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

Give a concise description of how AZN is financed, with reference to the different sources of capital and gearing levels Essay Example Give a concise description of how AZN is financed, with reference to the different sources of capital and gearing levels Essay Give a concise description of how AZN is financed, with reference to the different sources of capital and gearing levels Essay Analysis of AstraZenecas (AZN) 2001 annual report1 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 AstraZenecas Sources of Finance. and Diagram 1 Ratio Analysis of AstraZenecas Financing. à ¯Ã‚ ¿Ã‚ ½m à ¯Ã‚ ¿Ã‚ ½m à ¯Ã‚ ¿Ã‚ ½m % % Sources of Finance 2001 2000 Variance Variance Total Financing Creditors due within one year Short term borrowings 150.7 88.7 62.0 41.1% 1.3% Current instalments of loans 75.4 62.0 13.4 17.8% 0.6% Other creditors 4,337.3 4,706.3 -369.0 -8.5% 36.0% 4,563.4 4,857.0 -293.7 -6.4% 37.9% Creditors due after more than one year Loans 447.2 444.4 2.8 0.6% 3.7% Other creditors 107.0 208.5 -101.4 -94.7% 0.9% 554.2 652.8 -98.6 -17.8% 4.6% Capital and reserves Called-up share capital 307.0 311.3 -4.2 -1.4% 2.6% Share premium account 235.2 165.5 69.7 29.6% 2.0% Capital redemption reserve 6.3 2.1 4.2 66.7% 0.1% Merger reserve 304.9 304.9 0.0 0.0% 2.5% Other reserves 1,035.2 1,021.8 13.4 1.3% 8.6% Profit and loss account 5,002.8 4,899.3 103.5 2.1% 41.6% Shareholders funds equity interests 6,891.5 6,704.9 186.6 2.7% 57.3% Minority equity interests 25.4 14.8 10.6 41.7% 0.2% Shareholders funds and minority interests 6,916.9 6,719.7 197.2 2.9% 57.5% Total Financing of AZN 12,034.5 12,229.6 -195.1 -1.6% 100.0% Table 1: AstraZenecas Sources of Finance Diagram 1: Ratio Analysis of AstraZenecas 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 services2, taxes and short-term loans (includes bank overdraft). Further analysis3 shows that AZN have à ¯Ã‚ ¿Ã‚ ½150.7m of short-term borrowings from the bank, the break down is shown in Table 2. à ¯Ã‚ ¿Ã‚ ½m à ¯Ã‚ ¿Ã‚ ½m à ¯Ã‚ ¿Ã‚ ½m % Short term borrowings 2001 2000 Variance Variance Bank borrowings Fixed securities 15.5 14.8 3.7 4.5 Secured by floating charge 5.6 7.7 -2.1 -37.5 Unsecured 128.9 64.1 64.8 50.3 Total 150.0 86.6 63.4 42.3 Other borrowings (unsecured) 0.7 2.1 -1.4 -200.0 Total 150.7 88.7 62.0 41.1 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% AZNs 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 interest4 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 tax5. Table 4: AstraZenecas 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 companys financial structure changed significantly during the year. AZN have done well to reduce their long-term creditors from à ¯Ã‚ ¿Ã‚ ½208.5m in 2000 to à ¯Ã‚ ¿Ã‚ ½107m in 2001, this is a 94.7% reduction of AZN creditors. Additionally, AZN have reduced short-term creditors by 8.5% from à ¯Ã‚ ¿Ã‚ ½4,706.3m in 2000 to à ¯Ã‚ ¿Ã‚ ½7,337.3 in 2001. However, with further analysis of AZN balance sheet6 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 AZNs current assets have reduced by à ¯Ã‚ ¿Ã‚ ½466.2m 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 à ¯Ã‚ ¿Ã‚ ½719m in 2000 to à ¯Ã‚ ¿Ã‚ ½496.5m in 2001. In addition, there has been a 0.6% increase in the value of long-term loans AZN have, from à ¯Ã‚ ¿Ã‚ ½444.4m in 2000 to à ¯Ã‚ ¿Ã‚ ½447.2m 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 à ¯Ã‚ ¿Ã‚ ½3,809.2m and increased fixed asset investment by 52.2% to à ¯Ã‚ ¿Ã‚ ½16.2m, this accounts for the 2.6% increase in fixed assets. The 12.4% increase in stock from à ¯Ã‚ ¿Ã‚ ½1,482.4m in 2000 to à ¯Ã‚ ¿Ã‚ ½1,691.5 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 à ¯Ã‚ ¿Ã‚ ½756.3m 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 à ¯Ã‚ ¿Ã‚ ½2,7887 in 2000 to à ¯Ã‚ ¿Ã‚ ½2,554.9 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 current7 and acid test8 ratios will illustrate how liquid9 AZN is in Table 5. 2001 2000 Variance Variance % Current Ratio 1.52 1.52 0.00 0% Acid Test Ratio 1.15 1.27 -0.07 -6.1% Table 5: AstraZenecas 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 AZNs 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 AZNs 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 AZNs gearing level has decreased by 0.1% in 2001 is due to the revaluation of reserves which accounted for a negative à ¯Ã‚ ¿Ã‚ ½348.6m. c) Do you consider the level of financial gearing to be appropriate for a company of this type? AZNs level of financial gearing stands at 6.1, this is considerably low in comparison to the industry sector average10, which stands at 38.65. A comparison of gearing levels of AZN to other companies in the pharmaceutical industry is shown in Table 7, Company 2001 Gearing British Biotec 2.96 Johnson Johnson 3.16 Pfizer Inc 3.87 Celltech Group PLC 5.43 Astra Zeneca PLC 6.49 Merck Co., Inc. 9.84 Shire Pharmaceutical 10.54 Drew Scientific Group PLC 13.89 Eli Lilly and Company 15.10 Industry 38.65 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 pharmaceuticals 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 à ¯Ã‚ ¿Ã‚ ½756.3m 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. 2. a) By reference to the companys five-year record describe the companys earning per share history. Earnings per share (EPS)11 is frequently used to view performance. It indicates how much of AZNs 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 AZNs performance. AZNs EPS12 for the last five years 13can be seen in Table 4 and in Diagram 2. à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ 2001 2000 1999 1998 1997 EPS à ¯Ã‚ ¿Ã‚ ½ 1.25 1.24 1.08 1.01 1.02 Variance à ¯Ã‚ ¿Ã‚ ½m 0.01 0.15 0.07 -0.01 0 Variance % 0.6% 12.5% 6.5% -0.7% 0 Table 8: AstraZenecas Five-year earning per share history. The five-year EPS history of AZN as shown in Table 6 shows that EPS took a à ¯Ã‚ ¿Ã‚ ½0.01 loss from 1997 to 1998 to à ¯Ã‚ ¿Ã‚ ½1.01 from à ¯Ã‚ ¿Ã‚ ½1.02. 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 à ¯Ã‚ ¿Ã‚ ½0.15 (12.5% on 1999 EPS) from à ¯Ã‚ ¿Ã‚ ½1.08 in 1999 to à ¯Ã‚ ¿Ã‚ ½1.24. Finally, there was a slight increase in EPS on 2000 in 2001, AZN EPS saw an increase of à ¯Ã‚ ¿Ã‚ ½0.01, taking EPS to à ¯Ã‚ ¿Ã‚ ½1.25 in 2001. According to Merrill Lynch, Morning Meetings Notes 4th February 2002, state that AZN is estimating EPS midway between à ¯Ã‚ ¿Ã‚ ½1.06 to à ¯Ã‚ ¿Ã‚ ½1.17 range for 2002 and Merrill and Lynch14 estimate à ¯Ã‚ ¿Ã‚ ½1.11 EPS for AZN in 2002. Diagram 3: AstraZenecas earning per share year on year comparison. The EPS of AZN are compared to other companies in the same industry in the table below. EPS à ¯Ã‚ ¿Ã‚ ½ 2001 à ¯Ã‚ ¿Ã‚ ½ 2000 GlaxoSmithKline 0.72 0.69 Drew Scientific -0.06 -0.04 United Drug