Short-Term Liquidity Analysis

Square Pharmaceuticals Ltd. 2012

Author

ABIR, MD. ZABER TAUHID

Bachelor of Business Administration
Class of 2013
Faculty of Business Administration
American International University-Bangladesh

10/14/2012
 Short-Term Liquidity Analysis of
SQUARE PHARMACEUTICALS

Net Working Capital (NWC)

NWC_2012 = 6,718,544,893 - 4,252,934,845

= 2,465,610,048

Cash and Cash Equivalents (2012): Tk. 586,920,267 - 26,962,115 = 559,958,152

NWC_2011 = 7,022,213,840 - 4,668,189,426

= 2,354,024,414

NWC Trend (In Thousand)

2,480,000
2,460,000
2,440,000
2,420,000
2,400,000
2,380,000
2,360,000
2,340,000
2,320,000
2,300,000
2,280,000
2011 2012

SQUARE PHARMACEUTICALS has its Net Working Capital Surplus of 2,465 Million Tk. in 2012 and
2,354 Million Tk. in 2011 which indicate the firm has the efficiency in its short-term financial health.
The firm is able to pay off its short-term liabilities with the current asset easily which could be a good
sign for short-term & long-term creditors for the firm.

Current Ratio Analysis

CR_2012 = 6,718,544,893 / 4,252,934,845

= 1.58 Times

CR_2011 = 7,022,213,840 / 4,668,189,426

= 1.50 Times

MD. ZABER TAUHID ABIR 1|Page

 Current Ratio Trend 2008-2011

1.6

1.58

1.56

1.54

1.52

1.5

1.48

1.46
2011 2012

Similar to the NWC the strong Current Ratio of 1.58 Times (2012) & 1.50 Times (2011) of SQUARE
PHARMACEUTICALS indicates they are capable of meeting their short-term obligations with its short-
term assets very efficiently. Creditors will be attractive to make credit transactions with SQUARE which
shows the firms liquidity strength on liability coverage, buffer against losses and liquid fund reserve.

Net Trade Cycle (NTC)

NTC_2012

Purchase = COGS – Beginning Inventory + Ending Inventory – Depreciation

= 9,167,253,620 - 2,541,688,329 + 2,687,818,472 - 820,532,316 = 8,492,851,447

So, NTC_2012 = 105.55 + 18.13 - 37.11 = 87 Days

MD. ZABER TAUHID ABIR 2|Page

NTC_2011

Purchase = COGS – Beginning Inventory + Ending Inventory – Depreciation

= 7,703,661,010 - 2,207,078,082 + 2,541,688,329 - 662,949,732 = 7,375,321,525

So, NTC_2011 = 118.78 + 20.64 – 35.80 = 104 Days

NTC Trend (In Days)

110
105
100
95
90
85
80
75
2011 2012

SQUARE PHARMACEUTICALS has the lower trend from 2011 to 2012 which reflects a good indication
to the firm’s stockholders. SQUARE is minimizing the time frame of its payment to receiving the cash.
SQUARE takes only 87 days to get back its cash which also indicates the firm can run their cycle almost
four times throughout the year. SQUARE’s NTC is getting lower may result they need lower NWC to
keep paying its short-term obligations which is good for the firm.

MD. ZABER TAUHID ABIR 3|Page

 Common-Size Analysis

SQUARE PHARMACEUTICALS LIMITED

Common-Size Analysis (Current Asset Segment)
Particulars 2012 % 2011 %
Inventories 2,687,818,472 39.85 2,541,688,329 36.19
Trade Debtors 808,311,714 11.98 772,421,345 11.01
Advances, Deposits and Prepayments 577,156,445 8.56 523,991,079 7.46
Short Term Loan 2,085,300,110 30.91 2,813,811,332 40.07
Cash and Cash Equivalents 586,920,267 8.70 370,301,755 5.27
Total Current Assets 6,745,507,008 100% 7,022,213,840 100%

To comment on SQUARE PHARMACEUTICALS liquidity performance, only NWC and Current Ratio
Analysis is not enough. We need to allocate weights to determine which of the item has the most weight
in the current asset segment. Here shows 36.19% of current asset is stuck in inventory during 2011 and
likely 39.85% in 2012 which reflects most of the portion has been blocked with the inventory which is
least liquid asset in current asset segment and it’s increasing from year 2011 to 2012. To find the root
we need to determine the Activity Analysis of Inventory. On the other hand, Accounts Receivables
(Trade Debtors) are not that much problematic, its only 11.01% in 2011 and 11.98% in 2012. Though
A/R count is moderate, we should go for analysis Activity of A/R too to make a concrete comment on
the liquidity of the firm.

