Table of Contents

1.0 Introduction: ........................................................................................................................................... 1

1.1 Objective: ................................................................................................................................................ 1
1.2 Methodology:.......................................................................................................................................... 2
1.2.1 Data source: ..................................................................................................................................... 2
1.2.2 Data Analysis: ................................................................................................................................... 2
1.3 Limitations: ............................................................................................................................................. 2
2.0 Company Overview: ................................................................................................................................ 3
2.1 Square pharma:....................................................................................................................................... 3
2.1.1 Stock market information of Square Pharma: ................................................................................. 4
2.1.2 Dividend History of Square Pharma: ................................................................................................ 4
2.2 Renata Limited: ....................................................................................................................................... 4
2.2.1 Stock market information of Renata Ltd: ........................................................................................ 5
2.2.2 Dividend History of Renata Ltd: ....................................................................................................... 5
3.0 Porter's Five Forces: ................................................................................................................................ 6
4.0 Ratios Analysis: ....................................................................................................................................... 9
4.1 Receivables Turnover: ......................................................................................................................... 9
4.2 Days of sales outstanding: ................................................................................................................ 11
4.3 Inventory Turnover: .......................................................................................................................... 13
4.4 Days of Inventory on hand ................................................................................................................ 14
4.5 Total Asset turnover ratio: ................................................................................................................ 15
4.6 Fixed Asset Turnover:........................................................................................................................ 17
4.7 Current Ratio: .................................................................................................................................... 18
4.8 Quick ratio: ........................................................................................................................................ 20
4.9 Cash ratio: ......................................................................................................................................... 21
4.10 Debt to Equity Ratio: ....................................................................................................................... 24
4.11 Debt to Asset Ratio: ........................................................................................................................ 25
4.12 Financial Leverage Ratio: ................................................................................................................ 26
4.13 Interest Coverage Ratio: ................................................................................................................. 26
4.14 Gross profit margin: ........................................................................................................................ 27
 4.15 Operating profit margin: ................................................................................................................. 28
4.17 Return on Asset:.............................................................................................................................. 30
4.18 Return on Equity: ............................................................................................................................ 30
4.19 Free Cash Flow to the Firm (FCFF) and Free Cash Flow to the Equity (FCFE): ................................ 31
4.20 DuPont Analysis: ............................................................................................................................. 33
4.21 Coefficient of variation (Business Risk): .......................................................................................... 34
4.22 Cash flow to Revenue: .................................................................................................................... 35
4.23 Cash Return on Asset: ..................................................................................................................... 36
4.24 Debt Coverage: ............................................................................................................................... 37
5.0 Relative Valuation ................................................................................................................................. 37
5.1 Dividend Discount Model Valuation: .................................................................................................... 42
6.0 Conclusion: ............................................................................................................................................ 44
7.0 References: ........................................................................................................................................... 45
1.0 Introduction:

Ratio analysis is the quantitative analysis of a company’s financial statements. It is being used
by individuals all over the world to evaluate soundness of a company. When an investor or an
analyst wants to assess a company’s performance, they do ratio analysis. Data collected from
the statements is used to compare a company's performance over time to assess whether the
company is improving or deteriorating; compare a company's financial standing with the
industry average; or compare a company to one or more other companies operating in industry
to see how the designated company stacks up.

For our term paper we are asked to select two companies from the pharmaceuticals industry
and to do an extensive ratio analysis. For our project we have selected Square pharma and
Renata limited. Square pharma is one of the largest in our pharmaceutical industry, producing
affordable medicine for the masses and maintaining flawless standards. Where, Renata is also
one of the top ten (in terms of revenue) pharmaceutical manufacturers in Bangladesh. This
report tries to cover extensive range of ratios and to interpret these ratios as accurate as
possible. This report also tries to depict soundness of the companies and compare these two
companies over time.

1.1 Objective:
The main objective of this report is to learn the process of ratio analysis and understand the
valuation. Objective also includes-

Assessing company performance over five years period of time by doing ratio analysis
i.e. activity, performance, liquidity, solvency, profitability, coverage ratios etc.
Calculating the Coefficient of variation, EPS, DuPont analysis etc.
Identifying the free cash flow to the firm and free cash flow to the equity.
Determining the value of an asset using relative valuation in relation to the value of
other assets

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 Using Dividend discount model to determine the intrinsic value of a stock.
Analyzing the business competition using Porter’s five forces model.

1.2 Methodology:
1.2.1 Data source:

Secondary data:

In order to complete this report we needed huge number of data. All of the data used for this
report is collected from secondary source. The sources are as follows-

Company website
Company annual report
Dhaka stock exchange website
Lanka Bangla website
Various course materials provided by our course instructor etc.

1.2.2 Data Analysis:

This report is primarily based on quantitative data analysis. We took data from the annual
report of respected companies and used them to calculate different ratios. We used MS Excel
as our analysis tool. We tried to analyze data thoroughly and to provide rational interpretation
of the situation.

1.3 Limitations:
In spite of best of efforts to minimize all limitations that might creep in the course of this
report, there were certain constraints within which the report was completed. These are given
as follows-

We took numbers from the annual report and we are not sure whether these numbers
are free of any biases.

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 Same goes for the lanka bangla, data could be fabricated which we might don’t know.
Lack of experience is an issue. We are not professional analyst so there might be
chances of mistakes.
Another big limitation was time constraint. Covering such huge number of ratios within
this short period of time was cumbersome.

2.0 Company Overview:

2.1 Square pharma:

SQUARE today symbolizes a name – a state of mind. But its journey to the growth and
prosperity has been no bed of roses. From the inception in 1958, it has today burgeoned into
one of the top line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship
company, is holding the strong leadership position in the pharmaceutical industry of
Bangladesh since 1985 and is now on its way to becoming a high performance global player.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it

has been continuously in the 1st position among all national and multinational companies since
1985. It was established in 1958, converted into a public limited company in 1991 and listed
with stock exchanges in 1995. The turnover of Square Pharma was Taka 30.28 Billion (US$
385.22 million) with about 18.64% market share having a growth rate of about 25.36% (April
2014– March 2015).

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2.1.1 Stock market information of Square Pharma:
Closing Price BDT. 314.60
Market Capitalization (mn) BDT. 233,605.497
Authorized Capital (mn) BDT. 10,000
Paid-up Capital (mn) BDT. 7373.91
Num. of Shares outstanding 737,391,090
Market Category A
Face value BDT. 10

2.1.2 Dividend History of Square Pharma:

Year Cash Dividend % Stock Dividend %
2012-13 25 30
2013-14 30 15
2014-15 30 12.5
2015-16 40 10
2016-17 35 7.5

2.2 Renata Limited:

Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing
pharmaceutical and animal health product companies in Bangladesh. The company started its
operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of
its Bangladesh operations to local shareholders and the name of the company was changed to
Renata Limited.

