In any investment, investors are seeking to obtain returns and
trying to get information from the future amount of profitability of companies.
One of the most common methods to examine financial information is to prepare
financial ratios. This study aims to find the variables with the greatest
prospective to explain the profitability. The investor, whether personal stockholders
or the firms, are in need of a model to assess the performance of the companies
and determine their expected profitability. Financial ratios play an important
part in the development of a company with an effective way, if a company is not
maintaining financial ratio efficiently it will directly hit the performance of
the company, different financial ratios like Profitability ratios, liquidity
ratios, Gearing ratio and yield ratio have a major role in judgment of the
progress of a company by the new investor and existing investors.
The pharmaceutical industry in Pakistan has
grown during the last few decades. At the time of the independence of Pakistan in
1947, there were few production units in the country. Currently Pakistan has
more than 800 large volume pharmaceutical formulation units, including those
operated by 25 multinationals present in the country. The Pakistan
Pharmaceutical Industry meets around 90% of the country’s demand of finished
dosage forms and 4% of Active ingredients. Specialized finished dosage
forms such as soft gelatin capsules, parenteral fat emulsions and Metered-dose
inhalers continue to be imported. There are only a few bulk drug Active
ingredient producers and Pakistan mainly depends on imports of bulk drugs
for its formulation needs resulting in frequent drug shortages. Political
disturbances and allegations of under-invoicing add to the uncertainty of
imports and clashes with the customs and tax authorities are common. The
National pharmacy industry has shown growth over the years, particularly over
the last decade. The industry is trying to upgrade itself and today the
majority industry is following local Good Manufacturing Practices laws, with a
few in accordance with international guidance.
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1.
Problem
Statement
To find which financial ratios will have magnifying impact on
profitability of pharmaceutical industry of Pakistan. In Pakistan
pharmaceutical industry companies profit is deteriorating day by day in last
few years’ .In fact many companies are facing severe loss. Out of the selected
ratios analyzed here in the research, to determine which one will have a major
effect of company’s profitability in
pharmaceutical industry of
Pakistan.
2.
Research
Questions
·
What
is the impact of earning per share ratio on Return on Asset?
·
What
is the impact of earning per share ratio on Return on Equity?
·
What
is the impact of debt to equity ratio on Return on Asset?
·
What
is the impact of debt to equity ratio on Return on Equity?
·
What
is the impact of current ratio on Return on Asset?
·
What
is the impact of current ratio on Return on Equity?
·
What
is the impact of firm size on Return on Asset?
·
What
is the impact of firm size on Return on Equity?
3.
Research
Objective
The objective of this research is to determine, is there any effect
of financial ratios on the profitability of companies in the pharmaceutical industry
of Pakistan. For this purpose sample has been selected from Karachi stock
exchange.
·
To analyze the
impact of earning per share ratio on return on equity.
·
To analyze the
impact of earning per share ratio on return on asset.
·
To evaluate the
impact of debt to equity ratio on return on equity.
·
To evaluate the
impact of debt to equity ratio on return on asset.
·
To investigate
the impact of current ratio on return on equity.
·
To investigate
the impact of current ratio on return on asset.
·
To analyze the
impact of firm size on return on equity.
·
To analyze the
impact of firm size on return on assets
Methodology
The science
of studying how
the research is
to be conducted
is known as
research methodology. It can
also be defined
as the study
of methods by
which knowledge is gained.
The main aim
of the research
methodology is to
give the work plan
for the research in
order to explore
the impact of
financial ratios on
firm profitability.
Data set and sample
Secondary data is used for the purpose of
empirically examining the impact of financial ratios on pharmaceutical companies’
listed Karachi Stock Exchange -100 index. I take 09 companies from
pharmaceutical sector as sample from Karachi stock exchange to check the effect
of financial ratio on firm profitability.
Models
·
Descriptive
statistics
·
Correlation
·
Regression
Conclusion
Researcher
has conducted study on the topic “Impact of financial ratio on firm
profitability, evidence from pharmaceutical sector of Pakistan”. Two models
used for the purpose of drawing results suggest here that all regression
coefficients collectively are statistically significant so, over all models are
a good fit.
Definition
According
to Namazi and Rostami (2006) amongst
the financial ratios, a conventional of market ratios occur for corporate
performance valuation that investors during construction their investment
decisions have particular care to it and the most vital is earnings per share
ratio (EPS) which shows earnings that the company has realized in a fiscal
period for an ordinary share and often is used to estimate the profitability
and risk related with earning and also findings about stock prices.
Significance
of the study
Despite many studies
conducted for analyzing the determinants of profitability there is still a wide
scope for further research. Here study has been conducted in an emerging market
in a developing country where there are many factors which highly effect
company’s performance.