Cash based Ratio Analysis

Cash Ratio

Cash Ratio_2012 = 586,920,267 / 6,745,507,008

= 8.70 %

Cash Ratio_2011 = 370,301,755 / 7,022,213,840

= 5.27 %

MD. ZABER TAUHID ABIR 4|Page

 Cash Ratio Trend

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2011 2012

SQUARE has the increasing drift of Cash Ratio resulting 5.27% in 2011 and 8.70% in 2012 which
reflecting the firm is improving its amount of most liquid asset in its current asset segment which
indicates the firms liquidity strength is increasing. This position of the firm will be able to attract
potential credit relationship with other parties.

Cash to Current Liability Ratio

Cash to Current Liability Ratio_2012 = 586,920,267 / 4,252,934,845

= 13.80 %

Cash to Current Liability Ratio_2011 = 370,301,755 / 4,668,189,426

= 7.93 %

Cash to Current Liability Ratio Trend

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2011 2012

MD. ZABER TAUHID ABIR 5|Page

SQUARE is improving itself in terms of the Cash Availability to pay its current obligations which
reflected in liquidity measure of cash to current liability ratio. SQUARE has 7.93% in 2011 and 13.80%
in 2012 indicating the flexibility of payment of its bills and payables. With the help of this information
SQUARE will be able to build some goodwill to their existing and potential creditors.

Operating Activity of Accounts Receivables

“Liquidity & Quality Measures”

Accounts Receivables Turnover Ratio

A/R TO_2012 = 16,054,425,243 / 790,366,530

= 20.31 Times

Average Receivable = (808,311,714 + 772,421,345) / 2 = 790,366,530

A/R TO_2011 = 13,471,424,469 / 640,335,260

= 21.04 Times

Average Receivable = (772,421,345 + 508,249,174) / 2 = 640,335,260

Accounts Receivables Turnover Ratio Trend

21.2
21
20.8
20.6
20.4
20.2
20
19.8
2011 2012

SQUARE has efficient rate of A/R Turnover which reflects the firm can receive cash from its credit sales
proficiently. The firm has 21.04 times in 2011 and 20.31 times in 2012 which indicates the firm’s
comfortable position in its liquidity of collecting cash form receivables and they have a decent credit
policy.

MD. ZABER TAUHID ABIR 6|Page

 Accounts Receivable Collection Period

Accounts Receivable Collection Period_2012 = 360 / 20.31

= 18 Days

Accounts Receivable Collection Period_2011 = 360 / 21.04

= 17 Days

Accounts Receivables Collection Period Trend (In Days)

18.2
18
17.8
17.6
17.4
17.2
17
16.8
16.6
16.4
2011 2012

SQUARE has very efficient rate of A/R Collection which reflects the firm can receive cash from its credit
sales within very short period of time. The firm has only 17 days in 2011 and 18 days in 2012. Though
one day has been increased but still it’s a very comfortable position for a big-time firm like SQUARE
reflects its speed of collecting cash form receivables.

Days Sales in Receivables (Receivable Conversion)

= 18 Days

= 21 Days

MD. ZABER TAUHID ABIR 7|Page

 Days Sales in Receivables Trends (In Days)

21.5
21
20.5
20
19.5
19
18.5
18
17.5
17
16.5
2011 2012

SQUARE has a good quality position in collecting cash from its ending A/R. The firm takes 21 days in
2011 and 18 days in 2012 to collect cash from its receivables which are reflecting the quality of
accounts receivables is very sound. To make more realistic comment we need age in receivable
schedule which will avail us making profound A/R quality.

Here Liquidity & Quality of Accounts Receivable is good for the firm and valid. So we can interpret that
Accounts Receivable’s liquidity measure is good for SQUARE PHARMACEUTICALS.

Operating Activity of Inventory

“Quality & Liquidity Measure”

Inventory Turnover Ratio

ITO_2012 = 9,167,253,620 / 2,614,753,401

= 3.51 Times

Average Inventory = (2,687,818,472 +2,541,688,329 ) / 2 = 2,614,753,401

ITO_2011 = 7,703,661,010 / 2,374,383,206

= 3.24 Times

Average Inventory = (2,541,688,329 + 2,207,078,082 ) / 2 = 2,374,383,206

MD. ZABER TAUHID ABIR 8|Page

 Inventory Turnover Ratio Trend

3.6

3.5

3.4

3.3

3.2

3.1
2011 2012

The average rate of speed of inventory is very efficient for SQUARE also it has the upward trend having
3.24 times in 2011 and 3.51 times in 2012. The high rate of turnover of inventory shows the inventory
is high moving, high sales volume and high demand for the product. SQUARE has the high quality
inventory turnover to dominate in the market.