The core businesses of Renata Limited are human pharmaceuticals and animal health products.
In Bangladesh it is the 4th largest pharmaceutical company and the market leader in animal
health products. In addition, Renata products are exported to Afghanistan, Belize, Cambodia,
Ethiopia, Guyana, Honduras, Hong Kong, Kenya, Malaysia, Myanmar, Nepal, Philippines, Sri

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Lanka, Thailand, United Kingdom, and Vietnam. The Company is listed on the Dhaka Stock
Exchange with market capitalization of approximately Taka 50 billion.

The Company has eight manufacturing facilities spread over three manufacturing sites. In
addition Renata Oncology Limited has two manufacturing facilities. Distribution of products is
carried out by 19 depots across the country. Renata employs 4,334 people.

2.2.1 Stock market information of Renata Ltd:

Closing Price BDT. 1238.90

Market Capitalization (mn) BDT. 87,398.715

Authorized Capital (mn) BDT. 1,000

Paid-up Capital (mn) BDT. 700.31

Num. of Shares outstanding 70,031,022

Market Category A

Face value BDT. 10

2.2.2 Dividend History of Renata Ltd:

Year Cash Dividend % Stock Dividend %

2012-13 60 25

2013-14 75 25

2014-15 80 20

2015-16 85 15

2016-17 130 15

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3.0 Porter's Five Forces:

According to www.investopedia.com 'Porter's Five Forces is a model that identifies and

analyzes five competitive forces that shape every industry, and helps determine an industry's
weaknesses and strengths.' What it means is that this analysis will help a firm to understand the
industry's nature and structure, allowing the firm to come up with corporate strategies that will
allow them to take advantage of the industry.

Since our project is based on pharmaceutical companies our Porter Analysis will be on the
pharmaceutical industry. This theory analyses five different forces to measure competition
intensity, attractiveness and profitability of an industry or market. These forces are:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

Analysis:

1. Competition in the industry: HIGH

 Number of firms is high in the industry so competition is high.

 Most firms follow a combination of cost leadership strategy and brand focus strategy i.e.
same type of product are sold by different brands at different prices and quality.

2. Potential of new entrants into the industry: LOW

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  Capital requirement to start a pharmaceutical business is very high as it requires a huge
investment for research and development of a new drug.

 Government drug regulatory bodies such as The Directorate General of Drug

Administration (DGDA) and The Pharmacy Council of Bangladesh (PCB) forces
companies to strictly follow the World Health Organization's (WHO) current Good
Manufacturing Practices (GMP) and manufacturing units are regularly inspected by the
DGDA.

3. Power of suppliers: LOW

 Suppliers of pharmaceutical companies are chemical companies however many of the

key pharmaceutical companies have their own chemical factories thus they do not need
a third party supplier. In fact these key players also provide raw materials to other
pharmaceutical companies. Overall most suppliers have low bargaining power in the
market.

4. Power of customers: MEDIUM

 For simple illness customers can get the same type of drug made by different
companies.

 For more complex health problems customers have no choice other than to get the
drugs prescribed by their doctors at whatever price it is sold for in the market.

5. Threat of substitute products: LOW

 There is very little threat for the pharmaceutical industry because there are no
substitutes for medicine.

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 Potential of new
entrants : LOW

R&D Capital
requirement to start
a pharmaceutical
business is very high

Strict government
regualtion

Competition in the Power of customers:

Power of suppliers: LOW
industry: HIGH MEDIUM

Key pharmaceutical Number of firms is high in Simple illness same

companies have their the industry . type of drug made by
own chemical factories. different companies.

Key players also provide Most firms follow a

raw materials to other combination of cost Complex illness
pharmaceutical leadership strategy and customers have no
companies. choice
brand focus strategy .

Threat of substitute
products: LOW

There is very little

threat for the
pharmaceutical
industry because
there are no
substitutes for
medicine.

8|Page
4.0 Ratios Analysis:

4.1 Receivables Turnover:

The receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness
in extending credit and in collecting debts on that credit. It indicates the efficiency with which a
firm collects on the credit it issues to customers. Firms that maintain accounts receivables are
indirectly extending interest-free loans to their clients since accounts receivable is money owed
without interest.

The method for calculating receivables turnover ratio can be represented with the following
formula:

Receivables Turnover =

2013- 2014- 2016-

2012-2013 2014 2015 2015-2016 2017

Square Pharmaceuticals
Ltd. 24.86 30.35 29.83 30.26 16.58

Renata Ltd. 9.72 12.22 8.29 3.87 7.97

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 Receivables Turnover

35.00 30.35 29.83 30.26

30.00 24.86
25.00
16.58
Times

20.00
12.22
15.00 9.72
8.29 7.97
10.00
3.87
5.00
0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that, in the year 2012-2013, Square pharma had a
receivables turnover of 24.86 and Renata Pharma had a receivables turnover of 9.72. This
means that Square Pharma could collect its receivables 24.86 times on average on the year
2012-2013 and Renata Pharma could collect its receivables 9.72 times on average on the year
2012-2013. In the year 2013-2014, both Square Pharma and Renata Pharma’s receivables
turnover increased to 30.35 and 12.22 accordingly which are higher than the last year. It
indicates that, both the company’s collection of accounts receivable is efficient, and that the
company has a high proportion of quality customers that pay off their debts quickly. From the
year 2013-2014 to 2015-2016, square Pharma maintained their receivables turnover in a
constant rate from 30.35 to 30.29. Even though it decreased a bit, it is not that significant. It’s
because, their sales turnover increased from 23 billion to 40 billion and their accounts
receivables increased from 700 million to 1 billion. In comparison to the accounts receivables,
their sales increased significantly. It indicates that, they became more efficient in selling their
products to good customers and they maintained a conservative policy regarding its extension
of credit. On the other hand, in that same period of time, Renata Pharma’s Receivables
turnover decreased significantly from 12.22 to 3.87. It’s because even though their sales

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turnover increased from 7 billion to 12 billion, their accounts receivables also increased
significantly from 800 million to 1.7 billion. It indicates that Renata pharma may have poor
collecting processes, a bad credit policy or none at all, or bad customers or customers with
financial difficulty. Theoretically, a low ratio can also often mean that the company has a high
amount of cash receivables for collection from its various debtors. Finally, from the year 2015-
2016 to 2016-2017, Square Pharma’s decreased significantly from 30.26 to 16.58. its because
their sales turnover significantly dropped from 4. Billion to 36.5 billion and their accounts
receivables significantly increased from 1 billion to 2 billion. In that same period, Renata
pharma’s receivables turnover increased from 3.87 to 7.97 due to their increased sales
compared to accounts receivables.

