Ratio Analysis Report of Financial Accounting
NAME：刘曦 CLASS: 082
STUDENT NO.:286601330
1. Background of Tongrentang Co.,Ltd.
Tongrentang Co.,Ltd, is a Chinese pharmaceutical company founded in 1669, which is now the world’s largest producer of traditional Chinese medicine. The company is headquartered in Beijing, and is engaged in both manufacture and retail sales, operating drug stores predominantly in Northeast China and even all around the world.
Tongrentang Co.Ltd. issued 50 million common shares on May 29th, 1997 and Listed on the Shanghai Stock Exchange on June 25th, the same year. The pharmaceutical industry stock quote is C81. The stock quote is 600085.
Back to see the Chinese market, Tongrentang remains one of the oldest surviving brand names for traditional Chinese medicine, and has wide name-recognition among Chinese and Asians worldwide. While, at present the fierce competition cannot be neglected. To adapt to the modern operating management tendency, Tongrentang has been changing to modernize its facilities. In recent years, its working is growing steadily as a whole. The detailed information is shown as follows.
2. Trend analysis
Based on the figure of ratios in both tables and line charts, we can see that Tongrentang is a good-operating Chinese pharmaceutical company. We can never deny the reputation of the largest traditional Chinese medicine.
2.1. Profitability
Net profit margin, ROA and ROE held a same trend, which was shown in chart 2.1 that figures increased steadily and in 2007, the increase was more obvious. It is easy to see clearly that Tongrentang’s ability of gaining profits through expanding selling methods has been enhanced already gradually. Investors, to some extent, could believe its reliability and stability.
2.2. Leverage
The ratios of leverage fluctuated (seen in chart 2.2) irregular during the 5 years, but the change was not quite large. Both in 2007 and 2009, the data boosted a lot and in the following year dropped down. All of these could prove that Tongrentang’s the amount of long-term liabilities has waved, which might influence the entity’s liability rate and even shake shareholders’ confidence in investing. Fortunately, the figure was too low to shock on its financial position. As to a pharmaceutical company, the leverage was in a good condition and held a nice debt paying ability and a relatively low risk rate.
2.3. Liquidity
In recent former 4 years, Tongrentang’s liquidity lay in a good position. Both of the current ratio and quick ratio stepped into an upstairs tendency, which means company’s acquired increased cash ability. While in 2010, the current ratio got a more or less decrease. We cannot ignore this little change, even though it was not that serious. As to Tongrentang, in 2010, the short-term debt paying ability had a decline. Better to consider that the figures the liquidity were all above the industry criteria, which is worth seeing pleasedly.
2.4. Efficiency
In this part, the inventory turnover and assets turnover almost remained the same. They did not get any change. Differently, the AR turnover has increased a lot. This is a good trend for Tongrentang, which showed the quicker time to withdraw accounts receivable. And the degree of assets management had a development. Taking AR back in time could not only avoid losses brought by bad debts, but enhance the debts paying ability as well.
However, from 2009 to 2010, the AR turnover increased ranging from about 10 to 13(according to table 2). This change, to some degree, did not mean it was a really good for Tongrentang. Each company should have an appropriate AR turnover rate. If a high AR turnover was caused by harsh credit policies or payment terms, this might restrict company’s sales so that influenced benefits.
2.5. Market value
According to the figures in table 2, the EPS had a slice increase, which showed a good operation result. The P/E ratio and the P/B ratio held a same trend, and the only difference is that, the former fluctuated sharply than the latter. We cannot deny Tongrentang’s achievement. However, the risks existed based on the data of P/E ratio’s sharp increase and dramatically fluctuation. Because under the conditions of a remaining EPS, the higher P/E ratio was, the riskier the entity would get.
On the other hand, high P/E and high P/B ratio would also bring more advantages to Tongrentang. The higher the ratio was, the better the quality of assets was, which means the company got a good development potential. As to investors, they would like to concentrate on this kind of company and show their confidence. At the same time, investors would also realize high risks existing.
