATO)Sales / NOA0.89770.97191.1891.2291.183

Days in Accounts Receivables turnover measures the days that it takes the company to collect its accounts receivables. The number of days required to convert receivables into cash. In 2008 number of days was 41. In 2009 it was 31days. After that last three years, days in accounts receivables was decreased by 34days, 36days, and 40days.Days in Accounts payable turnover ratio indicates that in how many days the company pays off its suppliers. From the chart we can see that the firm is quite efficient in making payment to the trade payable within one week.Days in inventory: Days' inventory on hand (also called days' sales in inventory or simply days of inventory) is an accounting ratio which measures the number of days a company takes to sell its average balance of inventory. It is also an estimate of the number of days for which the average balance of inventory will be sufficient.The industry where it operates requires high level of inventory in its stock & so RENATAs days in inventory is quite large. It were around 200 days in 2012, 187 days in 2011, 197 day in 2010, 216 days in 2009 & 230 days in 2008. As the price of the R/M are quite high we can predict that the firm will continue this momentum in the upcoming years.

Accounts receivable turnover ratio measures that the efficiency of a business in collecting in credit sales. In 2008 this ratio was 8.98 which was increased by11.34 in 2009. That means their credit collection was improving. It reflects a short lapse of time between sales and the collection of cash. After this year in 2010, 2011 and 2012, Accounts receivable turnover ratio decreased by 10.64, 10.18 and 9.1. That indicates inefficiency of collecting outstanding sales compared to the year of 2009.Inventory turnover indicates the number of times per period that the company sells and replaces its entire batch of inventory again. That means how well a company is turning their inventory into sales. In 2008, RENATAs inventory turnover was 1.591. In 2009, inventory turnover was 1.693. After two years this turnover increased; that were 1.856 and 1.955 respectively. These low inventory turnover ratio is a signal of inefficiency, since inventory usually has a rate of return of zero. It also implies either poor sales or excess inventory. A low turnover rate can indicate poor liquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices. As we have mentioned earlier that it faced some difficulties in selling their product.Asset turnover ratio tells that how successfully the company is using its assets to generate revenue. In 2008, 2009 and 2010, asset turnover ratio was 1.183. 1.229 And 1.189. In these years RENATA Company used their assets efficiently in generating revenue. But in last two years this performance was getting worse. Asset turnover ratio was decreased by 0.9719 and 0.8977 in 2011 and 2012. That indicates that the company was not using its assets properly compared to previous years.PPE turnover ratio tells that how much amount of sales company gets for each amount invested in property, plant, and equipment (PPE). Its a measure of how efficient the company is generating revenue from fixed assets such as buildings, vehicles, and machinery. In 2008, the ratio was 3.0458, which mean the company generated 3.0458 taka in sales revenue for every 1 taka of PPE. In 2009, 2010 and 2011 this ratio was decreased by 2.7936, 1.9849 and 1.7235. In these years their revenue had been decreased. In 2012 they tried to overcome their performance. In 2012 the ratio was 1.7971, as it disposed some of its PPE in that year. The most plausible explanation for this downward drift is the lack of blockbuster products in the market. With new drug discoveries becoming fewer and far between globally, generic companies in Bangladesh have had to generate growth by relying on their existing products portfolio.