4.2 Days of sales outstanding:

Days sales outstanding (DSO) is a measure of the average number of days that it takes a
company to collect payment after a sale has been made.

The formula for calculating days sales outstanding can be represented with the following
formula:

Days of sales outstanding =

2012- 2013- 2014- 2015- 2016-

2013 2014 2015 2016 2017

Square Pharmaceuticals Ltd. 14.68 12.03 12.24 12.06 22.01

Renata Ltd. 37.55 29.87 44.04 47.16 45.79

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 Days of Sales Outstanding
47.16 45.79
50.00 44.04
37.55
40.00
29.87
30.00 22.01
Days

20.00 14.68
12.03 12.24 12.06

10.00

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that in the year 2012-2013 Square Pharma’s Days of sales
outstanding was 14.68. It means on an average square Pharma takes 14.68 days or 2 weeks to
collect their payment after making the sales. In that same period Renata Pharma’s days of sales
outstanding was 37.55. Which means on an average it takes them 37.55 days or more than 1
month to collect their payment after making a sale. Due to the high importance of cash in
running a business, it is in a company's best interest to collect on its outstanding account
receivables as quickly as possible. After analyzing this two pharma’s in the year 2012-2013 it
can clearly be stated that, Square pharma is more efficient in selling their products with short
receivables period compared to Renata pharma. From the year 2013-2014 to 2015-2016,
Square Pharma maintained its days of sales outstanding between 12.03 to 12.06 because of
that they could generate more cash in their cash flow. That’s why they could cover their
operating cost more efficiently. On the other hand, in that same period, Renata Pharma’s days
of sales outstanding increased from 29.87 to 47.04. It means, they had cash flow problems.
Because of that, they faced more problems in covering their operating activities.

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4.3 Inventory Turnover:
Inventory turnover is a ratio showing how many times a company's inventory is sold and
replaced over a period of time. A low turnover implies weak sales and, therefore, excess
inventory. A high ratio implies either strong sales and/or large discounts. The speed with which
a company can sell inventory is a critical measure of business performance.

The formula for calculating Inventory turnover can be represented with the following formula:

Inventory Turnover =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 3.66 4.74 4.51 5.67 4.90

Renata Ltd. 1.86 2.01 2.07 1.05 2.41

Inventory Turnover
5.67
6.00
4.74 4.90
4.51
5.00
3.66
4.00
Times

3.00 2.41
2.01 2.07
1.86
2.00 1.05
1.00

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

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From the above graph, we can see that, in the year 2012-2013, Square Pharma’s inventory
turnover was 3.66. it means, in that year Square pharma could sell or replace their inventory
3.66 times. But in that same year Renata pharma could sale or replace their inventory only 1.86
times. From the year 2012-2013 to 2014-2015, Square pharma’s inventory turnover increased
gradually, due to their increased sales. During that time their profitability increased from 3.6
billion to 6 billion due to high sales. In that same period Renata pharma’s inventory turnover
slightly increased from 1.86 to 2.07. Because their sales did not grow that much. From the year
2015-2016 to 2016-2017, square pharma’s inventory turnover slightly decreased from 5.67 to
4.90 as their profitability slightly decreased from 9.8 billion to 9.7 billion. In that same period,
Renata Pharma’s profitability was much lower than that of Square pharma’s, only 2 Billion to
2.6 Billion. Since it increased a bit, Renata pharma’s inventory turnover also increased from
1.05 to 2.41. So, it can be said that, Square Pharma’s overall business performance is better
than that of Renata Pharma’s.

4.4 Days of Inventory on hand

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.

Days of Inventory on hand =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 99.77 77.08 80.85 64.35 74.51

Renata Ltd. 196.24 181.59 176.72 173.8 151.45

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 Days of Inventory on Hand
196.24
200.00 181.59 176.72 173.8
151.45
150.00
99.77
Days

100.00 77.08 80.85 74.51

64.35

50.00

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, it can be observed that, in the year 2012-2013 Square Pharma’s Days of
Inventory on hand was 99.77. It means, on an average it takes 99.77 days to sell Square
Pharma’s inventory. On the other hand, Renata Pharma’s Days of Inventory on hand as 196.24.
Since inventory carrying costs take significant investment, a business must try to reduce the
level of inventory. Lower level of inventory will result in lower days' inventory on hand ratio.
Therefore, lower values of this ratio are generally favorable and higher values are unfavorable.
From the year 2012-2013 to 2016-2017, Square Pharma’s Days of Inventory on hand decreased
significantly from 99.77 to 74.51 because their profitability increased from 3.6 billion to 9.7
billion. In that same period, Renata Pharma’s Days of inventory on hand decreased a bit since
their profitability has slightly increased from 1.2 billion to 2 billion.

4.5 Total Asset turnover ratio:

Asset turnover ratio measures the value of a company’s sales or revenues generated relative to
the value of its assets. The Asset Turnover ratio can often be used as an indicator of the
efficiency with which a company is deploying its assets in generating revenue.

Total asset turnover =

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 2012- 2013- 2014- 2015- 2016-
2013 2014 2015 2016 2017

Square Pharmaceuticals Ltd. 0.73 0.75 0.76 0.91 0.70

Renata Ltd. 0.78 0.81 0.84 0.44 0.92

Total Asset turnover

0.84 0.91 0.92

1.00 0.81
0.78 0.75 0.76
0.73 0.70
0.80

0.60 0.44
Taka

0.40

0.20

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that, in the year 2012-2013, Square Pharma’s Total Asset
turnover was 0.73. It means, for every taka of fixed asset, Square Pharma generated 0.73 taka.
from the year 2012-2013 to 2014-2015 square pharma’s total asset turnover increased from
0.73 to 0.76. similarly, Renata Pharma’s Total Asset Turnover Increased at a higher rate from
.78 to .84. As Square pharma is a large company with high profitability, their investment on
fixed asset is also high compared to that of Renata Pharma’s. That’s why their total asset
turnover is lower than that of Renata Pharma’s from the year 2014-2015 to 2015-2016, Square
pharma’s total asset turnover increased significantly than Renata Pharma. Because in

16 | P a g e
proportion to their investment on fixed asset, their profitability increased at a higher rate. In
the year 2016-2017, Square pharma invested around 52 billion which is more than the last year.
In comparison to that their profitability decreased. That is why their total asset turn over
decreased to .70.