3. Comparative Analysis
3.1. Profitability
In this aspect, we could see in table 3 that all the ratios of NP margin, ROA and ROE
were high than the industry average, especially the NP margin as a leader in pharmaceutical industry. As a whole, we could find that Tongrentang held a good profitability in a certain time.
According the trend of the recent 5 years, this result gained a strong and doubtless proof. Comparing with its competitor, Yunnanbaiyao Ltd., Tongrentang still played a leading role in this industry based on NP margin figures. The figures of ROA and ROE were slightly less than those of its competitor yet. Taking one with another, this did not become critical enough so that influenced in Tongrentang’s company profile.
3.2. Leverage
Low leverage figures we could see in table 3 showed Tongrentang’s good management in entity’s debts payment field. No matter compared with Yunnan Baiyao or the whole industry, we could tell that Tongrentang’s liabilities situation was one of the best. This means Tongrentang held a large number of funds and made a good use of company’s internal money. As to shareholders, low leverage would also give them more confidence, when they considered company’s debt-equity structure.
3.3. Liquidity
Tongrentang’s liquidity was not terrible, when the industry average industry was taken into consideration. Current ratios were above 3, which was higher than both of its competitor, Yunnan Baiyao and the whole industry. Although quick ratios were lower than the average, we could believe its cash ability due to a not low quick ratio. After all, it is too difficult to see an absolutely perfect financial position.
3.4. Efficiency
Tongrentang’s efficiency was not that good according to the figures (seen in table 3). Although its AR turnover was slightly higher than the industry average, it was really low comparing with Yunnan Baiyao, which means the speed of collecting accounts receivable was not that fast and would influence in the bad debts rate.
In addition, the inventory turnover ratios of both Tongrentang and Yunnan Baiyao were lower than the industry average. What was worse, Tongrentang was even lower than Yunnan Baiyao. This indicated that company’s stocks turnover speed was too slow and the stocks storage was too much. Correspondently, stocks occupied too much money and could not make good use.
3.5. Market value
The EPS was larger than industry average, but did not catch up with Yunnan Baiyao’s. Investors would like to concentrate more on its competitor, when considering EPS.
And in terms of the P/E ratios, the whole industry had a huge potential in the future. Certainly, the risks of investing return could not be avoided. To my surprise, the two companies could not appear as leaders. Their P/E ratio was much lower below the industry average. That is, both of them should account for this part. Similarly, the P/B ratios of Tongrentang were also smaller than both its competitor and the industry. When evaluating company’s asset quality, this should be included.
4. Comments and Conclusion
According to my analysis, Tongrentang had a good financial situation as a whole. The only one part which could be paid more attention to is the current assets, especially the stocks.
Based on the trend analysis of inventory turnover, we could conclude that Tongrentang held a steady level, which was probably appropriate to it. However, it was really low compared to the industry average. Low inventory turnover would lead to slow speed of inventory turnover. With no doubts, the stocks would be stacked with warehouses, which means the cash or checks could not be made good use of.
Therefore, as to Tongrentang, the development of inventory management should be added into the management strategies. A terrible inventory management would influence in the short-term debt paying ability of an enterprise. It is necessary for managers to consider.
Company should analyze stock batch factors, district differences of manufacturing and marketing and so on. Moreover, Tongrentang should coordinate and adjust the internal structure of inventories and also inventory turnover rate so as to apply to enterprise’s present and future situation.
On the other hand, under the inventory’s conditions, to some degree, we can anticipate the speed of realizing Tongrentang’s marketing target. Although Tongrentang has a long history and the great reputation also impresses the public deeply, the possibility of poor sales exists which cannot be easily denied. This needs top managers to take into consideration, when they make company’s policies.
As a whole, Tongrentang, Ltd. contains a good financial position. As a leader of Chinese pharmaceutical company, its financial management should regard as an example. And it also deserves all investors’ attentions.