Forecasting the Performance of Renata Ltd. in the Next Period

To evaluate & forecast the performance of RENATA ltd. we have focused on nine different base point or parameter:The ratio is calculated & elaborated in Appendix 11. Short Term Liquidity Stock: Here we have calculated current ratio, quick ratio, cash ratio & defensive interval. The overall analysis about this particular measure shows upward momentum that indicates the firm will keep operating leverage next year.2. Long Term Solvency Ratio: To get an overall result about this parameter we have calculated debt/asset ratio, debt/equity ratio & CFO/debt ratio. We have found that the firm will not increase or decrease the amount of its debt by next year.3. Business Profitability Ratio: As the firms NBC is high in 2012, Return on NOA will be affected negatively. That will hurt the companys profitability in front of shareholders.4. Payout & Retention Ratio: As the firm will be less profitable in the upcoming fiscal year, it may offer higher dividend to its shareholders.5. Shareholders Profitability: Shareholders Profitability will also be hurt as the firm will keep its long term borrowing that will cost higher interest expense.6. Growth Ratio: As the firm has no other opportunity in the upcoming future, its Growth Ratio will suffer as it decided to pay debt by this time.7. Income Statement Ratio: Here we have focused operating profit margin, sales profit margin, net income profit margin, & expense ratio. In this context we can say that the firm will do well in the 2013. As its sales may up in the upcoming year, the other variable related to sales will proportionately increase.8. Balance Sheet Ratio: Previous sections evaluation about operating asset composition ratio shows us a constant pattern & so does the operating liability composition ratio. But the firm will lower its operating liability leverage & financial leverage by the next year. The Capitalization ratio will be constant by that time- this means it will no issue further shares in the market in 2013.9. Turnover Drivers: When we measured he A/R turnover, Inventory Turnover, PPE Turnover & ATO, we got similar & constant result. So, we end up our forecasting by saying that the firm will have constant performance & may be able to do well in upcoming years.The year 2012 was extremely challenging for Renata Limited. Adverse developments on the macroeconomic front as well as slowdown in the industries that they operate in severely constrained their growth. The combined effect of currency depreciation, higher borrowing costs, and collapse of the poultry industry reduced their overall bottom-line growth by approximately Taka 280 million. As a result, net profit and sales grew modestly at 14.36% and 17.67%, respectively. Furthermore, there are unmistakable signs of slowdown and structural change in the pharmaceutical industry.

CONCLUSION

In anticipation of this evolution, Renata has been working for several years to develop our non-antibiotics portfolio. While inroads into chronic care products have been limited, they have made considerable progress in over-the-counter (OTC) products. In 2012, their OTC portfolio grew by an impressive 35% and now constitutes nearly 25% of our overall product portfolio compared to 14% only five years ago.Two additional diversifications to their range of products are worth mentioning. First, their latest subsidiary, Renata Oncology Limited, will introduce a range of new oncology products in the coming years. Second, the newly constituted herbal division has been working to enter the fast growing herbal product market with a few well-chosen products, which will be marketed through their subsidiary Purnava Limited.They continue to believe that the most effective way to ensure sustained growth is by expanding their exports. Although accessing foreign markets has proved difficult for all Bangladeshi pharmaceutical companies including Renata, there are signs of progress. By accessing institutional markets, they have been able to raise our short-term growth prospects. In 2012, their exports grew by 89% largely due to new institutional business. In addition, 88 dossiers in 14 countries were filed, while 57 approvals from previous filings were received. Finally, it added several products to the development pipeline for accessing the EU markets.After reviewing the financial statement of RENATA & careful analysis of the selected ratios we have found some intuitive knowledge.We first focus on the firms short term liquidity ratio. In includes current ratio, quick ratio, cash ratio & defensive intervals in days. To meet up the short term obligations, the firm had good financial back up in 2012. Again its defensive interval ratio is quite constant over the operational period- it managed the capital expenditure with its cash about 100 days in 2012.Then we calculate its ability to meet long term obligation. The firm was quite constant in the last 3 years in making long term debt payment.As the present economic condition is quite reverse for the company, its business profitability ratio is quite unpleasant for its shareholders. Its net borrowing cost was higher than ever with low return on NOA in 2012.Although it has been passing troublesome situation, it increases its dividend in the year 2012 thanks to the free cash flow of the firm in that year. But as it paid a large amount of tax & operating cost in the year, ROCE is still quit low & continue to decrease at an alarming rate.The growth rate of the firm was constant through the years. As ROCE was low in 2012 the growth rate of CSE was also quite low comparing to the previous years. The firms operating profit margin, sales profit margin, net CI profit margin & expense ratio was also remain the same as earlier years.By analyzing balance sheet ratio we found that the firm makes huge investment on its PPE, it keeps large amount of money in tax provision & other liabilities. In 2012, operating liabilities had eaten up only 18% of NOA. We can easily judge on this matter by reviewing the chart that shows the firm periodically lowering the ratio & keep the RNOA constant over its operational life. It financed operating assets from equity & its capitalization ratio was quite high in 2012 as it had greater NFO.