4.6 Fixed Asset Turnover:

This ratio specifically measures how able a company is to generate net sales from fixed-asset
investments, namely property, plant and equipment (PP&E), net of depreciation. In a general
sense, a higher fixed-asset turnover ratio indicates that a company has more effectively utilized
investment in fixed assets to generate revenue.

Fixed Asset Turnover =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 0.98 0.99 1.05 1.48 1.24

Renata Ltd. 1.65 1.54 1.53 0.83 1.77

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 Fixed asset turnover

2.00 1.77
1.65
1.54 1.53 1.48
1.50 1.24
0.98 0.99 1.05
Taka

0.83
1.00

0.50

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that, from the year 2012-2013 to 2015-2016, Square
Pharma’s fixed asset turnover increased gradually from .98 to 1.48. it means square pharma is
doing an effective job of generating sales with a relatively small amount of fixed assets. It can
also be assumed that they are Outsourcing work to avoid investing in fixed assets. On the other
hand, even though Renata’s fixed asset turnover is higher than that of Square pharma, it
decreased from 1.65 to .83 due to their decrease of profitability and sales. It means Renata
have overinvested in fixed assets and they need to increase sales. as their receivable turnover
decreased over the years and they have made a large investment in fixed assets, their
profitability decreased as their operating cost increased.

4.7 Current Ratio:

The current ratio is a liquidity ratio that measures a company's ability to pay back its liabilities
(debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts
receivable).

A ratio under 1 indicates that a company’s liabilities are greater than its assets and suggests
that the company would be unable to pay off its obligations if they came due at that point.

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While a current ratio below 1 shows that the company is not in good financial health, it does
not necessarily mean that it will go bankrupt.

The higher the current ratio, the more capable the company is of paying its obligations, as it has
a larger proportion of asset value relative to the value of its liabilities

Current ratio =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 2.12 3.13 3.82 6.34 9.81

Renata Ltd. 0.79 1.02 1.15 1.36 1.75

Current ratio
9.81
10.00

8.00 6.34
6.00
Taka

3.82
3.13
4.00 2.12
1.36 1.75
0.79 1.02 1.15
2.00

0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that, in the year 2012-2013, square Pharma’s current ratio
was 2.12. it means for every 1 Taka; Square pharma has 2.12 taka available to pay off their

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debt. In that same period Renata pharma’s current ratio was .79. which means, for every 1 taka
of debt, Renata pharma has only .79 taka available to pay off their debt. It indicates that
Renata’s financial health is not that good. From the year 2012-2013 to 2016-2017, current ratio
of Square Pharma increased gradually from 2.12 to 9.81. It’s because their current liability
decreased from 3.2 billion to 2.3 billion and their current assets increased significantly from 6.9
billion to 23 billion. On the other hand, in that same period, Renata pharma’s current ratio
increased from 079 to 1.75. due to their increased of both current asset and current liability.
Based on this, it can be said that, compared to Renata Pharma, Square pharma’s financial
health is much sound.

4.8 Quick ratio:

The quick ratio is an indicator of a company’s short-term liquidity and measures a company’s
ability to meet its short-term obligations with its most liquid assets.

Quick ratio =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 0.89 1.71 2.23 4.55 7.62

Renata Ltd. 0.21 0.31 0.36 1.23 0.59

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 Quick Ratio
7.62
8.00
7.00
6.00 4.55
5.00
Taka

4.00
2.23
3.00 1.71
0.89 1.23
2.00 0.31 0.59
0.21 0.36
1.00
0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the above graph, we can see that, in the year 2012-2013, Square Pharma’s quick ratio was
.89. It means that they have 0.89 taka worth of liquid asset available to cover each 1 Taka of
current liability. It means Square pharma has less money available to pay off their current
liability. It’s because on that year, their current liability was much higher and they had lower
amount of cash compared to other years. On the other hand, Renata pharma’s quick ratio was
below 1 except the year 2015-2016. It’s because their current liability increased from 2.8 Billion
to 4.4 billion, whereas, their most liquid assets such as cash, account receivables marketable
securities did not increase that much. From the year 2012-2013 to 2016-2017 Square
phar5ma’s Current ratio increased gradually from .89 to 7.62 which indicated that they had
utilized their most liquid assets efficiently than that of Renata Pharma’s.

4.9 Cash ratio:

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability to pay off
its current liabilities with only cash and cash equivalents. The cash ratio is much more
restrictive than the current ratio or quick ratio because no other current assets can be used to
pay off current debt–only cash.

If a company's cash ratio is equal to 1, the company has exactly the same amount of current
liabilities as it does cash and cash equivalents to pay off those debts.

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If a company's cash ratio is less than 1, there are more current liabilities than cash and cash
equivalents. In this situation, there is insufficient cash on hand to pay off short-term debt.

If a company's cash ratio is greater than 1, the company has more cash and cash equivalents
than current liabilities. In this situation, the company has the ability to cover all short-term debt
and still have cash remaining.

Cash ratio =

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharmaceuticals Ltd. 0.64 1.39 1.87 4.05 6.69

Renata Ltd. 0.04 0.05 0.05 0.22 0.14

Cash ratio
6.69
7.00
6.00
5.00 4.05
4.00
3.00 1.87
1.39
2.00 0.64
1.00 0.04 0.05 0.05 0.22 0.14
0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Year

Square Pharmacuticals Ltd. Renata Ltd.

From the year 2012-2013 to 2016-2017, we can see that except the year 2012-2013, Square
pharma has cash ratio which is more than 1. It means square pharma can pay off their debt by

22 | P a g e
 only using cash and marketable security which is extremely liquid. Since it ranges from 1.39 to
6.69, it means even after paying off their current liabilities with cash and cash equivalents, they
will have cash remained. It indicates that square pharma is highly profitable. On the other hand,
Renata Pharma’s cash ratio is below 1 from the year 2013-2013 to 2016-2017. Which indicates
that, they cannot repay their debt only with cash and marketable securities. It means they are
in shortage of cash due to high operating cost and low profitability and they are in financial
difficulty. However, high cash ratios may indicate that a company is inefficient in the utilization
of cash or not maximizing the potential benefit of low-cost loans.