Days to Sell Inventory

Days to Sell Inventory_2012 = 360 / 3.51

= 103 Days

Days to Sell Inventory_2011 = 360 / 3.24

= 111 Days

Days to Sell Inventory Trend (In Days)

112

110

108

106

104

102

100

98
2011 2012

MD. ZABER TAUHID ABIR 9|Page

The liquidity of Average Inventory is moderate or good for SQUARE PHARMA. The firm takes 111 days
in 2011 and 103 days in 2012 to sell its average inventory. The trend is downward and number of days
is lower than other big firms which may reflect it has the moderate or good liquidity in selling average
inventory. But industry average is needed to explain more clearly.

Days Sale in Inventory

= 106 Days

= 119 Days

Days Sale in Inventory Trend (In Days)

120

115

110

105

100

95
2011 2012

The liquidity of Ending Inventory is moderate for SQUARE PHARMA. The firm takes 119 days in 2011
and 106 days in 2012 to sell its ending inventory. The trend is downward and number of days is lower
than other big firms which may reflect it has the moderate or good liquidity in selling ending inventory.
But industry average is needed to explain more clearly.

MD. ZABER TAUHID ABIR 10 | P a g e

 Operating Cycle

(From Previous Calculation of Accounts Receivable Collection Period “Page 6” And Days to Sell
Inventory “Page 9”)

Operating Cycle_2012 = 18 + 103

= 121 Days

Operating Cycle_2011 = 17 + 111

= 128 Days

Operating Cycle Trend (In Days)

130
128
126
124
122
120
118
116
2011 2012

The speed of inventory converted into cash is moderate or good for SQUARE PHARMA. The firm takes
128 days in 2011 and 121 days in 2012 to convert its inventories into cash. The decreased days from
year 2011 to 2012 indicates the firm is improving its ability but we need industry average to make
more concrete comment.

Here Quality & Liquidity of Inventory is moderate or good for the firm and lawful. So we can interpret
that Inventory’s liquidity measure is good for SQUARE PHARMACEUTICALS.

MD. ZABER TAUHID ABIR 11 | P a g e

Operating Activity of Accounts Payable

Accounts Payable Turnover

A/P TO_2012 = 8,492,851,447 / 804,400,387

= 10.56 Times

Purchase = COGS – Beginning Inventory + Ending Inventory – Depreciation

= 9,167,253,620 - 2,541,688,329 + 2,687,818,472 - 820,532,316 = 8,492,851,447
Average Payable = (875,431,555 + 733,369,218) / 2 = 804,400,387

A/P TO_2011 = 7,375,321,525 / 564,042,567

= 13.08 Times

Purchase = COGS – Beginning Inventory + Ending Inventory – Depreciation

= 7,703,661,010 - 2,207,078,082 + 2,541,688,329 - 662,949,732 = 7,375,321,525
Average Payable = (733,369,218 + 394,715,915) / 2 = 564,042,567

Accounts Payable Turnover Trend

14
12
10
8
6
4
2
0
2011 2012

The pay-off rate of A/P Turnover is decreasing for SQUARE which reflects the firm is taking longer time
to pay its payables. The firm has 13.08 times in 2011 and 10.56 times in 2012. This scenario can be
good for the firm, because if the firm can delay its payments, the amount of money can be invested in
short-term marketable securities and can earn profit which will be reflected in the bottom line.

MD. ZABER TAUHID ABIR 12 | P a g e

 Day’s Purchase in Payable (Payable Conversion)

= 37 Days

= 36 Days

Day’s Purchase in Payable Trend

37.2
37
36.8
36.6
36.4
36.2
36
35.8
35.6
35.4
2011 2012

The length of time the firm is taking to pay-off its payables is decreasing for SQUARE which is a good
sign for the firm. The firm is taking 36 days in 2011 and 37 days in 2012 which indicates SQUARE is
delaying to pay-off. This scenario could be a good remark for the firm, because the amount of money
delayed can be invested in short-term marketable securities and can earn profit which will be reflected
in the bottom line.

