Table of Contents

Executive Summary .............................................................................................................. 2

1. Introduction....................................................................................................................... 3
1.1 Objective of the Study: ................................................................................................ 4
1.1.1 Primary Objective: ................................................................................................ 4
1.1.2 Secondary Objectives: ........................................................................................... 4
1.2 Hypotheses .................................................................................................................. 4
1.3 Analytical Model: ........................................................................................................ 5
1.4 Limitations of the Study ............................................................................................... 5
2. Literature review ............................................................................................................... 6
3. Methodology of the Study ................................................................................................. 7
3.1 Research Design .......................................................................................................... 7
3.2 Population of the Study ................................................................................................ 8
3.3 Sample Size ................................................................................................................. 8
3.4 Data Collection ............................................................................................................ 9
3.5 Data Analysis .............................................................................................................. 9
4. Result & Discussion ........................................................................................................ 10
4.1 Descriptive Statistics .................................................................................................. 10
4.2 Analysis ..................................................................................................................... 10
4.3 Correlation Statistics .................................................................................................. 11
4.4 Regression Statistics .................................................................................................. 11
5. Conclusion ...................................................................................................................... 15
Reference ............................................................................................................................ 16

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 Executive Summary

Financial ratio analysis is a vital one since the profitability of an enterprise is directly affected
by such decision. The successful selection and use of appropriate financial ratio is one of the
key elements of the firm’s financial strategy. These financial ratio analyses have immense
potentials to help organizations in improving their revenue generation ability as well as
minimization of costs. The main data collection from the annual financial reports on Square
pharmaceutical companies, Renata Limited Company & Pharma Aids Limited Company in
2014 to 2016. The paper encompasses six variables, namely, Debt to Equity Ratio (DER),
Inventory Turnover Ratio (ITR), Debtors’ Turnover Ratio (DTR), Creditors’ Velocity (CRSV),
Total Assets Turnover Ratio (TATR) and Net profit Margin (NPM). Profitability as a
dependent variable is exhibited by Net profit Margin (NPM) while the selected ratios DER,
ITR, DTR, CRSV, TATR and CRSV are expressed as independent variables. Based on the
findings of the study, it is cogently revealed that there is a significant relationship between the
three selected ratios and Net Profit Margin (NPM) of Pharmaceutical companies in Bangladesh.

Keyword: Financial Ratios, Profitability, Pharmaceutical Companies.

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1. Introduction

Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a
business generates after it pays all expenses directly related to the generation of the revenue,
such as producing a product, and other expenses related to the conduct of the business activities.
There are many different ways for you to analyze profitability. This lesson will focus on
profitability ratios, which are a measure of the business's ability to generate revenue compared
to the amount of expenses it incurs. The two key aspects of profitability are revenues and
expenses. Revenues are the business income. This is the amount of money earned from
customers by selling products or providing services. Generating income isn’t free, however.
Businesses must use their resources in order to produce these products and provide these
services. Resources, like cash, are used to pay for expenses like employee payroll, rent, utilities,
and other necessities in the production process. Profitability looks at the relationship between
the revenues and expenses to see how well a company is performing and the future potential
growth a company might have. Profitability ratio is a measure of profitability, which is a way
to measure a company's performance. Profitability is simply the capacity to make a profit, and
a profit is what is left over from income earned after you have deducted all costs and expenses
related to earning the income. The formulas you are about to learn can be used to judge a
company's performance and to compare its performance against other similarly-situated
companies. Types of profitability ratio:

 Gross profit margin (GPM

 Operating margin (OM)
 Return on assets (ROA)
 Return on equity (ROE)
 Return on sales (ROS)
 Return on investment (ROI)

The pharmaceutical industry discovers, develops, produces, and markets drugs or

pharmaceutical drugs for use as medications to be administered (or self-administered)
to patients, with the aim to cure them, vaccinate them, or alleviate
the symptoms. Pharmaceutical companies may deal in generic or brand medications and
medical devices. They are subject to a variety of laws and regulations that govern the patenting,
testing, safety, efficacy and marketing of drugs.

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1.1 Objective of the Study:

1.1.1 Primary Objective:

The main objective of the study is to analyze the effect of selected financial ratios on
profitability of the listed firms of pharmaceutical sector in Bangladesh.

