Key Financial Statements of the British Pharmaceutical Company - Term Paper Example

Financial Report Analysis: GlaxoSmithKline plc Table of Contents Introduction 2 2. Objectives of Financial Communications illustrated by the GlaxoSmithKline plc…………….2 3. The main users of GlaxoSmithKline plc Financial Communications………………………….3 4. Regulation of published financial statements .............................................................................5 5. GlaxoSmithKline plc performance over the last 2 years ............................................................6 6. Recommendation whether you rate the company’s shares as Buy, Hold or Sell………………9 7. The Corporate Governance of GlaxoSmithKlein plc…………………………………………11 References 13 Introduction The aim of this research is to analyze the objectives of financial communications, to assess the financial performance through the analysis of key financial statements of the British pharmaceutical company GlaxoSmithKline plc. The research will also carry recommendation character based on brief overview of the company’s share’s performance and analysis of the corporate governance reporting. Objectives of Financial Communications illustrated by the GlaxoSmithKline plc Financial Communications have several major objectives, which may vary depending on the type of economy where the financial information is presented. Thus, for example, the objectives of the financial reporting in a socialist economy will be quite different from the objectives of the financial reporting in a capitalist economy (Spiceland, Sepe & Tomassini, 2007). External financial reporting by business entity in the private sector, such as a UK-based pharmaceutical company, GlaxoSmithKline plc, has the following key objectives: To provide information that will be useful for both existing and potential users in making rational decisions (investment, credit, etc.); To ensure that information presented is comprehensible to the users with adequate understanding of the company’s business; To disclose information about the company’s economic resources; its obligations; and the effects of events, transactions, and circumstances, which cause changes in company’s assets and liabilities/obligations; To provide information that will be helpful in assessing the amounts, timing, and uncertainty of prospective net cash inflows (Spiceland, Sepe & Tomassini, 2007). In its annual report for 2013, GlaxoSmithKline plc has illustrated compliance with all of the major objectives of financial reporting. The company provides information about its business, its strategy, and financial performance. The layout of the whole report is presented in structured and logical understandable way for different categories of users. Financial statements and Investor information sections meet one of the major objectives of financial reporting as it discloses financial information about the company’s resources (GlaxoSmithKline plc Annual Report 2013). Thus, the company provides information which is helpful for both existing and potential users for decision making. The company also provides an overview of its economic performance during the FY, highlighting the progress and success achieved. This overview is supported with visual illustrations of the company’s business performance spitted into key business activities (business lines). In the reporting part of the report, there are provided extensive comments and clarifications of the effects of transactions, effects and circumstances, which cause changes in company’s assets and liabilities. The notes and comments to the financial statements as well as detailed overview of the external factors and potential risks that the company is facing also provide information helpful in in assessing the amounts, timing, and uncertainty of prospective net cash inflows (Spiceland, Sepe & Tomassini, 2007). The narrative part of the report also has a structured and well presented layout which makes the text easily understandable for any category of users. Thus, the company ensures that information is comprehensible to the users with adequate understanding of the company’s business. The main users of GlaxoSmithKline plc Financial Communications GlaxoSmithKline plc is a publicly traded company, and the users of its financial communications are typical for such companies. This category of users is comprised of: existing and potential equity investors; existing and potential loan investors (creditors); analysts of capital market; suppliers, customers, industry representative bodies; employees and trade unions; central and local government, including tax authorities; consumer groups and general public. Brief overview of each category of users of financial communications is given below. Existing and potential equity investors Potential investors considering the decision of equity investment in GlaxoSmithKline need to understand the financial profitability of such decision. Therefore, existing and potential investors will analyze the company’s financial communications in order to evaluate the past performance of the GlaxoSmithKline as well as to analyze