Solvency Ratio Analysis:

2013 2014 2015 2016 2017

Square Renata Square Renata Square Renata Square Renata Square Renata

Debt to
0.107 1.03 0.049 0.87 0.021 0.72 0.0 0.31 0.0 0.45
Equity

Debt to
0.087 0.51 0.042 0.47 0.019 0.42 0.0 0.37 0.0 0.31
Asset

Financial
1.22 1.98 1.16 1.93 1.13 1.72 1.09 1.65 1.07 1.52
Leverage

Interest
14.56 5.77 36.32 6.61 45.44 12.25 N/A 38.93 N/A 32.29
Coverage

23 | P a g e
4.10 Debt to Equity Ratio:
From the table we can see that in 2013 the debt-to-equity ratio was 0.107 for Square and 1.03
for Renata. In 2014 the debt-to-equity ratio was 0.049 for Square and 0.87 for Renata. In 2015
the debt-to-equity ratio was 0.021 for Square and 0.72 for Renata. In 2016 the debt-to-equity
ratio was 0.0 for Square and 0.31 for Renata. In 2017 the debt-to-equity ratio was again 0.0 for
Square and 0.45 for Renata.

Debt to Equity Ratio

1.2

0.8

0.6 Square
Renata
0.4

0.2

0
2013 2014 2015 2016 2017

This data show that both companies are having a downward trend for their debt-to-equity
ratios. This means that the overall financing of the company is shifting from debt to equity
financing. In 2013 Renata was primarily financed using debt because their ratio was over 1 but
in 2017 this ratio was lowered by more than half compared to 2013's ratio. The reason for this
was that Renata's number of issued shares were almost double the amount in 2017 compared
to 2013. SquarePharma on the other hand had paid off their long term debts by 2015 and did
not take any additional short term or long term debts in 2016 and 2017. Thus their debt to
equity ratio was 0 for both years.

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4.11 Debt to Asset Ratio:
From the table we can see that in 2013 the debt-to-asset ratio was 0.087 for Square and 0.53
for Renata. In 2014 the debt-to-asset ratio was 0.042 for Square and 0.47 for Renata. In 2015
the debt-to-asset ratio was 0.019 for Square and 0.42 for Renata. In 2016 the debt-to-asset
ratio was 0.0 for Square and 0.37 for Renata. In 2017 the debt-to-asset ratio was again 0.0 for
Square and 0.31 for Renata.

Debt to Asset
0.6

0.5

0.4

0.3 Square
Renata
0.2

0.1

0
2013 2014 2015 2016 2017

For debt to asset ratios both companies are facing a downward trend. This means most of their
assets are being financed by equity rather than debt. Once again this trend occurred because
both companies had less debt obligations in 2017 compared to 2013. Square Pharma's had no
debt in 2016 and 2017 thus their ratios became 0. Renata also had lower amount of short term
and long term borrowings in 2016 and 2017 when compared to 2013. This indicates that in
recent years more of their assets were financed using equity and also Renata was lowering their
overall borrowings.

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4.12 Financial Leverage Ratio:
From the table we can see that in 2013 the financial leverage ratio was 1.22 for Square and 1.98
for Renata. In 2014 the financial leverage ratio was 1.16 for Square and 1.93 for Renata. In 2015
the financial leverage ratio was 1.13 for Square and 1.72 for Renata. In 2016 the financial
leverage ratio was 1.09 for Square and 1.65 for Renata. In 2017 the financial leverage ratio was
again 1.07 for Square and 1.52 for Renata.

Financial Leverage
2.5

1.5
Square
1 Renata

0.5

0
2013 2014 2015 2016 2017

Once again the financial leverage ratio for both companies is following a downward trend. This
indicates that the increase in average total equity was higher in each subsequent year
compared to the increase in average total assets. This tells us that both the companies are
focusing towards equity financing thus shareholders have more claim on assets compared to
debt holders.

4.13 Interest Coverage Ratio:

From the table we can see that in 2013 the interest coverage ratio was 14.56 for Square and
5.77 for Renata. In 2014 the interest coverage ratio was 36.32 for Square and 6.61 for Renata.
In 2015 the interest coverage ratio was 45.44 for Square and 12.25 for Renata. In 2016 the
interest coverage ratio was N/A for Square and 38.93 for Renata. In 2017 the interest coverage
ratio was again N/A for Square and 32.29 for Renata.

26 | P a g e
 Interest Coverage
50
40
30
Square
20
Renata
10
0
2013 2014 2015 2016 2017

Interest coverage ratio had an upward trend for both companies because both companies had
less amount of interest payable in each subsequent years and also their EBIT was higher
compared to previous years. In the graph we see that Square Pharma has no interest coverage
in 2016 and 2017. This was because they retired all their debts in 2016 and had no new
borrowings in 2017 thus no interest expense occurred in these two years. On the other hand
Renata had a slightly lower EBIT in 2017 compared to 2016 which lowered the interest coverage
ratio of 2017.

4.14 Gross profit margin:

Gross Profit margin

54.00%
52.00% 51.71% 51.65%
51.21% 50.81%
50.51%
50.00%
48.00%
Square Pharmaceutical
46.00%
Renata Limited
44.00%
42.00%
40.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Gross profit indicates how much each monetary unit of earning is available to cover the cost of
goods sold of a firm. In this case, the graph indicates for the last five consecutive years Renata

27 | P a g e
limited has higher gross margin than Square pharmaceutical. But Square pharmaceutical's gross
profit margin increased substantially from 2014-2015 to 2015-2016. Because turnover
increased from 26.68 billion in 2014-2015 to 40.42 billion in 2015-2016 whereas cost of goods
sold increased from 14.94 billion in 2014-2015 to 20.95 billion in 2015-2016. As a result,
increase in turnover is higher than increase in cost of goods sold which result larger gross profit
margin. In other word we might say, revenue increase at a higher rate than cost of goods sold.
It indicates, though Square pharmaceutical has lower gross profit margin than Renata limited
but they are improving, in controlling their cost associated with goods sold whereas Renata
limited is almost maintaining the efficiency of controlling cost at a same degree compared to its
previous years. But based on only this ratio Renata limited is in a better position than Square
pharmaceutical

4.15 Operating profit margin:

Operating profit margin

40.00%
35.00% 32.00% 33.65%
30.00% 26.41% 27.01%
25.00%
25.73%
20.00% Renata Limited
15.00% Square Pharmaceutical
10.00%
5.00%
0.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Operating profit margin indicates how much each monetary unit of earning can be translated
into profit before interest and tax by a firm. Square pharmaceutical shows operating cost
efficiency for the last four years whereas Renata limited operating cost margin decrease till
2014-2015 then increase and in the last year, it decreases again. So Renata limited performance
in this regard is not consistent whereas Square pharmaceutical performance is consistent and

28 | P a g e
increasing in every year. The main reason behind that travelling expenses, sales promotion,
filed experiences and distribution are the large operating cost for Renata limited which they
should minimize to gain higher operating profit margin.