1.1.2 Secondary Objectives:

The study intends to study the relation in the followings ratios:

 To study the effect of Debt to Equity Ratio (DER) on Net Profit Margin (NPM) of
pharmaceutical companies in Bangladesh.

 To study the effect of Inventory Turnover Ratio (ITR) on Net Profit Margin (NPM) of
pharmaceutical companies in Bangladesh.

 To study the effect of Debtors’ Turnover Ratio (DTR) on Net Profit Margin (NPM) of
pharmaceutical companies in Bangladesh.

 To study the effect of Creditors’ Velocity (CRSV) on Net Profit Margin (NPM) of
pharmaceutical companies in Bangladesh.

 To study the effect of Total Assets Turnover Ratio (TATR) on Net Profit Margin (NPM)
of pharmaceutical companies in Bangladesh.

1.2 Hypotheses

This is an unproven statement that is of interest to the researcher.

H1: There is no significant relationship between Debt to Equity Ratio (DER) and Net Profit
Margin (NPM) of pharmaceutical companies in Bangladesh.

H2: There is no significant relationship between Inventory Turnover Ratio (ITR) and Net Profit
Margin (NPM) of pharmaceutical companies in Bangladesh.

H3: There is no significant relationship between Debtors’ Turnover Ratio (DTR) and Net Profit
Margin (NPM) of pharmaceutical companies in Bangladesh.

H4: There is no significant relationship between Creditors’ Velocity (CRSV) and Net Profit
Margin (NPM) of pharmaceutical companies in Bangladesh.

H5: There is no significant relationship between Total Assets Turnover Ratio (TATR) and
Net Profit Margin (NPM) of pharmaceutical companies in Bangladesh.

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1.3 Analytical Model:

Debt to Equity Ratio

(DER)

Inventory Turnover
Ratio (ITR)
Net Profit Margin
(NPM)
. Debtors’ Turnover
Ratio (DTR)

Creditors’ Velocity
(CRSV)

. Debtors’ Turnover
Ratio (DTR)

Independent Variable Dependent Variable

1.4 Limitations of the Study

The limitation of this study is that it utilized secondary data, which might be historical. The
researcher exercised a lot of caution when using dated information from the previous years.
With companies competing in fast changing industries, an out-of-date research reports many
have little or no relevance to the current market situation. Therefore, the researcher reviewed
the secondary data before analyzing to ensure that it was accurate and reliable.

The study adopted was conducted in a period of three years between (2014-2016). These
findings may not hold in the next three years as a result of macro-economic factors that might
affect the profitability of the listed firms in Dhaka Stock Exchange. The factors might involve
political factors, change of government regulations and technology.

Most of the financial statements are reaffirmed in the preceding years meaning that material
misstatements of firms’ performance can create a window of opportunity for prior year’s
adjustments and this may not be brought to the attention of the public. This means the pattern
depicted may affect the relationship established.

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This study was carried out within a limited time frame of three years with inadequate resources
which constrained the scope and depth of the study. This necessitated the adoption of a sample
design hence these findings cannot be used to make generalizations on the effect of operating
expenses on profitability of listed firms in the Dhaka Stock Exchange.

2. Literature review

Literature review or narrative review is a type of review article. A literature review is

a scholarly paper, which includes the current knowledge including substantive findings, as well
as theoretical and methodological contributions to a particular topic. Literature reviews
are secondary sources, and do not report new or original experimental work. Most often
associated with academic-oriented literature, such reviews are found in academic journals, and
are not to be confused with book reviews that may also appear in the same publication.
Literature reviews are a basis for research in nearly every academic field. A narrow-scope
literature review may be included as part of a peer-reviewed journal article presenting new
research, serving to situate the current study within the body of the relevant literature and to
provide context for the reader. In such a case, the review usually precedes the methodology
and results sections of the work.