the forecast and perspectives of future performance (Rutherford 2000). Existing and potential loan investors (creditors) Existing and potential loan investors the same as equity investors will use financial communications of GlaxoSmithKline in order to evaluate the overall company’s performance and its cash reserves capability for making necessary repayments of interest and the return to its lenders (Rutherford 2000). Analysts of capital market Use the financial information of the company indirectly, but for providing professional advice to potential investors and other interested parties (Rutherford 2000; Smith 2010). Investment analysts as well as investors represent an important category of financial communication users to the GlaxoSmithKline as a company quoted on the New York and London Stock Exchanges (Gsk.com, 2013). Investment analyst use financial communications in order to analyze the company’s business performance and to provide detailed accounting disclosures (Tutor2u.net, 2011). Suppliers, customers, industry representative bodies Suppliers who provide both goods and materials to the GlaxoSmithKline on credit will more likely use the financial communications with a purpose to evaluate the risks of not being paid (Rutherford 2000). Also, by using financial communications, both suppliers and customers can evaluate whether the corporation is going to continue partnership relationships with them (Rutherford 2000). Employees, trade unions Employees can use financial information of the corporation in order to evaluate whether their employer is reliable and whether their jobs are secured (Rutherford 2000). Trade unions may use financial information for: analyzing the company’s capability to maintain pension funding and retirement benefits (Smith 2010; Tutor2u.net, 2011); demanding more favorable working conditions to the employees and seeking for pay rise opportunities (Rutherford 2000). Central and local government, including tax authorities Both central and local government agencies use financial communications of the company due to their interest in accounting information. An important category of users of accounting information are tax authorities (Smith 2010). Consumer groups and general public Consumer groups and general public groups that consist of the individuals with a specific interest in the GlaxoSmithKline plc business and performance also may use financial communications as the source of accounting and other relevant information (Smith 2010; Tutor2u.net, 2011). Regulation of published financial statements Financial reporting and accounting is an important instrument for effective management and functioning of capital markets and therefore is it is strictly regulated by government and other regulatory bodies. Regulation of published financial statements is focused on reduction of information asymmetry (Pervan, Horak, & Vasilj, 2010). Public companies are required to comply with heavy regulations related to the financial statements reporting. World-known scandals related to Enron, Parmalat, WorldCom, and other public giants have contributed to the development and adoption of stricter requirements for financial reporting in the EU and the USA. In order to prevent accounting frauds and ensure better oversight of financial reporting and auditing of financial statement of publicly listed companies there are continuously introduced new accounting regulations and provisions (Pervan, Horak, & Vasilj, 2010). In case of the GlaxoSmithKline plc, the financial statements should be prepared in accordance with International Financial Reporting Standards (IFRS) adopted for the companies based in the European Union, as well as with IFRS issued by the IASB (GlaxoSmithKline plc Annual report 2013). There are 37 standards and 26 interpretations defined by the IFRS to which should comply financial statements of publicly traded companies (Weets n.d.). IASB continuously develops and publishes new standards for public companies. One of the goals of these standards is to ensure comparability of financial statements of one entity from period period and in a single period across of business entities (Weets n.d.). Based on these requirements, the company is required to provide assumptions and estimates that might have effect on its revenue and expenditures, assets and liabilities reported in the financial statements (GlaxoSmithKline plc Annual report 2013, 67). For the company, operating in the pharmaceutical industry, the major regulatory focus in published financial statement falls on expanded disclosures relating to collaboration agreements, revenue recognition, material patents, in-process research and development assets and research and development activities (Ernst & Young, 2013). GlaxoSmithKline plc performance over the last 2 years GlaxoSmithKline’s performance over the period 2012-2013 was quite good taking into consideration the effect of the global financial recession and its impact on the global business environment. More detailed overview of the company’s performance is provided by the analysis of the income statement, balance sheet and