The Financial Position And Performance Of Two Businesses

995 Words4 Pages
The aim of the report is to analyse and interpret the financial position and performance of two businesses supported by ratio analysis identifying which company represents the better investment option. Findings show that GlaxoSmithkline appears to be the more favourable candidate for investment.

GlaxoSmithkline plc is a global healthcare company, which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products, including cutting-edge vaccines, over-the-counter medicines and health-related consumer products. The Company operates in three primary areas of business: Pharmaceuticals (treating cancer, asthma, heart disease and HIV/AIDs), Vaccines (treating hepatitis,
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Ratios analysis is used in creating benchmarks for comparative analysis. Though ratio analysis should be used to compare companies within the same industry, it can be used in cross-section analysis.
In measuring the companies’ profitability we examine their gross profit, net profit and return on capital employed (ROCE). The gross profit ratio is a tool used to assess afirm’s financial health by showing the proportion of profits generated by sales before selling and administrative expenses. Both Tesco and GlaxoSmithKline have seen decreases in their gross profit margin over the past three years. GlaxoSmithKline is a more efficient company as it has higher gross profits. The net profit ratio calculated as net income divided by revenue is useful in measuring the overall profitability of a company. It measures how much out of every dollar of sales a company keeps as earnings. GlaxoSmithKline is the more profitable company based on its higher net profit ratios. The ROCE calculated as earnings before interest and tax (EBIT) divided by the sum of shareholders equity and debt liabilities is a measure of a company’s profitability and efficiency with which its capital is employed. GlaxoSmithKline appears more favourable because its ROCE is more stable and higher. A high ROCE indicates more efficient use of capital.
In measuring the companies’ liquidity we examine the current and quick ratio. The current ratio is an indication of a
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