Chakraborty and Bandopadhyay (2007) in their research studied strategic working capital
management, and its role in corporate strategy development, ultimately ensuring the survival
of the firm. They also highlight how strategic current asset decisions and strategic current
liabilities decisions had multi-dimensional impact on the performance of a company. Lazaridis
and Tryfonidis (2006) They conducted a cross sectional study by using a sample of 131 firms
listed on the Athens Stock Exchange for the period of 2001 - 2004 and found statistically
significant relationship between profitability, measured through gross operating profit, and the
cash conversion cycle and its components (accounts receivables, accounts payables, and
inventory). Based on the results analysis of annual data by using correlation and regression
tests, they suggest that managers can create profits for their companies by correctly handling
the cash conversion cycle and by keeping each component of the conversion cycle (accounts
receivables, accounts payables, and inventory) at an optimal level. James Clausen (2009), He
state that the Profitability Ratio Analysis of Income Statement and Balance Sheet Ratio analysis
of the income statement and balance sheet are used to measure company profit performance.
He said the learn ratio analyses of the income statement and balance sheet. Gopinathan
Thachappilly (2009), He discuss about the Profitability Ratios Measure Margins and Returns
such as gross, Operating, Pretax and Net Profits, ROA ratio, ROE ratio, ROCE ratio. However,
he determines the Gross profit is the surplus generated by sales over cost of goods sold. He
discussion about the Gross Profit Margin = Gross Profit/Net Sales or Revenue. Maria Zain
(2008), in this articles he discuss about the return on assets is an important percentage that
shows the company’s ability to use its assets to generate income. He said that a high percentage
indicates that company’s is doing a good utilizing the company’s assets to generate income.
He notices that the following formula is one method of calculating the return on assets

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percentage. James Clausen (2009), in this article he barfly express about the liquidity ratio. He
Pronounce that it is analysis of the financial statements is used to measure company
performance. It also analyses of the income statement and balance sheet. Diane White (2008),
He refer that the accounts receivable is an important analytical tool for measuring the efficiency
of receivables operations is the accounts receivable turnover ratio. Many companies sell goods
or services on account. This means that a customer purchases goods or services from a company
but does not pay for them at the time of purchase. Lucia Jenkins (2009), Understanding the use
of various financial ratios and techniques can help in gaining a more complete picture of a
company's financial outlook. He thinks the most important thing is fixed cost and variable cost.
Fixed costs are those costs that are always present, regardless of how much or how little is sold.
Gopinathan Thachappilly (2009), in this articles him express about debt management. He
mention that the Ratio of Debt to Equity has Implications for return on equity debt ratios check
the financial structure of the business by comparing debt against total capital, against total
assets and against owners' funds. The ratios help check how "leveraged" a company is, and also
the financial maneuverability of the company in difficult times. James Hutchinson (2010), He
realizes that about the long term debt to equity ratio of a Business. The ratio of these numbers
tells a lot about the business. It is calculated by taking the debt owed by the company and
divided by the owner‟s equity, also known as capital. Gopinathan Thachappilly (2009), he
shows that the EPS is computed by dividing the company's earnings for the period by the
average number of shares outstanding during the period. He discuss that Stock analysts
regularly estimate future EPS for listed companies and this estimate is one major factor that
determines the share's price.

3. Methodology of the Study

In carrying out the study this section covers the methodology that was employed. This section
also considers the methods used in data collection and identifies the techniques and procedures
used in data processing and analysis. These methods, models and statistical tools used in this
analysis are also discussed in the following.

3.1 Research Design

This study adopted descriptive research design. The design gives a description of
characteristics, phenomenon and association of the research variables. Regression and
correlation analysis have been used to establish the extent of relationship between financial
ratios and profitability of selected companies at the Dhaka Stock Exchange (DSE).

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 TABLE 1: List of Variables

Dependent Variable Independent Variable

Financial Performance 1. Debt to Equity Ratio (DER)
1. Net Profit Margin (NPM) 2. Inventory Turnover Ratio (ITR)
3. Debtors’ Turnover Ratio (DTR)
4. Creditors’ Velocity (CRSV)
5. Total Assets Turnover Ratio (TATR)

Through their significance, the select dependent variable and the independent variables define
the multi facets of efficient financial management and therefore are considered in analyses of
the sector.

Net Profit Margin (NPM): The ratio is an effective measure to check the profitability of business.

Debt to Equity Ratio (DER): It indicates the soundness of financial policies and capital structure of
the company.

Inventory Turnover Ratio (ITR): This ratio indicates whether investment in inventory is efficiently
used or not.

Debtors ‘Turnover Ratio (DTR): It indicates the speed at which debts are being collected.

Creditors’ Velocity (CRSV): It indicates the speed with which the payments for credit purchases are
made to the creditors.

