In or the firms, are in need of a

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.