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 in short-term and long-term creditors may have been to some extent financed by current assets and an increase in long-term loans.
The balance sheet shows that AZN’s current assets have reduced by £466.2m from 2000 to 2001. The 6.7% reduction in current assets is due to a 10.0% decrease in short term investments from 2000 to 2001 and a 4.8% reduction in cash from £719m in 2000 to £496.5m in 2001.
In addition, there has been a 0.6% increase in the value of long-term loans AZN have, from £444.4m in 2000 to £447.2m in 2001, this may have been used to fund the payment of long term creditors.
However, the release of cash and short-term investments and the increase in the long-term loans may have been a consequence of a 2.6% increase in fixed assets and a 12.4% increase in stock.
AZN in 2001 increased tangible fixed assets by 8.4% to £3,809.2m and increased fixed asset investment by 52.2% to £16.2m, this accounts for the 2.6% increase in fixed assets.
The 12.4% increase in stock from £1,482.4m in 2000 to £1,691.5 in 2001 is a result of AZN purchasing 31.8% more raw materials and consumables in 2001 and the 10.4% increase of finished goods and goods for resale. Table 5 reinforces that AZN have a higher level of stock in the warehouse in 2001 in comparison to 2000 because the acid test ratio reduced by 6.1% in 2001 from 2000.
In addition, AZN have repurchased £756.3m shares in 2001 which is mostly likely done because AZN had a high level of cash they wished to dispose of.
However, the one weakness of AZN in 2001 is that debtors have decreased by 9.2%, hence, this illustrates that working capital in 2001 is weak in comparison to 2000. The decrease of debtors from £2,7887 in 2000 to £2,554.9 in 2001 indicates that customers of AZN are taking more time to pay their debts. In addition, AZN are paying creditors (short and long term) 9.6% quicker in 2001 in comparison to 2000.
Liquidity ratios would be able to show how effectively AZN are able to pay its creditors, expenses, loans falling due etc. at the correct times. Failure to ensure the payments are covered effectively could mean AZN would have to close down. The current and acid test ratios will illustrate how liquid AZN is in Table 5.
Table 5: AstraZeneca’s liquidity comparison from 2000 to 2001
The rule of thumb for the current ratio is that the figure should always be above 1, otherwise the company does not have enough assets to meets its liabilities, therefore, insolvent. Table 5 shows that AZN has a desirable current ratio, it shows that AZN is able to cover its liabilities 1.52 times with its current assets. The current ratio has remained consistent between 2000 to 2001.
However, the current ratio also includes AZN’s stock and this could distort the ratio. The acid test ratio takes into account. Table 5 shows that there was a 6.1% decrease in the acid test ratio from 2000 to 2001. This indicates AZN in 2001 have more stock that is piling up in the warehouse.
In relation to Table 3 AZN’s gearing level in 2001 was 6.1% compared to 6.2% the previous year, see Table 6.
Table 6: Relationship between ordinary shares to other forms of long-term finance.
The reason why AZN’s gearing level has decreased by 0.1% in 2001 is due to the revaluation of reserves which accounted for a negative £348.6m.
c) Do you consider the level of financial gearing to be appropriate for a company of this type?
AZN’s level of financial gearing stands at 6.1, this is considerably low in comparison to the industry sector average, which stands at 38.65. A comparison of gearing levels of AZN to other companies in the pharmaceutical industry is shown in Table 7,
Table 7: Industry Gearing level analysis.
The level of gearing is at an inappropriate level taking into consideration the nature of the pharmaceutical industry whereby large sums of finance are required to undertake business activities, however, AZN like other pharmaceutical’s are money rich companies, hence, requiring less external borrowing. It can be assumed that AZN is a money rich company because in 2001 AZN repurchased £756.3m shares, which suggests that AZN has a high level of cash that they wished to dispose of.
As it has been suggested that AZN have and inappropriate gearing level according to the industry average, but, when the gearing of AZN is compared to the other companies in table 7, the level of gearing is seen as being appropriate. The average gearing of companies in table 7 is 7.92, hence, AZN is 22% below the average, however, it can be suggested the level of gearing is seen as being appropriate in comparison to the average of table 7 and because it is able to cover interest payable 47.3 times.
Diagram 2: Industry Gearing Level comparison.
- a) By reference to the company’s five-year record describe the company’s earning per share history.