APPENDIX 1RATIO ANALYSIS SUMMARYRatioFORMULA20122011201020092008

1. SHORT TERM LIQUIDITY STOCK MEASURES

Current RatioCA/CL1.150.7281.1151.171.15

Quick RatioCASH+RECEIVABLES/CL0.410.230.350.350.36

Cash RatioCASH/CL0.120.040.10.10.09

Defensive Interval (Day)365*(CASH+RECEIVABLES)/CAP. EXP.1007593127168

2. LONG TERM SOLVENCY RATIO20122011201020092008

Debt/AssetTOTAL DEBT/TOTAL ASSETS33%31%22%21%26%

Debt/EquityTOTAL DEBT/TOTAL EQUITY63%61%38%36%50%

CFO TO DEBTCF FROM OPERATION/TOTAL DEBT34%37%70%95%26%

3. BUSINESS PROFITABILITY RATIO20122011201020092008

RETURN ON NOAOI/.5*(END NOA+BEG. NOA)28%31%35%34%33%

Net Borrowing CostNFE/.5*(END NFO+BEG. NFO)14%12%13%13%15%

4. PAYOUT & RETENTION RATIO20122011201020092008

Dividend PayoutDIVIDENDS/CI11%10%10%10%11%

Retention Ratio1-DIVIDEND PAYOUT RATIO89%90%90%90%89%

5. SHAREHOLDER PROFITABILITY20122011201020092008

ROCECI/.5*(END CSE+BEG. CSE)28%31%33%31%29%

6. GROWTH RATIO20122011201020092008

GROWTH RATE OF CSEROCE+NET INVESTMENT RATE32%35%37%36%34%

Net Investment RateNET TRANSACTION WITH SH/BEG. BV CSE4%4%4%5%5%

Growth Rate In Operating IncomeCHANGE IN OPERATING INCOME(AFTER TAX)/PRIOR PERIODS OI26.52%30.16%35.36%32.18%33.31%

GROWTH IN NOACHANGE IN NET OPERATING ASSETS/BEGINNING NOA27.40%56.69%21.52%21.52%47.46%

7. INCOME STATEMENT RATIO20122011201020092008

Operating Profit Margin (Pm)OI (AFTER TAX) / SALES16%17%17%15%14%

Sales PmOI (AFTER TAX) FROM SALES / SALES22%21%22%26%14%

Net (Comprehensive) Income Profit MarginCOMPREHENSIVE INCOME / SALES16%17%0%0%0%

Expense RatioEXPENSE / SALES36%35%35%37%36%

8. BALANCE SHEET RATIO

(I)OPERATING ASSET COMPOSITION RATIO20122011201020092008

Property, Plant And Equipment/ToaPROPERTY, PLANT AND EQUIPMENT / TOTAL OPERATING ASSET42%47%48%35%31%

Inventories/ToaINVENTORIES / TOTAL OPERATING ASSET20%20%25%27%29%

Trade And Other Receivables/ToaTRADE AND OTHER RECEIVABLES / TOTAL OPERATING ASSET8%8%9%9%10%

Advance Deposits And Prepayments/ToaADVANCE DEPOSITS AND PREPAYMENTS / TOTAL OPERATING ASSET1%1%2%2%2%

Capital Work-In-Progress/ToaCAPITAL WORK-IN-PROGRESS / TOTAL OPERATING ASSET21%17%7%18%17%

Investment In Subsidiaries/ToaINVESTMENT IN SUBSIDIARIES / TOTAL OPERATING ASSET1%1%1%2%2%

