Pharmaceutical companies are bound to have high inventory levels since having

Pharmaceutical companies are bound to have high

This preview shows page 12 - 16 out of 22 pages.

Pharmaceutical companies are bound to have high inventory levels since having good supply availability is considered to be of prime importance. According to industry standards, the average inventory level of pharmaceutical companies is 170 days. The inventory level of Eli lily needs to be bought down to improve cash flows in the company to cater to better growth and investment opportunities. 2.50 2.00 1.50 1.00 0.50 0.00 Current Ratio Quick Assets Ratio 11
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Efficiency of AstraZeneca and Eli Lilly 400 350 245 210 Eli Lilly Astrazeneca 2010 2009 2010 2009 2010 2009 Inventory Turnover Account receivable Account Payable Turnover Turnover Account Receivable Turnover This indicates the time taken by the debtors to clear off their balance. AstraZeneca has an accounts receivable period of 86 days which has remained constant over the two years under consideration. However, payment days for the customers of Eli Lilly have increased from 64 in 2009 to 66 in 2010. Both the companies need to reduce the debtor payment days to ensure better cash flows in the company. Accounts Payable This is the time taken by the company to clear its pending dues. AstraZeneca has an account payable ratio of 129 days which has decreased from the previous years. This could be due to the improving ability of the company to sell off its inventories or an increase in pressure from the creditors. In 2010, the account payable ratio of Eli Lilly has increased from 83 days in 2009 to 90 days. This may be due to the increase in time taken by the debtors to pay off their debts in the current fiscal. Efforts need to be made by both the companies to keep this ratio as high as possible. 300 250 83 90 200 150 66 64 100 50 146 129 96 111 86 86 0 12
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Working Capital Cycle Working Capital Cycle This ratio is an indication of the length of time the monetary funds are caught up as a part of the current assets. The working capital of AstraZeneca has increased from 51 days to 53 days while that of Eli Lilly has decreased from 226 days to 186 days. AstraZeneca needs to needs to be cautious on this ratio and make efforts to keep the working capital cycle as low as possible. In Comparison, Eli Lilly has a much bigger investment caught up in the working cycle. The company needs to bring down this investment capital to make available funds for conducting more R&D and thus increasing profitability. Financial Structure Gearing A gearing ratio measures the degree to which a company’s performance and activities is sponsored. This could be through owner’s funds or through creditor’s funds. 226 250 186 200 150 100 53 51 50 0 2010 2009 Astrazeneca Eli Lilly 13
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Gearing AstraZeneca has a gearing ratio of 30% in 2009 which has decreased by 2% in 2010. The high gearing ratios could be as a result of acquisition of new assets, which is indicated in the decline in return on capital employed and decreasing gross profits and constant net profits. Eli Lilly has managed to decrease its gearing ratios in 2010 by 6%. This could be due to the increase in the net profit obtained in 2010. Both the companies need to ensure that their companies have low gearing ratios to reduce the vulnerability of their business to financial crisis.
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