4.16 Net profit margin:

Net Profit Margin

35.00%

30.00% 30.04%

25.00% 22.76%
21.73%
20.00% 17.84%
16.43% Renata Limited
15.00%

10.00%
Square
5.00% Pharmaceutical

0.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Net profit margin indicates how much each monetary unit of earnings can be translated into
profit by a firm. Comparing the net profit margin between Square pharmaceutical and Renata
limited, the graph shows us that Renata limited has lower net profit margin than Square
pharmaceutical for the last five consecutive years. The main reason behind that finance cost is
more for Renata limited than Square pharmaceutical. Another reason is "other income" is
higher for Square pharmaceutical than Renata limited. As a result, the spread resulting from
revenue minus cost is larger for Square pharmaceutical which results higher net profit margin.
Moreover, the graph indicates this overall cost controlling efficiency for Square pharmaceutical
is higher than Renata limited which causes every year higher net profit margin in Square
pharmaceutical. As a result, Square pharmaceutical is more effective in converting revenue into
actual profit.

29 | P a g e
4.17 Return on Asset:
Return on Asset
25.00%

20.00% 20.90%
20.77%
16.47%
15.00% 15.07% 16.37%
Renata Limited
10.00%

5.00%
Square
0.00% Pharmaceutical
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Return on asset indicates how efficient the management in utilizing the asset to generate
profit. Between this two firm Square pharmaceutical has higher return on asset than Renata
limited in every year. Though Square pharmaceutical has higher amount of total asset but it
generally outperforms Renata limited in every year because of its capability to generate higher
net income, resulting higher return on asset. Moreover, Renata Limited return on asset
increased in 2016-2017 though it total asset increases. The main reason behind this is higher
net income which is caused lower finance cost of Renata limited. In 2015-2016 the finance cost
was 0.27 billion but in 2016-2017 it was 0.19 billion.

4.18 Return on Equity:

Return on Equity
30.00%

25.00%
22.68% 22.38%
20.00%
18.65%
18.37% 19.00%
15.00% Renata
Limited
10.00%

5.00%

0.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

30 | P a g e
Return on equity indicates how many monetary units results from each dollar of equity. The
graph shows that Renata Limited return on equity is decreasing for the last five consecutive
years. Though its net income increases but equity is also increases and increase in equity is
higher than increase in net income resulting lower return on equity. But it still in better position
than Square pharmaceutical. One possible reason behind that Renata limited as a smaller firm
has low amount of equity compared to Square pharmaceutical. Though its net income is also
lower than Square pharmaceutical but lower equity offset the impact of lower net income
resulting better ROE for Renata limited. On the other hand Square pharmaceutical's return on
equity substantially increases in 2015-2016 since equity increases by 30% but the net income
increases by 90%.

4.19 Free Cash Flow to the Firm (FCFF) and Free Cash Flow to the Equity
(FCFE):

2017

Square Renata

FCFF 9,070,009,641 3,404,382,193

FCFE 9,069,893,849 2,536,775,013

FCFF indicates how much cash is left by a firm to cover its costs and investment activities. A
positive value indicates the firm is capable to finance its costs, pay dividends and make further
investments on its own. A negative value indicates the firm will require additional financing
through debt or by raising equity. Square Pharma has a FCFF of BDT 9.070 billion while Renata
has a FCFF of BDT 3.404 billion. Both firms have positive FCFF but Square Pharma has a higher
FCFF than Renata thus Square is more financially safe than Renata.

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FCFE indicates whether a firm is capable of making its dividend payments and stock repurchases
by themselves or whether they need external financing. If the FCFE is higher than total dividend
payments and stock repurchases then it indicates firm is using its own money. For Square, their
total dividend and stock repurchase was BDT 2,494,346,184. Since the FCFE is BDT
9,069,893,849, which is higher, it indicates Square Pharma is capable of financing itself. For
Renata, their total dividend and stock repurchase was BDT 685,184,435. Since the FCFE is BDT
2,536,775,013, which is higher, it indicates Renata is also capable of financing itself. However
Square Pharma's FCFE is a lot higher than Renata.

Also another effect that can be seen is that the difference in Square Pharma's FCFF and FCFE is
very low. This value is consistent with Square's financing behavior because Square Pharma has
retired all of its debts in 2016 and 2017. This indicates that most of the cash generated in 2017
belongs to the shareholders. On the other hand, Renata had some debts in 2017 thus they had
to pay an interest expense. This caused difference of almost a BDT 1 billion between the FCFF
and FCFE.

The following table includes all the calculated FCFF from 2013-2017 which can also be
interpreted like above.

Year Square Pharma Renata Ltd.

2012-13 4,418,384,693.68 -870,128,599

2013-14 2,518,884,324.10 266,100,371

FCFF 2014-15 2,512,762,695.58 1,030,078,231

2015-16 507,782,998.75 1,883,137,080

2016-17 9,070,009,640.75 3,404,382,193

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4.20 DuPont Analysis:
The original DuPont ROE ratio is basically divided into three factors which are net profit margin,
asset turnover and leverage. In this section we focus on analyzing each of this factor.

DuPont ROE
30.00%

25.00%

20.00% 22.68%
18.65% 22.38%
Renata
15.00% 14.69% 15.52% Limited

10.00%
Square
Pharmac
5.00%
eutical
0.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Renata Limited 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Net profit Margin 0.1587 0.154 0.1558 0.1562 0.1628
Total asset turnover 0.78 0.81 0.84 0.44 0.92
Financial leverage 1.98 1.93 1.72 1.65 1.52
DuPont ROE 24.51% 24.07% 22.51% 11.34% 22.77%

Table 01: DuPont Factors Analysis of Renata Limited

Square Pharmaceutical 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Net profit Margin 0.1643 0.1784 0.2173 0.2276 0.3004
Total asset turnover 0.73 0.75 0.76 0.91 0.70
Financial leverage 1.22 1.16 1.13 1.09 1.07
DuPont ROE 14.69% 15.52% 18.65% 22.68% 22.38%

Table 02: DuPont Factors Analysis of Square pharmaceutical

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Comparing these two companies, Square pharmaceutical has consistently improved during the
first 4 years and slightly dropped in the last year. In case of Renata limited a substantial
dropped is observed in 2015-2016 which caused due to low total asset turnover ratio that is
caused by a drop in the revenue. But in next year Renata limited is at better position due to
higher revenue per total asset mainly. Between the two firms higher leverage indicates Renata
limited is riskier than Square pharmaceutical but both of the firms are reducing their financial
leverage. Moreover, as a smaller company compared to Square pharmaceutical higher leverage
than larger comparing peer firm is concerning for Renata limited. Since higher financial leverage
causes higher finance cost that reduces the net profit margin which is case of Renata limited. As
a result in tern of risk aversion Square pharmaceutical is at better position.

