Give a concise description of how AZN is financed, with reference to the different sources of capital and gearing levels.

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Give a concise description of how AZN is financed, with reference to the different sources of capital and gearing levels.

Analysis of AstraZeneca’s (AZN) 2001 annual report reveals that the company is financed by all the traditional methods. The sources of finance which are employed to fund AZN operations comprise of;

  • Creditors due within one year (short-term).
  • Creditors due after more than one year (long-term).
  • Capital and reserves (Capital and Reserves).

A detailed break down of the sources of finance employed are detailed below in Table 1 ‘AstraZeneca’s Sources of Finance.’ and Diagram 1 ‘ Ratio Analysis of AstraZeneca’s Financing.’

Table 1: AstraZeneca’s Sources of Finance

Diagram 1: Ratio Analysis of AstraZeneca’s Financing

Creditors due within one year.

Creditors due within one year are individuals or companies to whom AZN owes sums of money to within one year. For AZN these include goods and services, taxes and short-term loans (includes bank overdraft).

Further analysis shows that AZN have £150.7m of short-term borrowings from the bank, the break down is shown in Table 2.

                

Table 2: Detail of Short-term borrowing.

Examination of Table 1 and Table 2 shows that short term borrowing makes up 3.3% of all creditors due within one year. Current instalments of loans make up 1.7% and other creditors 95% of creditors due within one year.  In relation to the overall financing of AZN creditors due within one year made up 37.9% of total financing.

Creditors due after more than one year (long-term).

Loans and other creditors make up AZN due after more than one year. Loans make up 80.7%, whereas, other creditors make up 19.3% of creditors due after more than one year. Table 1 shows that creditors due after more than one year accounts for only 4.6% AZN’s total financing.

Shareholders Funds

The scrutiny of Table 1 makes obvious that AZN is financed 57.3 % by Shareholders funds. The relationship between ordinary shares to other forms of long term financing can be extremely important. It is advisable to establish the ratio/percentage for this relationship as will show the level of debt that is currently financing the AZN, see table 3.

Table 3: Relationship between ordinary shares to other forms of long-term finance.

It can be suggested that AZN is a low-geared company; this assumption is based on the 6.1% outcome of the gearing ratio equation, table 3. The ratio of 6.1% reveals that AZN are financed by 6.1% debt and long term finance. The low gearing ratio means that AZN have a higher dependence on equity finance. A low rate of debt means that at bad times AZN will still have enough left over for ordinary shareholders after payment of interest on debt items.

Another way of analysing debt would be to establish the interest cover of interest to be paid by AZN on their loans. The interest cover equation would show how many times AZN would be able to cover the interest to be paid with AZN profit before interest and tax.

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Table 4: AstraZeneca’s Interest cover.

The interest cover equation reveals that AZN are very comfortable, as they are able to cover interest payable 47.3 times.

b) Has the company’s financial structure changed significantly during the year.

AZN have done well to reduce their long-term creditors from £208.5m in 2000 to £107m in 2001, this is a 94.7% reduction of AZN creditors. Additionally, AZN have reduced short-term creditors by 8.5% from £4,706.3m in 2000 to £7,337.3 in 2001.

However, with further analysis of AZN balance sheet unveils that the reduction ...

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