Total Assets Turnover Ratio (TATR): It indicates the efficient utilization of fixed assets.

3.2 Population of the Study

The population means pharmaceuticals companies listed at the Dhaka Stock Exchange (DSE).
In 2019, there are a total of 31 pharmaceuticals companies listed in DSE. So, the population of
the study is 31 pharmaceuticals and chemicals companies.

3.3 Sample Size

Simple random sampling method was used to select the sample from the population. With the
help of market size of the companies, a sample of 3 pharmaceuticals companies have been
selected for the duration of three years (2014-2016) from the population of 31 pharmaceuticals
companies listed at the DSE.

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 TABLE 2: List of the Pharmaceutical Industry in DSE

Serial Name Years

1 Renata Limited 2014-2016

2 Square Pharmaceuticals 2014-2016

3 Pharma Aids Limited 2014-2016

3.4 Data Collection

This study is based on the secondary data. To satisfy the objective of the study data was
collected from the audited financial statement of the selected pharmaceuticals and chemicals
companies. All the financial statements have been collected from the company websites and
Dhaka Stock Exchange Ltd.

3.5 Data Analysis

After collecting data from the financial statement, it was sorted, cleaned and coded into the excel
sheet. Then the data was entered into Statistical Package for Social Science (SPSS). Data were
analyzed using a Linear Regression Model as the data were quantitative in nature to determine
the relationship between selected dependent and independent variables.

TABLE 3: LIST OF VARIABLE’S RATIOS

Variable Method of Computation

Net profit Margin (NPM) Net Profit /Sales
Debt to Equity Ratio (DER) Total Debt/Shareholder Equity
Inventory Turnover Ratio (ITR Cost of Sales / Inventory
Debtors’ Turnover Ratio (DTR) Sales /Trade Debtors
Creditors’ Velocity (CRSV Cost of Sales /Trade Creditors
Total Assets Turnover Ratio (TATR) Sales / Total Assets

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4. Result & Discussion

4.1 Descriptive Statistics

Table 4 is showing the descriptive statistics of all variables used in this model about the
selected companies of the Pharmaceutical sector of Bangladesh over the period of 3 years from
2014 to 2016. The total no. of observations are nine (9). Information about the ranges of the
variables is contained in the Minimum and Maximum. Variability can be assessed by
examining the values in the Standard Deviation column.

Table-4. Descriptive Statistics for all the Variables Tested for Select Companies over the 3 Years

Standard
Mean Minimum Maximum Observations
Deviation

NPM 0.536251 0.173431 3.552293 0.444422 9

DER 0.327370 0.030237 1.181985 0.268731 9

ITR 0.351350 0.041952 4.288537 0.582051 9

DTR 0.135967 0.015541 0.587317 0.108613 9

CRSV 1.788663 0.221054 48.25146 6.726905 9

TATR 4.586934 1.752891 73.16600 9.945440 9

Source: Data computed on the basis of the company’s annual financial statements Researchers’
SPSS

4.2 Analysis

The standard deviation measures the amount of variability in the distribution of a variable.
The Net Profit Margin (NPM) measured by Net Profit/Sales gives positive mean values, that is
0.536251.This indicates that the companies showed overall good performance in the analyzed
period. The descriptive statistics reveals that under the study period, the selected financial ratios
as measured by Debt to Equity Ratio (DER), Inventory Turnover Ratio (ITR), Debtors’
Turnover Ratio (DTR), Creditors’ Velocity (CRSV), and Total Assets Turnover Ratio (TATR)
have a positive mean value which ranges from 0.135967 for Debtors’ Turnover Ratio (DTR)
to 4.586934 for Total Assets Turnover Ratio (TATR). Creditors’ Velocity (CRSV) and Total
Assets Turnover Ratio (TATR) have highest standard deviation of 6.726905 and 9.945440
respectively. This indicates that the observations in the data set are widely dispersed from the
mean. So the management of Pharmaceutical industry in Bangladesh should monitor their
creditors and total assets.