4.21 Coefficient of variation (Business Risk):

1. Coefficient of variation of Sales

CV Sales
0.295361164
0.3
0.24974234
0.25 Renata Limited
Square Pharmaceutical
0.2
2016-2017

2. Coefficient of variation of operating income

CV Operating Income
0.6
0.411222586
0.4
0.176056407 Renata Limited
0.2
Square Pharmaceutical
0
2016-2017

34 | P a g e
3. Coefficient of variation of net income

CV Net Income
0.6 0.462881674
0.4 0.333166397
Renata Limited
0.2
Square Pharmaceutical
0
2016-2017

In each of the three ratios of business risk Square pharmaceutical has more variation or it is
facing more risk than Renata limited in generating sales, operating income and net income.

4.22 Cash flow to Revenue:

Cash flow to Revenue
50.00%

40.00%
Renata
30.00% Limited
26.23% 27.57% 26.12%
24.26%
20.00%
Square
10.00% Pharma
ceutical
3.30%
0.00%
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

The cash flow to revenue shows a firm's ability to generate operating cash flow in term of
revenue. In other word, for each dollar revenue how much operating cash flow is generated by
the firm. From the graph we can understand that operating cash flow to revenue for Renata
limited has been increasing since last five years and substantially increased from 2012-2013 to
2013-2014. This is caused since net cash flow generated from operating activities increased
from .916 billion in 2012-2013 to 1.716 billion. It indicates a high cash collection by firm during
this year. Since the last two years a higher growth in this ratio also indicates firm may have to
rigid policy in their cash collection procedure but further information is required to make
proper judgment of this point of view. Comparing with Renata limited, Square pharmaceutical

35 | P a g e
has lower cash flow to revenue ratio in every year except the first year and it has a large
dropped in cash flow to revenue in 2015-2016 due to substantial decrease in the net cash
provided by operating activities. Net cash flow decrease because cash received decrease by
67%, whereas revenue increased by 51%. Another reason is Cash payment is 86% of the cash
received in 2015-2016 whereas in 2014-2015 cash payment is only 78% of cash received.

4.23 Cash Return on Asset:

Cash flow on Asset

25.00%

20.00% 20.67%
19.24% 18.39% 18.17%
15.00% Renata
Limited
10.00%

5.00% Square
3.01% Pharmace
0.00% utical
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

While return on asset indicates how much each taka of asset generate earnings which is based
on accrual basis accounting, cash flow on asset ratio shows how much each dollar of asset
generate operating cash flows. Comparing this two firm Square pharmaceutical has a
substantial decrease in cash return on asset in 2015-2016 due a large increase in their current
assets. The current asset increase from 9.72 billion in 2014-2015 to 17.06 billion in 2015-2016.
Moreover as the net operating cash flows decreases results a lower ratio. But in following year,
as net operating cash flow substantially increases, Square pharmaceutical's ratio also increases.
But for Renata limited the last year's net operating cash flows substantially increased causes a
higher cash flow on asset ratio. Between these two firms at present Renata limited is at better
position.

36 | P a g e
4.24 Debt Coverage:
Debt coverage
3.00
2.73
2.50

2.00 Renata
1.58 Limited
1.50 1.49
1.00 1.07
Square
0.50 0.36 Pharmaceut
ical
0.00
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Cash flow to debt ratio indicates firm's ability to support its debt obligation from the operating
cash flows. Between our comparing firms Square pharmaceutical has much better ability to
support their existing debt load or payback their debt from operating cash flow. On the other
hand Renata limited in this regard is getting better compared to their previous performance in
the last five fiscal year.

5.0 Relative Valuation

Relative valuation is a valuation, which tries to determine the value of an asset in relation the
values of other assets. The most common models use market price as a multiple of an individual
financial factor of the firm, such as earnings per share. The resulting ratio, price-to-earnings
(PIE), is easily compared to that of other firms. If the P /E is higher than that of comparable
firms, it is said to be relatively overvalued. The converse is also true: if the P/E is lower than
that of comparable firms, the firm is said to be relatively undervalued.

For relative valuation of both the firms, we have taken 2 more pharmaceutical companies along
with Square pharma and Renata Pharma. They are, Orion pharma and ACI. They are, Orion
pharma and ACI ltd. Firstly, we will try to determine what should be the current value per share
of Square Pharma Ltd and then we will determine the current value per share of Renata
Pharma. After that we will measure both of their current value with their market values.

37 | P a g e
Square Pharma

Square Renata Orion ACI

Current stock Price 1248.7 46.4 406.7

EPS 15.51 42.89 4.19 77.99

Book value Per Share 71.49 204.85 67.84 247.16

Cashflow Per Share 21.38 8.81 2.72 19.04

Sales Per Share 49.56 229.09 47.06 1021.44

Since we will determine the value per share of Square pharma, we have taken the current stock
price of Renata, Orion and ACI from DSE. Then we have calculated their EPS per share, Book
value per share, cashflow per share and sales per share.

Now we will calculate the relative valuation for comparable firms:

Relative Value Measure Renata Orion ACI

Current stock Price 1248.7 46.4 406.7

P/E 29.11 11.07 5.21

P/B 6.10 0.68 1.65

P/CF 141.68 17.06 21.36

P/S 5.45 0.99 0.40

We have calculated relative value measure by simply dividing current stock price by EPS, BV, CF
and Sales consecutively.

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Mean Relative Value Measures

Relative Value Renata Mean Relative Value measure

Measure (a) Orion(b) ACI(c) (a+b+c)/3

P/E 29.11 11.07 5.21 15.13

P/B 6.10 0.68 1.65 2.81

P/CF 141.68 17.06 21.36 60.03

P/S 5.45 0.99 0.40 2.28

After calculating the relative measures of the 3 firms, we have calculated mean relative value
measure.

Relative Estimated Stock

Target Company Square Value Mean relative value based on
Statistics Statistics(a) measure Value Measure(b) comparable(a*b)

EPS 15.51 P/E 15.13 234.73

Book value Per Share 71.49 P/B 2.81 200.77

Cashflow Per Share 21.38 P/CF 60.03 1283.70

Sales Per Share 49.56 P/S 2.28 112.91

After calculating the mean relative value measure of the 3 firms, we have multiplied EPS per
share, B/V per share, CF per share and sales per share with the mean relative value measure.