(II) OPERATING LIABILITY COMPOSITION RATIO20122011201020092008

DEFERRED LIABILITY-STAFF GRATUITY/TOLDEFERRED LIABILITY-STAFF GRATUITY / TOTAL OPERATING LIABILITY12%11%14%15%16%

DEFERRED TAX LIABILITY/TOLDEFERRED TAX LIABILITY / TOTAL OPERATING LIABILITY18%15%15%13%12%

TRADE PAYABLES/TOLTRADE PAYABLES / TOTAL OPERATING LIABILITY3%4%3%3%19%

Accruals/TOLACCRUALS / TOTAL OPERATING LIABILITY18%25%22%20%20%

Provision And Other Liabilities/TOLPROVISION AND OTHER LIABILITIES / TOTAL OPERATING LIABILITY23%26%28%28%12%

Provision For Taxation/TOLPROVISION FOR TAXATION / TOTAL OPERATING LIABILITY27%19%18%21%22%

(III) OPERATING LIABILITY LEVERAGE20122011201020092008

Deferred Liability-Staff Gratuity/NOADEFERRED LIABILITY-STAFF GRATUITY / NET OPERATING ASSET2%2%3%4%4%

Deferred Tax Liability/NOADEFERRED TAX LIABILITY / NET OPERATING ASSET3%3%4%3%3%

Trade Payables/NOATRADE PAYABLES / NET OPERATING ASSET0%1%1%1%5%

Accruals/NOAACCRUALS / NET OPERATING ASSET3%5%5%5%5%

Provision And Other Liabilities/NOAPROVISION AND OTHER LIABILITIES / NET OPERATING ASSET4%5%7%7%3%

Provision For Taxation/NOAPROVISION FOR TAXATION / NET OPERATING ASSET5%4%4%5%6%

(IV) FINANCIAL LEVERAGE20122011201020092008

Capitalization RatioNET OPERATING ASSET / COMMON STOCKHOLDER'S EQUITY169%169%144%144%157%

Financial Leverage RatioNET FINANCIAL OBLIGATIONS / COMMON STOCKHOLDER'S EQUITY59%61%35%34%47%

9. TURNOVER DRIVERS20122011201020092008

Account Receivable TurnoverSALES / ACCOUNT RECEIVABLE(NET)9.110.1810.6411.348.98

Days In Account Receivable365 / ACCOUNT RECEIVABLE TURNOVER40.1135.85534.30531.35740.646

Days In Accounts Payable365* ACCOUNTS PAYABLE / PURCHASE4.1555.9084.8185.59330.392

Inventory TurnoverCOST OF GOODS SOLD / INVENTORY1.8221.9551.8561.6931.591

Days In Inventory365 / INVENTORY TURNOVER200.329186.701196.659215.594229.415

PPE TurnoverSALES / PPE NET1.79711.72351.98492.79363.0458

Asset TurnoverSALES / NOA0.89770.97191.1891.2291.183

APPENDIX-2

APPENDIX- 3THE REFORMULATED CASH FLOW STATEMENT20122011201020092008

Cash Flow from Operations (C)1,711,562,7261,346,126,0941,128,141,4941,014,136,746418,117,883

Cash Investment (I)(18,456,978)(145,198,925)(1,326,611,180)(475,888,036)(285,209,914)

Free Cash Flow (C-I)1,693,105,7481,200,927,169-198,469,686538,248,710132,907,969

Equity Financing Flows

Dividends & Share Repurchases134,205,384 85,372,340 85,555,885 57,051,213 47,511,431

Share Issues282,418,750225,935,000180,748,000144,598,400115,678,700

Net Dividend (d)-148,213,366-140,562,660-95,192,115-87,547,187-68,167,269

Debt Financing Flows

Net Purchase of FA177,650,31711,333,863103,101,50251,167,47453,364,205

Interest on FA [after tax]467,4005,392,318407,774915,768407,100

Net Issue of Debt3,170,938,5112,402,992,7581,129,414,884794,424,620823,163,615

Interest on Debt [after tax]370,881,897 215,315,416 117,473,675 99,513,638 87,270,665

F1,841,319,1141,341,489,829-103,277,571625,795,897201,075,238

Total financing Flows (d+F)1,693,105,7481,200,927,169-198,469,686538,248,710132,907,969

APPENDIX- 4Reformulated Comprehensive Income Statement

APPENDIX- 5

REFORMULATED BALANCE SHEET