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4.3 Correlation Statistics

Table 5 indicates the relationship between the various independent variables and the
dependent variable used in the study. The correlation matrix below shows that Debt to Equity
Ratio (DER), Inventory Turnover Ratio (ITR), Debtors’ Turnover Ratio (DTR), Creditors’
Velocity (CRSV), Total Assets Turnover Ratio (TATR), Creditors’ Velocity (CRSV) have a
weak positive relationship with Net Profit Margin (NPM). The strength of their relationship
is indeed at 0.325%, 0.939%, 0.560%, 0.968%, and 0.963% for Debt to Equity Ratio (DER),
Inventory Turnover Ratio (ITR), Debtors’ Turnover Ratio (DTR), Creditors’ Velocity
(CRSV), Total Assets Turnover Ratio (TATR), and Creditors’ Velocity (CRSV) respectively.

Table-5. Correlations for all the Variables Tested for Select Companies over the 3 Year Period
Correlation

NPM DER ITR DTR CRSV TATR

NPM 1.000000 0.325994 0.939922 0.560772 0.968017 0.963973

DER 0.325994 1.000000 0.481115 0.344465 0.511087 0.500101

Continue

ITR 0.939922 0.481115 1.000000 0.585817 0.981254 0.981529

DTR 0.560772 0.344465 0.585817 1.000000 0.594253 0.626637

CRSV 0.968017 0.511087 0.981254 0.594253 1.000000 0.996552

TATR 0.963973 0.500101 0.981529 0.626637 0.996552 1.000000
Source: Data computed on the basis of the company’s annual financial statements Researchers’ SPSS
Analysis

4.4 Regression Statistics

In Table 6 (Model Results), the coefficient column for variable CRSV stands at
+0.114095.This reveals that there is a positive relation between CRSV and Net Profit Margin;
it means that an increase in CRSV will also lead to an increase in the Net Profit Margin. At the
significance level of 0.0000 < 0.05, it is statistically significant. The weight of evidence,
therefore suggests rejecting the null hypothesis and confirming that there is a significant
relation between CRSV and Net Profit Margin of Pharmaceutical sector companies in
Bangladesh. As shown in the table, the coefficient column for variable DTR stands at
+0.036969 .This reveals a positive relation between DTR and Net Profit Margin, it means that
an increase in DTR will also lead to an increase in the Net Profit Margin. At the significance
level of 0.7649, it is more than 0.05, so it is statistically insignificant. The weight of evidence,
therefore suggests accepting the null hypothesis. This implies that change in DTR does not
have influence on the Net Profit Margin of Pharmaceutical companies in Bangladesh.

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As shown in the table, the coefficient column for variable DER stands at -0.401315 This
indicates that DER has negative relationship with Net Profit Margin. It means that an increase
in DER will lead to decrease in the Net Profit Margin. At the significance level of 0.0000<
0.05, it is statistically significant. The weight of evidence, therefore, suggests that null
hypothesis Ho(ITR) be rejected and the alternate hypothesis H1 (DER) be accepted. This
means DER exert significant influence over Net Profit Margin negatively of Pharmaceutical
companies in Bangladesh. As per the table, the coefficient column for variable ITR stands at -
0.286162. This indicates that ITR has negative relationship with Net Profit Margin. At the
significance level of 0.0000< 0.05, it is statistically significant The weight of evidence,
therefore, suggests that null hypothesis H0 (ITR) be rejected and the alternate hypothesis H1
(ITR) be accepted. This means ITR exert significant negative influence over Net Profit Margin
of Pharmaceutical companies in Bangladesh. Dependent Variable: NPM

Method: Least Squares

Sample: 9
Included observations: 9
Coefficien
Variable t Std. Error t-Statistic Prob.

C 0.615128 0.030237 20.34356 0.0000

-
DER -0.401315 0.040037 10.02360 0.0000
-
ITR -0.286162 0.083666 3.420292 0.0014

DTR 0.036969 0.122869 0.300884 0.7649

CRSV 0.114095 0.018975 6.013062 0.0000

-
TATR -0.012222 0.013407 0.911569 0.3670
Mean dependent
R-squared 0.981795 var 0.536251 Mean dependent var
Adjusted R-
squared 0.979727 S.D. dependent var 0.444422 S.D. dependent var
Akaike info - Akaike info
S.E. of regression 0.063279 criterion 2.570361 criterion
Sum squared -
resid 0.176186 Schwarz criterion 2.340918 Schwarz criterion