PLC 0.41 0.34 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. AZNs EPS in comparison to GlaxoSmithKline is 42.4% higher in 2001 and 44.0% higher in 2000. b) Similarly, review the companys 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 AstraZenecas Five-year dividend history. à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ 2001 2000 1999 1998 1997 Dividends à ¯Ã‚ ¿Ã‚ ½ 0.49 0.49 0.49 0.55* 0.51* Variance à ¯Ã‚ ¿Ã‚ ½m 0.00 0.00 0.06 0.04 0 Variance % 0.0% 0.0% -11.6% 7.3% 0.0% Table 10: AstraZenecas Five-year dividend history15. 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 AZNs 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 à ¯Ã‚ ¿Ã‚ ½0.49 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: AstraZenecas 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. 2001 2000 1999 Dividend Cover 2.4 2.1 0.9 Variance 0.3 1.2 0 Variance % 12.5% 57.1% 0 Table 11: AstraZenecas 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 companys 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 companys 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 AZNs average P/E ratios in previous years is shown in table 12 2001 2000 1999 1998 1997 1996 1995 1994 AZN 26.8 29 66.6 30.8 25.1 22 16.8 13.7 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. AZNs average P/E ratio in 2001 was 26.8, with EPS of à ¯Ã‚ ¿Ã‚ ½1.25 and dividends of à ¯Ã‚ ¿Ã‚ ½0.49, this indicates that investors confidence of the companys 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 companys comparative level of PE ratio? The Financial Times16 reported the pharmaceutical industry P/E ratio to be 33.31. AstraZenecas P/E ratio at present is above the industry average, as seen in table 13. Company Name Company P/E Ratio Industry P/E Ratio Drew Scientific Plc -3.90 33.31 Merck ; Co Inc 20.90 33.31 Eli Lilly and Company 23.00 33.31 Johnson ; Johnson 24.40 33.31 Shire Pharmaceuticals Plc 25.40 33.31 GlaxoSmithKline Plc 33.23 33.31 Astra Zeneca Plc 34.04 33.31 Pfizer Inc 34.20 33.31 Table 13: 15th March 2002 P/E ratio industry comparison. Comparing the P/E ratio over a period of time, table 14, shows that AZNs P/E ratio has been stronger in comparison to the companies, and these P/E ratios are reflected in AZN dividend payments and EPS. Company 2001 2000 1999 1998 1997 1996 1995 1994 AZN 26.8 29 66.6 30.8 25.1 22 16.8 13.7 JOHNSON JOHNSON 27.5 25.3 31.3 32.2 24 22.5 20.1 15 DREW SCIENTIFIC GROUP PLC -19.6 -33.4 -27.1 -64.3 0 0 0 0 BRITSH BIOTEC -6.9 -8.2 -7.3 -23.5 -57.6 -34.2 -8.7 0 PFIZER INC 33.1 67.2 49.7 68 35.1 25.2 21.1 16.2 ELI LILLY CO, 32 29.2 34.4 39.8 0 23.9 19.5 14 MERCK CO., INC. 24.2 25.6 30.3 30.6 24.9 22.6 19.6 14.4 CELLTECH GROUP PLC -48.6 -7.3 21 -65.5 -28.4 161.1 0 0 Table 14: P/E ratio 1994-2001 industry analysis. Diagram 5 illustrates the statement that AZNs P/E ratio has been strong in relation to others in the industry. Diagram 5: P/E ratio industry comparison 1994-2001. AZNs 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 AZNs dividend policy has remained consistently high for a number of years and as a result the citys assessment of AZNs 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 companys previous track record has again impacts the companys 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 companys 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.