Earnings per share (EPS) is frequently used to view performance. It indicates how much of AZN’s profits can be attributable to each ordinary share. EPS can be seen as a better comparison of performance rather than profit. This is because acquisition or the issue of new shares does not effect EPS, hence, providing a more true reflection of AZN’s performance.
AZN’s EPS for the last five years can be seen in Table 4 and in Diagram 2.
Table 8: AstraZeneca’s Five-year earning per share history.
The five-year EPS history of AZN as shown in Table 6 shows that EPS took a £0.01 loss from 1997 to 1998 to £1.01 from £1.02. Nevertheless, since 1998 AZN has seen an in crease in EPS in each year from 1998. The biggest increase in EPS was in 2000 when EPS increased £0.15 (12.5% on 1999 EPS) from £1.08 in 1999 to £1.24. Finally, there was a slight increase in EPS on 2000 in 2001, AZN EPS saw an increase of £0.01, taking EPS to £1.25 in 2001.
According to Merrill Lynch, ‘Morning Meetings Notes – 4th February 2002’, state that AZN is estimating EPS midway between £1.06 to £1.17 range for 2002 and Merrill and Lynch estimate £1.11 EPS for AZN in 2002.
Diagram 3: AstraZeneca’s earning per share year on year comparison.
The EPS of AZN are compared to other companies in the same industry in the table below.
Table 9: Pharmaceutical industry EPS comparison.
Table 9 shows that AZN have overall a better EPS in comparison to other companies in the same industry. AZN’s EPS in comparison to GlaxoSmithKline is 42.4% higher in 2001 and 44.0% higher in 2000.
b) Similarly, review the company’s five-year dividend policy.
A shareholder in AZN obtains their reward in the form of a share of the profits, known as a dividend. A five-year record of AZN dividend payment to shareholders can be examined in Table 4 ‘ AstraZeneca’s Five-year dividend history.’
Table 10: AstraZeneca’s Five-year dividend history.
It would be unfair to compare the dividend payments for the years 1997 and 1998 as Astra AB and Zeneca Group PLC merged to form AZN and as a result would give a distorted picture of AZN’s dividend payments per ordinary share, as shown in table 10 and diagram 4.
Table 10 shows that AZN from 1999 to 2001 have kept dividend payments at £0.49 per ordinary share. The possible explanation why AZN may have kept their dividend consistent is because if the payments were increased in one year, investors would expect an increase in dividends every year.
Diagram 4: AstraZeneca’s dividend year on year comparison.
Dividend cover compares the amount of profit earned per ordinary share with the amount of dividend earned, hence, illustrating the proportion of profits that could have been distributed to what was distributed. Table 11 shows a three-year dividend cover comparison.
Table 11: AstraZeneca’s three-year Dividend cover year on year comparison.
The dividend cover of AZN shows that there has been an increase from 1999 to 2001. The dividend cover increased 57.1% from 0.9 times in 1999 to 2.1 times 2000. Once again, there was a 12.5% increase on 2000 figures in 2001 taking the dividend cover to 2.4 times.
Investment analysts regard a high dividend over as a reassuring measure of the safety of the current dividend levels.
Dividend yield seeks to assess the cash return on investment earned by shareholders; this enables comparisons to be made with other investment opportunities available to shareholders.
The dividend yield for AZN at close of Friday 16th March 2002 was 1%, this suggests that investors would get more return on their money in a bank or building society or maybe investing in a different company.
c) Obtain the company’s PE ratio from the Financial Times. Asses how the PE ratio reflects the historic performance shown in points 2. a) and 2. b).
The Financial Times website reported the P/E ratio for AZN as 34.04. This ratio indicates that the price of the shares is 34.04 times the earnings (i.e. profits). In other words, it gives an idea a to the number of years it would take to cover the price out of the company’s earnings.
The price-earning ratio (P/E ratio) reflects the relationship between the share price and EPS of AZN. Like EPS the P/E ratio is considered to be a key ratio by stock market analyst. The P/E ratio is calculated as seen below.
A good P/E ratio is vital for a firm because it gives an indication of the confidence of investors in the expected future performance prospects and quality of earnings of the company.
