In any investment, investors are seeking to obtain returns andtrying to get information from the future amount of profitability of companies.One of the most common methods to examine financial information is to preparefinancial ratios. This study aims to find the variables with the greatestprospective to explain the profitability. The investor, whether personal stockholdersor the firms, are in need of a model to assess the performance of the companiesand determine their expected profitability. Financial ratios play an importantpart in the development of a company with an effective way, if a company is notmaintaining financial ratio efficiently it will directly hit the performance ofthe company, different financial ratios like Profitability ratios, liquidityratios, Gearing ratio and yield ratio have a major role in judgment of theprogress of a company by the new investor and existing investors. The pharmaceutical industry in Pakistan hasgrown during the last few decades. At the time of the independence of Pakistan in1947, there were few production units in the country.
Currently Pakistan hasmore than 800 large volume pharmaceutical formulation units, including thoseoperated by 25 multinationals present in the country. The PakistanPharmaceutical Industry meets around 90% of the country’s demand of finisheddosage forms and 4% of Active ingredients. Specialized finished dosageforms such as soft gelatin capsules, parenteral fat emulsions and Metered-doseinhalers continue to be imported. There are only a few bulk drug Activeingredient producers and Pakistan mainly depends on imports of bulk drugsfor its formulation needs resulting in frequent drug shortages. Politicaldisturbances and allegations of under-invoicing add to the uncertainty ofimports and clashes with the customs and tax authorities are common. TheNational pharmacy industry has shown growth over the years, particularly overthe last decade. The industry is trying to upgrade itself and today themajority industry is following local Good Manufacturing Practices laws, with afew in accordance with international guidance. 1.
ProblemStatementTo find which financial ratios will have magnifying impact onprofitability of pharmaceutical industry of Pakistan. In Pakistanpharmaceutical industry companies profit is deteriorating day by day in lastfew years’ .In fact many companies are facing severe loss. Out of the selectedratios analyzed here in the research, to determine which one will have a majoreffect of company’s profitability in pharmaceutical industry of Pakistan.2.
ResearchQuestions· Whatis the impact of earning per share ratio on Return on Asset?· Whatis the impact of earning per share ratio on Return on Equity?· Whatis the impact of debt to equity ratio on Return on Asset?· Whatis the impact of debt to equity ratio on Return on Equity?· Whatis the impact of current ratio on Return on Asset?· Whatis the impact of current ratio on Return on Equity?· Whatis the impact of firm size on Return on Asset?· Whatis the impact of firm size on Return on Equity? 3. ResearchObjectiveThe objective of this research is to determine, is there any effectof financial ratios on the profitability of companies in the pharmaceutical industryof Pakistan. For this purpose sample has been selected from Karachi stockexchange.· To analyze theimpact of earning per share ratio on return on equity.· To analyze theimpact of earning per share ratio on return on asset.· To evaluate theimpact of debt to equity ratio on return on equity.
· To evaluate theimpact of debt to equity ratio on return on asset.· To investigatethe impact of current ratio on return on equity.· To investigatethe impact of current ratio on return on asset.· To analyze theimpact of firm size on return on equity.
· To analyze theimpact of firm size on return on assets MethodologyThe 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 sampleSecondary data is used for the purpose ofempirically examining the impact of financial ratios on pharmaceutical companies’listed Karachi Stock Exchange -100 index. I take 09 companies frompharmaceutical sector as sample from Karachi stock exchange to check the effectof financial ratio on firm profitability.Models· Descriptivestatistics· Correlation· Regression ConclusionResearcherhas conducted study on the topic “Impact of financial ratio on firmprofitability, evidence from pharmaceutical sector of Pakistan”. Two modelsused for the purpose of drawing results suggest here that all regressioncoefficients collectively are statistically significant so, over all models area good fit.DefinitionAccordingto Namazi and Rostami (2006) amongstthe financial ratios, a conventional of market ratios occur for corporateperformance valuation that investors during construction their investmentdecisions have particular care to it and the most vital is earnings per shareratio (EPS) which shows earnings that the company has realized in a fiscalperiod for an ordinary share and often is used to estimate the profitabilityand risk related with earning and also findings about stock prices.
Significanceof the studyDespite many studiesconducted for analyzing the determinants of profitability there is still a widescope for further research. Here study has been conducted in an emerging marketin a developing country where there are many factors which highly effectcompany’s performance.