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The term paper "Principles of Corporate Finance" takes the point of view of a financial analyst looking at the financial performances of AstraZeneca Plc or GlaxoSmithKline Plc during the fiscal year. To fully identify which of the two companies fared better, this paper will utilize ratio analysis. …
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The rationale for choosing these two business organizations is simple. It should be noted that both of them are regarded as important players in the global pharmaceutical industry. AstraZeneca is involved in the “discovery, development, manufacture, and marketing of prescription pharmaceuticals primarily for the cardiovascular, gastrointestinal, neuroscience, oncology, respiratory and inflammation, and infection areas in the healthcare sector worldwide” (AstraZeneca Plc Profile 2006). GSK is the major competitor of Astrazeneca as the former engages in the “creation, discovery, development, manufacture, and marketing of pharmaceutical and consumer health-related products worldwide” (GlaxoSmithKline Plc Profile 2006). Being in the same line of business and the same industry, it is right to assume that GSK and AstraZeneca both faces the same challenges and opportunities in the industry. This assumption justifies the comparability of their financial performance during the fiscal year.
Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. It enables a financial analyst to spot trends in business and to compare it with the performance of similar business enterprises within the same industry. This tool is currently utilized by business managers, investors, creditors, suppliers, and other decision-makers in order to determine the financial performance and well being of a business organization. Financial ratios are grouped into four broad categories, each showing a different aspect of a company’s financial performance. These are profitability ratios, financial leverage ratios, liquidity/solvency ratios, and efficiency ratios. Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred (Fraser & Ormiston 2004). The ratios computed for this category are returned on capital employed, sales profit margin, asset turnover, and net profit margin.
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