Hannan-Quinn
- Hannan-Quinn
Log likelihood 70.25902 criter. 2.482988 criter.
Durbin-Watson
F-statistic 474.5908 stat 1.498613 Durbin-Watson stat
Prob(F-statistic) 0.000000
Source: Authors’ SPSS Analysis

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 As per the table, the coefficient column for variable TATR stands at -0.012222. This
indicates that TATR has negative relationship with Net Profit Margin. At the significance level
of 0.3670 that is more than 0.05, it is statistically insignificant. The weight of evidence,
therefore, suggests that null hypothesis H0(TATR) be accepted and the alternate hypothesis
H1 (TATR) be rejected. This means TATR does not exert significant influence over Net Profit
Margin of Pharmaceutical companies in Bangladesh.

The R2, the coefficient of multiple determinations indicate the extent to which the
independent variables influence the dependent variable. The (model snapshot) demonstrates
that coefficient of multiple determinations (R2) is 0.981795. Thus 98% of the variations in the
dependent variable are explained by the independent variables of the model. It also shows that
the independent variables are the major determinants factor of net profit margin of the
Pharmaceutical companies in Bangladesh. While, the remaining 2.0% could be explained by
other macroeconomic factors. F-test provided in Table 7, manifests that F = 474.5908 at a
significance level of 0.000. This indicates that all standardized regression coefficients will be
non-zero. So, the test outputs described below provide considerable reliability to the results
and the emerging multiple regression equation is as:

NPM = 0.615128 + -0.401315(DER) + -0.286162(ITR) + 0.036969(DTR) + 0.114095(CRSV)

+ -0.012222(TATR) + Єi.

Thus, in sum, out of the five hypotheses, it is revealed that our two variables Debtors’ Turnover
Ratio (DTR) and Total Assets Turnover Ratio (TATR) has no significant relationship with Net
Profit Margin (NPM) of Pharmaceutical companies in Bangladesh.

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Table-7. Testing of Hypotheses

No. Hypothesis Result

There is no significant relationship between Debt to
Hypothesis 1 (H0): Equity Rejected
Ratio (DER) and Net Profit Margin (NPM) of
Pharmaceutical
Companies in Bangladesh.

Hypothesis 2 (H0): There is no significant relationship between Inventory Rejected

Turnover Ratio (ITR) and Net Profit Margin (NPM) of
Pharmaceutical companies in Bangladesh.
Hypothesis 3 (H0): There is no significant relationship between Debtors’ Accepted
Turnover Ratio (DTR) and Net Profit Margin (NPM) of
Pharmaceutical companies in Bangladesh.
There is no significant relationship between
Hypothesis 4 (H0): Creditors’ Rejected
Velocity (CRSV) and Net Profit Margin (NPM) of
Pharmaceutical
companies in Bangladesh.

Hypothesis 5 (H0): There is no significant relationship between Total Assets Accepted

Turnover Ratio (TATR) and Net Profit Margin (NPM)
of
Pharmaceutical companies in Bangladesh.

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5. Conclusion

Pharmaceutical industry is one of the major contributors to Bangladesh’s economy. The

Bangladesh government is actively promoting the sector’s diversification and greater
downstream expansion for increasing the production of value added products. This move is
expected to enhance the profitability of local producers. The challenge that determines the pace
and scale of future development of this industry is the profitability. Thus, the objective of this
paper is to examine the selected financial ratios as a determinant of profitability in the
Pharmaceutical Industry in Bangladesh, so that the financial managers may gauge the prime
variables exerting substantial influence on the profitability. It is revealed that the Total Assets
Turnover Ratio (TATR) have the highest standard deviation of 9.945440.The management of
the Pharmaceutical sector have to rein in this ratio. The study covered five hypotheses. Out of
the five hypotheses, it is revealed that two variables Debtors’ Turnover Ratio (DTR) and Total
Assets Turnover Ratio (TATR) have no significant relationship with Net Profit Margin (NPM)
of Pharmaceutical companies in Bangladesh. This reveals that the Debtors’ Turnover Ratio
(DTR) and Total Assets Turnover Ratio (TATR) are not considered as a significant determinant
of the profitability of the enterprise. Based on the findings of the study, it is cogently revealed
that there is a significant relationship between the three selected ratios and Net Profit Margin
(NPM) of Pharmaceutical companies in Bangladesh.

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