Liquidity Index 2012

Particulars Amount Day’s Away From Cash $ x Days
Cash and Cash Equivalents 586,920,267 - -
Inventories 2,687,818,472 121 325,226,035,112
Trade Debtors 808,311,714 18 14,549,610,852
TOTAL 339,775,645,964

So, Liquidity Index_2012 = 339775645964 / 6,745,507,008

= 50 Days

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Liquidity Index 2011
Particulars Amount Day’s Away From Cash $ x Days
Cash and Cash Equivalents 370,301,755 - -
Inventories 2,541,688,329 128 325,336,106,112
Trade Debtors 772,421,345 17 13,131,162,865
TOTAL 338,467,268,977

So, Liquidity Index_2011 = 338,467,268,977 / 7,022,213,840

= 48 Days

Liquidity Index Trend (In Days)

50.5
50
49.5
49
48.5
48
47.5
47
2011 2012

SQUARE PHARMA waits 48 days in 2011 and 50 days in 2012 to receive cash from current asset.
Compared to 2011 & 2012 SQUARE takes 2 days more to receive cash from its current assets except
cash in hand which reflects the liquidity has been decreased slightly in 2012, it might be an adverse
situation for the firm. But to make more realistic comment we need at least 7-8 years trend analysis and
industry average.

Acid Test Ratio

= 0.82 Times

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 = 0.85 Times

0.855
0.85
0.845
0.84
0.835
0.83
0.825
0.82
0.815
0.81
0.805
2011 2012

Acid Test Ratio indicates whether a firm has enough short-term assets to cover its immediate liabilities
without selling inventory. SQUARE has its ratio of 0.85 times in 2011 and 0.82 times in 2012 which
indicate the performance of the firm in terms of liquidity has slightly been decreased. The company may
have to sell some portion of inventory to pay the immediate liability which may not be a good position
for the firm. Although inventory is a current asset but it’s not liquid as cash, immediate selling of
inventory may reach lower price of product which may hamper the goodwill of the firm and the
profitability as well.

Overall Observation
The big-time firm like SQUARE PHARMACEUTICALS has its Net Working Capital surplus of 2,465
million TK in 2012 showing a huge liquidity flood. In 2011 the firm also had a milestone of 2,354 million
TK surpluses in NWC. The Current Ratio Analysis reveals the equal scenario about the liquidity. 1.58
times in 2012 and 1.50 times in 2011 really influenced the liquidity growth of the giant firm. The cash
based ratio analysis shows the firm has just 8.70% cash & cash equivalents in 2012. On the other hand
the have 13.80% cash available to pay its short-term debt. Net Trade Cycle showing the positive result,
in 2011 NTC is 104 days and in 2012 its 87 days which clearly indicate the improvement of cash
management and good credit policy.

But the common-size analysis is not that much fluent on liquidity. The inventory figure shows 39.85%
in 2012 and 36.19% in 2011 is blocked on the total current asset figure, as the inventory in not liquid as
the cash & cash equivalents, acid-test ratio shows that SQUARE PHARMA may have to sell some portion

MD. ZABER TAUHID ABIR 15 | P a g e

of the inventory to pay-off their immediate obligations which will not be a good indication for the firm.
But in the analysis of Operating Activities (Quality & Liquidity of Inventory) the firm looks efficient in
having good inventory turnover rate in 2012 they got 3.51 times and in 2011 they got 3.24 times which
shows the inventory is high moving, high sales volume and high demand for the product. The liquidity
of inventory also shows a good or moderate rate. But the clear indication in 2012 the operating cycle is
that the firm has taken 7 days less compared to 2011 to convert the inventory to cash which indicates
the firm is improving its ability in terms of liquidity of inventory.

Other measure of operating activity, accounts receivable showing satisfactory situation of the firm. The
turnover of receivable has been increased by 0.73 times (2011, 21.04 and 2012, 20.31). The collection
period shows SQUARE has very efficient rate of A/R Collection which reflects the firm can receive cash
from its credit sales within very short period of time. The firm has only 17 days in 2011 and 18 days in
2012. Though one day has been increased but still it’s a very comfortable position reflects its speed of
collecting cash form receivables. This position indicates the quality & liquidity both are good in terms of
accounts receivables; the firm takes just 18 days in 2012 to get cash from its receivables.

Accounts Payable Turnover reveals the firm is taking more time from its creditors to pay its payables.
The firm has 13.08 times in 2011 and 10.56 times in 2012. This situation can be good for the firm,
because if the firm can delay its payments, the amount of money can be invested in short-term
marketable securities and can earn profit which will be reflected in the bottom line. And also there is a
good sign in time taken to pay-off is high.

The liquidity index has been decreased by 2 days in 2012 which reflects SQUARE takes 2 days more to
receive cash from its current assets which reflects the liquidity has been decreased slightly. But
comparing all of the analysis of the short-term liquidity of SQUARE PHARMACEUTICALS it can be said
that there are very few infections in the liquidity but the firm has the opportunity to overcome the
condition by 2-3 years.

By considering all of the key factors and analysis, I like to say the SQUARE PHARMACEUTICALS is
efficient in terms of short-term liquidity and the firm has the opportunity of huge growth in the future.
But to make more concrete comment analysis of more sections is needed and industry average data is
required.

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