cash flow statement of the company for 2013 compared with the company’s performance over 2012. The Income Statement The Income Statement is one of the key financial statements together with the balance sheet and cash flow statement. Income statement provides analysts and investors with the information about company’s revenues and expenses (Investopedia.com, 2013). Thus, users of the financial information can assess the overall performance of the regular business operations. The Income Statement analysis provides information on the following financial indicators: turnover, operating profit, profit before taxation, and profit attributable to shareholders. GlaxoSmithKline’s plc income statement report has shown that: Turnover increased from £26,431m to £26,505m, in 2012 and 2013, respectively In terms of geographical segmentation the USA, European, and Emerging countries markets were the markets with the highest turnovers. Operating profit declined from £7, 300m to £7, 028m in 2012 and 2013, respectively; This decrease is explained by the expected increases in cost of sales partially offset by lower R&D expenditure higher royalty income. Profit before taxation has slightly increased from £6,600m to £6,647m in 2012 and 2013, respectively; Profit attributable to shareholders increased from 2012 to 2013. In 2013 the company has significantly increased its EPS (4%). As explained in the report, share buy-back program has contributed to such financial efficiency (GlaxoSmithKline Annual Report 2013). Total sales of the company have grown of 1% up to £26.5 billion in 2013. About 70% of the sales in 2013 have been achieved through five key business lines: oncology, respiratory, ViiV Healthcare and Consumer Healthcare (GlaxoSmithKline Annual Report 2013). The company has reported consolidated group revenue increase of 0, 3% in FY2013 comparing with the FY 2012 results. While the operating profit of GlaxoSmithKline has decreased of 3, 7% during 2013, the net profit has been increased by 20, 8% (GlaxoSmithKline Annual Report 2013). The Balance Sheet The balance sheet is another important financial statement of the company, which provides information to investors and analysts about the company’s assets, liabilities and shareholder’s equity (Investopedia.com 2013). Thus, investors can evaluate what is the amount of shareholder’s investment, what the company owes and owns (Investopedia.com 2013). Analysis of the balance sheet of GlaxoSmithKline plc has shown that: The property, plant and equipment has increased from 2012 to 2013 Non-current assets declined £27, 789m to £26,859m in 2012 and 2013, respectively; The companys current assets grew 10.01 % over the previous year to £14,227m in 2013 The companys total assets grew 1.4% over the previous year to £42,0862m in 2013; Current liabilities and total liabilities of the company have decreased during the period from 2012 to 2013: Current liabilities decreased 1.1% over the previous year to £13,677m, and total liabilities decreased 1.37%, respectively. Therefore, the company’s asset to liability ratio reduced to 1.11 in 2013. Shareholders’ equity and total equity of the company have increased from 2012 to 2013 This is a good sign for potential investors as it demonstrates the company’s stability and investment attractiveness. Cash Flow Statement Cash and cash equivalents increased from 2012 to 2013. The company’s Cash flow statement indicated that its net cash inflow from operating activities increased significantly from £4,678m to £5,628m in 2012 to 2013, respectively. According to the information reported in the GSK Annual report, the business model of the GlaxoSmithKline enables the company to stay high cash-generative business. The management explains that these results are achieved due to the focus on reducing the working capital conversion cycle (GlaxoSmithKline Annual Report 2013). Thus, in 2013 the company has delivered an additional £46 million of savings (GlaxoSmithKline Annual Report 2013). Free cash flow of the company indicates that it has strong creditworthiness position and to return it to the shareholders. Thus, in 2013 the company has returned £5.2 billion of cash to its shareholders. Moreover, this is a positive sign for potential investors as it indicates that the company is capable to invest free cash flow into the business in order to generate more cash in future. Core Research & Development costs in 2013 has been decreased by 3% to £3,400 million comparing with £3,485 million in 2012 (GlaxoSmithKline Annual Report 2013). The company’s management has stressed R&D is one of the core strategic objectives of the GlaxoSmithKline. In the narrative part it is reported that the reason of this decline is the result of necessity to complete number of large trials and phasing of funding of ongoing R&D projects (GlaxoSmithKline Annual Report 2013). The company’s R&D activity in 2013 resulted in approval of six major new products, including HIV, cancer (skin cancer), and respiratory disease (GlaxoSmithKline Annual Report 2013). Recommendation whether you rate your company’s shares as Buy, Hold or Sell