Financial Performance Analysis on PT KIMIA FARMA (Persero) tbk. as Compared to Indonesian Pharma Market Leader
As the world’s fourth-most populous country with a fast growing economy, Indonesia is turning into an important market for pharmaceuticals. A major expansion of public healthcare is set to lift nationwide spending on medical treatment, but the budget pressure that accompanies government procurement means benefiting from the program will not be easy for drug companies. The local pharmaceutical industry has a long way to go in terms of quality, efficiency and innovation. Global players are drawn to Indonesia for its large potential, but they need to navigate rules and market conditions that are not always stacked in their favor. Pharmaceutical industry in Indonesia is said to be having a positive growth with this condition therefore PT Kimia Farma Tbk, as the first pharmaceutical company in Indonesia does have an increase for its sales but unexpectedly it has a decrease for its net profit margin. Financial performance assessment will be done in order to know the real condition of PT Kimia Farma Tbk’s financial condition and it will also be compared with competitor companies so that the result becomes clearer. The analysis method includes financial ratios analysis.
The method of analysis that is being used to measure a company’s financial performance is the financial ratios. Ross in his book “Corporate Finance” stated that financial ratios are being used to evaluate the connection between different parts of the financial information. When we use financial ratios to measure the financial performance of a company, we need to clearly state our method in calculating the ratios, because there are many different methods and formulas that is being used, which can produce different results and conclusions.
Pharmaceutical industry has something unique if compared to other industry. Pharmaceutical companies averagely use a bigger portion of their total revenues in Research and Development (R&D) division if compared to companies from other business industries. This means that the R&D is something very important in this industry, because people are continuously searching for cheaper and more effective medicines. The development in health care technology also demands pharmaceutical industry to provide medicine to support the healing process. As Larry Davidson and Gennadiy Greblov said in their paper “The Pharmaceutical industry in the Global Economy”, the process of researching and developing a new medicine takes an average of 10-15 years to complete and also a huge amount of money. The success rate in developing a new drug is also very low. Most of the chemical compounds found by researchers are either not medically effective or not safe enough to be an approved medicine. It means that there is a very high level of risk that is contained in the R&D process, which forces pharmaceutical companies to carefully choose which development process are feasible and which aren’t.
In liquidity ratio, there are two basic measures, which are current and quick ratio. Kimia Farma shows a stable in both current and quick ratio with a little increase in year 2012 – 2017. Overall, it means that Kimia Farma’s ability in meet its short term obligation. Kalbe Farma shows different trend, there is a decrease trend in 2012-2017. It showhs that liquidity of this firm is decreasing.
Activity ratio includes inventory turnover, average payment period, and total asset turnover. Basically, activity ratios may give information about company’s efficiency in managing several thing, such as inventory, collections, etc. Kimia Farma’s inventory turnover keep slightly increasing from 2012 – 2017, which means its inventory has becoming more liquid for the last five years. Same trend with Kalbe Farma, there is a little bit increase in overall activity ratio.
In debt, there are a ratios that being used to asses the company’s performance. Debt ratio that calculates company’s proportion of its total asset that being financed by creditors. Kimia Farma shows a decreasing trend in recent five years, from which is around 20% to only 1% of Kimia Farma’s total asset is being financed by its debt or liabilities. In Kalbe Farma, overall Debt ratio is not more than 5 %.
For market ratio, company’s performance can be seen based on its price earning (P/E ratio) . This ratio can shows investor’s confidence towards the company, so it will be better to have a high result. Kimia Farma shows a good trend, which is increasing from 2012-2017, but somehow there is a decrease in 2013, and 2015, succeed in manage its performance so it reaches the highest result in 2016. Kalbe Farma Shows the fair result. There is no increasing trend from 2012-2017.
Profitability ratio is being used to assess company’s ability in generating profit compared to its several cost for the business. Some measurements for profitability ratio includes gross profit margin, net profit margin, earnings per share (EPS), return on asset (ROA), and return on equity (ROE). In terms of profitability, Kimia Farma always give a positive value, which is good. For gross profit margin, operating profit margin, and net profit margin, the trend is also positive in year 2012 – 2013, although it has decreased in 2013, but Kimia Farma succeed to fix it in 2014. Kimia Farma’s EPS is also keep increasing from 2012 – 2017. Kalbe farma Profitability ratio is better compare to Kimia Farma. Higher Groos Profit margin, Operating Profit margin, and Net Profit margin means this firm is better for generating profit. ROA and ROE value also have a positive number, which is good. EPS is also keep increasing from 2012-2017.
Summary
Based on some financial ratios analytical methods that have been used, overall it shows that in 2012 – 2017, Kimia Farma has done well. Though it is not the best among the other benchmark companies, but still it is above the average of the five companies. Kimia Farma shows its strength in total asset turnover, ROE, and P/E ratio. Kimia Farma also dhas the best growth for profitability ratio with a positive growth for almost all of the indicators, except for its ROA but it is still good because its benchmark have negative trend.
Recommendation
Based on the conclusion above, some recommendations that can be given in order to improve Kimia Farma’s financial performance are:
Managing cost of goods sold (COGS)
It seems like Kimia Farma’s sales has increase in each year but its COGS has also increase with higher growth, resulted in decrease for its profitability ratios in 2013 and though it has improved in 2014, it is not better than in 2012. It is better to have a higher increase in sales than its COGS so that the profitability ratio will have a positive growth.
Managing other cost and expenses
Not only COGS, Kimia Farma also faced with the increase in its cost and expenses, such as operating expense and financial cost. This can be overcome by reducing the cost and expenses, for instance decrease salaries and employees’ welfare and also amortization, electricity, fuel, water, and gas payments. Maybe those cost and expenses cannot be reduced that much since for electricity, fuel, etc, they are controlled by the government. As a solution, Kimia Farma can manage these cost and expenses better so that the proportion of increase for its cost and expenses will not be higher than the proportion of increase for its sales revenue because if not, the profitability will be decrease though its sales revenue is increase.
Improve operating efficiency
Based on the data, it can be seen that Kimia Farma has a poor ability in managing its operating efficiency compared to its benchmark. If Kimia Farma can improve its operating efficiency, which means it needs to increase its net profit margin, it may be resulted in higher ROA and ROE. Related to the previous recommendation, Kimia Farma needs to have a higher proportion of increase for its earnings available for common stockholder than the increase for its cost and expenses.
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