Profitable Nigerian Pharmaceutical Industry Essay

Question:

Discuss About The Profitable Nigerian Pharmaceutical Industry?

Answer:

Introduction

This report contains financial data of APN Outdoor Company and depicts how it performs since last three years. There are several financial tools such as ratio analysis, capital structure analysis, NPV IRR which could be used to gauge the financial performance of company. This AMC Outdoor Company is international Australian company which has engaged in providing advertisement and media services to clients.

Comparing Firm’s Capital Structure

Capital structure could be defined as partition of company for raising capital through equity, debt and long term loans. It is evaluated that AMC Outdoor Company has capital structure of 32% debt and 68% equity capital. Nonetheless, AMC Outdoor Company has high financial risk and reduced its overall cost of capital by having more debt in its capital structure (Finance. Yahoo, 2017). There is below WACC has been computed as below (Brigham & Ehrhardt, 2013).

Cost of Equity

CAPM Model

Risk free rate of return

2.40%

Beta

1.3

Market Rate of Return

7%

Cost of Equity

8.38%

Cost of debt

Interest after tax

2956100

Debt

103000000

Cost of debt

2.87%

Weights

Debts (Loan)

103000000

Equity

222334000

Total

325334000

Weighted Average Cost of Capital (WACC)

Debt

Equity

Cost of Capital (WACC)

As per the data computed under WACC of company it is inferred that cost of capital of company is 6.64%. Debt to capital structure of AMC Outdoor Company is 32% debt and 68% equity capital. Another rival company in same industry is QMS Media Company which has shown debt to capital ratio 22: 78%. This QMS Media Company has low level of financial risk and high cost of capital. AMC Outdoor Company needs to have debt to equity ratio 30:70 with a view to increase its overall business efficiency and reducing financial risk (Finance. Yahoo, 2017).

Analysis of Financial Ratios of AMC Outdoor Company

Ratio analysis of company reflects the relation between two factors of business. APN Outdoor Company has reduced its current ratio by .65% in 2017 as compared to last three year data. Quick ratio of company has also decrease to .55 in 2017 since last three years. The gross profit of company has increased to 20% in 2016 from the loss of 7% which company had in 2015. Return on capital employed has also increased to 20% to create value of equity investment of investors. Interest coverage ratio of company has gown down to zero. This has reduced due to the no interest payment. Efficiency ratio of company has also managed by APN Outdoor Company to reduce the overall cost of capital. Inventory turnover ratio has been maintained zero due to zero inventories in balance sheet. In addition to this, creditor’s turnover ratio of company has gone up to 40% with a view to reduce the accounting blockage in its value chain activities. This will reduce the overall cost of capital of company. Dividend payout of company has increased by 40% since last three years which reflects that company has been creating value on the investment of investors (Brigham & Gerhardt, 2013).

Significant Changes in the Capital Structure in Past Three Years

Capital structure of AMC outdoor company is accompanied with equity and debt portion. Equity capital of company is $58.15, $63.74, and $59.64 million in 2014, 2015 and 2016 respectively. There is increment in debt portion by 5% since last three years. AMC Company had AUD$ 125 million debt funding in 2015. After that it went down to AUD $ 97 million in 2015. After that, it increased to AUD $ 133 in 2016 (Finance. 2017). This reflects that company has increased its financial risk to reduce the overall cost of capital (Innocent, Mary & Matthew, 2013)

Wealth Maximization in Past Three Years

After evaluating the annual report of company it is observed that stock price of company has increased by 200% since last three years. It shows that company has high level growth and increased revenue. All the investors who have invested their money in equity capital of company have created wealth on their investment by 200% since last three years (Brigham & Ehrhardt, 2013).

Importance of Minimization of the Cost of Capital

Minimization of cost is the major part for the business success of APN Outdoor Company. It is evaluated that if company could minimize its overall cost of capital then it will increase the overall earning, creation of core competency and increased brand image. However, company needs to evaluate the financial leverage before reducing cost of capital (Finance. Yahoo. 2017)

Recommendations for Lowering the Cost of Capital

It is evaluated that lowering cost of capital of company could be done by AMC Outdoor company by increasing the debt portion or operations for those sources of capital which has low level of cost associated with it. Nonetheless, financial risk is the major factors which should be considered by AMC Outdoor Company before lowering down its cost of capital (Kaur & Gupta, 2015). Company should shuffle its capital structure to establish proper level of capital to maintain risk and cost in effective manner (Xu, et al. 2014).

Conclusion

This report reflects that APN Outdoor Company has high growth and created wealth maximization on the shareholders’ investment. However, company should inject more money in its business functioning with a view to increase its overall profit and effectiveness of business in determined approach. Lower down the cost of capital could be risky for APN outdoor company as it will increase the overall financial risk.

References

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & economics. Cengage Learning.

Finance. Yahoo. (2017). APN Outdoor Group Limited (APO.AX). Retrieved September 16, 2017 from,

Finance. Yahoo. (2017). QMS Media Limited (QMS.AX). Retrieved September 16, 2017 from,

Innocent, E. C., Mary, O. I., & Matthew, O. M. (2013). Financial ratio analysis as a determinant of profitability in Nigerian pharmaceutical industry. International journal of business and management, 8(8), 107.

Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.

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