The P/E reflects the historic performance as discussed above with the increase in the year on year earnings per share. As the company merged in 1999 the overall prospects of the company evolved further, hence, investors were confident with the future earnings of AZN. A breakdown of AZN’s average P/E ratios in previous years is shown in table 12
Table 12: Average P/E ratio analysis 1994-2001
A share price with a high P/E ratio is one that has a high price compared with its earnings. AZN’s average P/E ratio in 2001 was 26.8, with EPS of £1.25 and dividends of £0.49, this indicates that investors’ confidence of the company’s ability to maintain and improve earnings in the future is strong.
d) How does the PE ratio compare to other companies in the same industry sector? Can you suggest reasons for your company’s comparative level of PE ratio?
The Financial Times reported the pharmaceutical industry P/E ratio to be 33.31. AstraZeneca’s P/E ratio at present is above the industry average, as seen in table 13.
Table 13: 15th March 2002 P/E ratio industry comparison.
Comparing the P/E ratio over a period of time, table 14, shows that AZN’s P/E ratio has been stronger in comparison to the companies, and these P/E ratios are reflected in AZN dividend payments and EPS.
Table 14: P/E ratio 1994-2001 industry analysis.
Diagram 5 illustrates the statement that AZN’s P/E ratio has been strong in relation to others in the industry.
Diagram 5: P/E ratio industry comparison 1994-2001.
AZN’s P/E ratio is the second highest in the industry behind Pfizer at the moment in comparison to other companies in the Pharmaceutical Industry. As a whole the main players in the industry such as GlaxoSmithKline Plc and Pfizer also have similar P/E ratios.
The P/E ratio is higher in comparison to other companies in the same industry. This is due to many reasons, firstly AZN’s dividend policy has remained consistently high for a number of years and as a result the city’s assessment of AZN’s quality of earnings and business prospects has an impact on the P/E ratio. Secondly, the company as a whole has endured consistent growth and the company’s previous track record has again impacts the company’s P/E ratio.
Thirdly, the pharmaceutical industry as a whole has been less affected by the recent economic downturn in comparison to other industries, thus AZN has been able to maintain the level of share price and P/E ratio.
Fourthly, another reason for the P/E ratio is also related to the company’s balance sheet gearing whereby AZN has a low level of gearing in comparison to other companies. This low level of gearing has made the company more attractive to investors as less of their money is used to finance interest and debt repayments. Finally, since the merger of Astra Zeneca the average P/E ratio overall has increased this has been due to the upturn in company fortunes and prospects since the merger becoming one of the leading pharmaceutical companies in the world with a established senior management team committed to continuing success.
Comments
~ Figures used in this report have been converted from USD $ to GBP £ at a rate of 1.42
AstraZeneca Annual Report 2001: Balance Sheet, page 48.
AZN other creditors include: Insurance obligations for group insurance subsidiaries’ exceptional charges, synergy and integration costs.
AstraZeneca Annual Report 2001: Notes to Financial Statements; Note 17, Page 69.
Interest to be paid; AstraZeneca 2001 Annual Report, page 49 in Statement of Group Cash Flow.
Profit before interest and tax; AstraZeneca 2001 Annual Report, page 46 in Group Profit and Loss Account.
AstraZeneca Annual Report 2001: Balance Sheet, page 48.
Current Ratio is calculated by dividing current assets over current liabilities.
Acid Test Ratio is calculated by dividing current assets less stock over current liabilities.
Being able to pay one’s debts as they fall is know as being ‘Liquid’.
The industry sector average of 38.65 was obtained from www.moneycentral.co.uk.
AstraZeneca Annual Report 2001 and 1999: Notes to financial Statements; Note 9. EPS used in report is ‘EPS per Ordinary Share before exceptional Items.
Earnings per Share (EPS) is calculated by FRS 14 simplified formula, which is the net profit or loss attributable to ordinary shareholders divided by the number of the average ordinary shares outstanding during the period.
Five-year record is a summary indicator which potential investors can study in order to assess the progress of a company over a reasonable period of time.
Information from Merrill Lynch ‘Morning Meetings Notes – 4th February 2002’ report, www.mlhsbc.co.uk
*In April 1999, Astra AB and Zeneca Group PLC merged to form AstraZeneca. Dividends for 1997 and 1998 are calculated by combining the dividend payments for Astra AB and Zeneca Group PLC in 1997 and 1998. Dividends in Astra AB are presented in SEK, these were divided at a rate of 14.711 and then combined with the dividend payments in Zeneca Group PLC.
Financial Times Newspaper, Monday 11th March 2002.