39 | P a g e
Then we have estimated mean stock value of Square pharma by simply adding all the estimated
stock value and the divide them by their total number, which is 4.

Mean Estimated Stock value of Square Pharma = 458.03

Current Stock Price of Square Pharma = 315.2

The P/E of Square pharma is (458.03/15.51) =29.53 which is higher than the comparable firm’s
average P/E of 15.13. It means the, the Square Pharma’s P/E is overvalued. Now if we compare
the mean estimated Sock price with the current stock price, we can see that, Square Pharma’s
mean estimated Stock value is 458.03 Tk, whereas its current market value is 315.2 Tk. It means
Square Pharma’s Stock is undervalued.

Renata Pharma

For relative valuation of both the firms, we have taken 2 more pharmaceutical companies along
with Square pharma and Renata Pharma. They are, Orion pharma and ACI. They are, Orion
pharma and ACI ltd. Firstly, we will try to determine what should be the current value per share
of Square Pharma Ltd and then we will determine the current value per share of Renata
Pharma. After that we will measure both of their current value with their market values.

Renata Square Orion ACI

Current stock Price 315.2 46.4 406.7

EPS 42.89 15.51 4.19 77.99

Book value Per Share 204.85 71.49 67.84 247.16

Cashflow Per Share 8.81 21.38 2.72 19.04

Sales Per Share 229.09 49.56 47.06 1021.44

40 | P a g e
Since we will determine the value per share of Renata pharma, we have taken the current stock
price of Square, Orion and ACI from DSE. Then we have calculated their EPS per share, Book
value per share, cashflow per share and sales per share.

Now we will calculate the relative valuation for comparable firms:

Relative Value Measure Square Orion ACI

Current stock Price 315.20 46.40 406.70

P/E 20.32 11.07 5.21

P/B 4.41 0.68 1.65

P/CF 14.74 17.06 21.36

P/S 6.36 0.99 0.40

We have calculated relative value measure by simply dividing current stock price by EPS, BV, CF
and Sales consecutively.

Relative Value Mean Relative Value

Measure Square(a) Orion(b) ACI(c) measure(a+b+c)/3

P/E 20.32 11.07 5.21 12.20

P/B 4.41 0.68 1.65 2.25

P/CF 14.74 17.06 21.36 17.72

P/S 6.36 0.99 0.40 2.58

After calculating the relative measures of the 3 firms, we have calculated mean relative value
measure.

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 Relative Mean relative Estimated Stock
Target Company Renata Value Value value based on
Statistics Statistics(a) measure Measure(b) comparable(a*b)

EPS 42.89 P/E 12.20 523.42

Book value Per Share 204.85 P/B 2.25 460.12

Cashflow Per Share 8.81 P/CF 17.72 156.16

Sales Per Share 229.09 P/S 2.58 591.39

Mean Estimated Stock Value of Renata Pharma = 432.77

Current Stock Price of Renata Pharma = 1248.7

The P/E of Renata pharma is (432.77/42.89) =10.09 which is lower than the comparable firm’s
average P/E of 12.20. It means the, the Square Pharma’s P/E is undervalued. Now if we
compare the mean estimated Sock price with the current stock price, we can see that, Renata
Pharma’s mean estimated Stock value is 432.77 Tk, whereas its current market value is 1248.7
Tk. It means Renata Pharma’s Stock is overvalued.

5.1 Dividend Discount Model Valuation:

2017

Square Market Renata Market

Square (BDT per Renata (BDT per
Price (BDT per Price (BDT per
share) share)
share) share)

Single Stage DDM 195.68 301.8 440.77 1243.4

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Dividend Discount Model is used to value the intrinsic value of a share and how much it differ
from the current trading price. If the intrinsic value is higher than the trading price then the
stock is undervalued. If the intrinsic value is lower than the trading price then the stock is
overvalued.

For our Required Rate of Return we used the value of CAPM. For Square Pharma's CAPM our
market return was 12%, risk free rate was 3.69%, adjusted Beta was 0.6387. It gave us a CAPM
value of 8.998%. For Renata, market return was 12%, risk free rate was 3.69%, adjusted Beta
was 0.6613. It gave us a CAPM value of 9.194%.

For growth rate we multiplied retention ratio with ROE. For Square Pharma, Retention Ratio
was 0.7434 and ROE was 0.2238. It gave a growth rate of 16.64%. For Renata, Retention Ratio
was 0.7377and ROE was 0.2269. It gave a growth rate of 16.74%.

For Price of the share we used Gordon Growth Model. However a main condition of using GGM
is Required Rate of Return has to be higher than Growth Rate. As our CAPM is lower than
Growth Rate, we had to raise the RRR for Square Pharma to 19% and for Renata it was 19.7%.
Price of Square Pharma was BDT 227.49 per share and for Renata it was BDT 512.43.

Dividend (D1) for Square Pharma was BDT 5.377 and for Renata it was BDT 15.176.

For Square Pharma by using Single Stage DDM we found out the Intrinsic value of the stock in
2017 to be BDT 195.68 per share while the market price on 2017 to be BDT 301.8 per share. For
Renata by using Single Stage DDM we found out the Intrinsic value of the stock in 2017 to be
BDT 440.77 per share while the market price on 2017 to be BDT 1243.4 per share. Since the
intrinsic value of share of both companies is less than market price, companies are overvalued.

43 | P a g e
6.0 Conclusion:

Different ratios tell us different results regarding the activity, liquidity, solvency, profitability,
performance and coverage of these both companies. But from the analysis we can see that the
liquidity is higher for Square pharmaceutical than Renata limited. But based on the activity ratio
Renata Limited is more efficient than Square pharmaceutical. It may occur since Renata Limited
as a small firm proportionately has lower asset in term of net income which causes a better
looking result. Again the financial risk is less in the Square pharmaceutical than Renata limited
which can tell us at a first look risk inverse investors should choose the Square Pharmaceutical
for making their investment. But more prudently based on our stock valuation analysis we can
tell a better way to make investment. The better way is, since the stock of Square
pharmaceutical is undervalued an investor should buy the stock On the other hand, since
Renata limited share is overvalued so that investors should sell the shares. Because on that way
an investors will be hopefully able to make superior return on his or her investment.

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7.0 References:

1. 2014 CFA Level 2 Study Note Book3

2. Annual report from-
https://www.squarepharma.com.bd/annual-reports.php
https://renata-ltd.com/news-media/annual-report-archive/
3. CFA-2017-level-1-schweser-notes-book-3
4. Palepu_business_analysis_and_valuation
5. Porter's five forces analysis from-
https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis

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