GlaxoSmithKlines shares are trading at 1,445.5, 3.03% above its 52-week low of 1,403, set on Jul 29, 2014 (Markets.ft.com, 2014). While this information is not enough for existing and potential investor, it should be analyzed with the overall company’s performance and strategy. GlaxoSmithKline’s performance reported for FY 2013 encourages an existing shareholder to buy the shares of the company, because of a set of factors related to the financial strength of the company and its profitability. The company operates in a highly profitable industry, as pharmaceutical industry has an overall potential for future growth taking into consideration factors, related to human health and aging issues (GlaxoSmithKline plc Annual Report 2013). The company’s financial indicators also have been improved comparing to 2012. Turnover has increased, while operating profit has declined. This decline is not viewed as negative sign, as the decrease is correlated with the expected increases in cost of sales partially offset by lower R&D expenditure and higher royalty income (GlaxoSmithKline plc Annual Report 2013). During the period from 2012-2013, the company’s sales have grown by 1%. Company is generating significant free cash flow and therefore, its liquidity rate is quite good. This free cash flow has been used partially for increase of dividends to the shareholders. Thus, the profit attributable to shareholders has increased due to free cash flow, whereas EPS increased by 4% in 2013. Even though this rate should be compared with the inflation rate, the dividends per share were significant, as the company paid out to its shareholders £5.2 billion (GlaxoSmithKlein plc Annual Report 2013). As it has been already mentioned, GlaxoSmithKline plc operates in an industry with huge potential. The company’s strategic direction towards business development in emerging market is additional feature that makes investment to this company more attractive. Investment into this company has a long-term perspective with great potential. Therefore, an existing investor should hold his/her shares in order to gain greater returns in the future. A potential investor might consider buying the shares of GlaxoSmithKline plc. However, it is recommended to carry out comparative analysis of other companies operating in pharmaceutical industry in order to make right decision. The Corporate Governance of GlaxoSmithKlein plc The Corporate Governance report presented in one of the sections of the annual report of GlaxoSmithKlein plc for FY 203 provides extensive information on the related issue. This section is comprised of 6 divisions, including: Our Board, Our Corporate Executive Team, Chairman’s letter, Board Report to Shareholders, Committee Reports, Remuneration Committee Chairman’s Annual Statement, Annual report on Remuneration, and Remuneration Policy Report (GlaxoSmithKlein plc Annual Report 2013). Based on the information provided in the annual report, it is possible to see that Board composition and decision-making are well presented. There is provided a brief description of all Board members, their skills and experience. The role of both the Chairman and the CEO are also clearly defined. The Board is comprised for 80% of Executives, and 20% of Non-Executives. This composition indicates that the management and the Board are mindful about good balance between strong executive and independent non-executive elements. Moreover, there is a letter of the Chairman which provides detailed information on the meetings held, strategic priorities and actions taken during 2013 and the progress. Also, there is provided an overview of the actions planned for 2014. Further, there is provided information about the Board structure which also includes various committees. The brief description and roles of these committees is also given. The fact that there is provided information about the Nomination Committee, Compensation Committee, and Audit Committee, indicates that the company’s corporate governance complies with corporate governance provisions. Moreover, there is provided detailed information on the each committee’s activity and performance. Next section in the corporate report is the section devoted to the Director’s remuneration, where is given data on the total remuneration for 2013 and which has undergone auditing. There is provided a detailed overview of the corporate targets, actual performance, and bonuses paid for achievements. Also, there are published performance targets set for FY 2014. Remuneration policy report reveals even more information to the users of the annual report, as it illustrates of what elements is comprised total remuneration for each Executive. All these aspects indicate on the transparency of the reported (and audited) information. It is possible to conclude that report on corporate governance published by the GlaxoSmithKline plc is highest level of disclosure. References: Ernst & Young, 2013, The shifting pharmaceutical industry landscape. Accounting and regulatory trends affecting reporting for 2012 and planning for 2013. 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