West Pharmaceutical Services Inc.: International Competitive Benchmarks and Financial Gap Analysis

PRLog (Press Release) - Jun 24, 2007 -
What does this report cover?
With the globalization of markets, greater foreign competition, and the reduction of entry barriers, it becomes all the more important to benchmark a company’s financial indicators against other firms on a worldwide basis. This report reflects to two inescapable trends: (1) a return to fundamentals, and (2) globalization. World stock markets have recently witnessed a return to fundamental financial analysis. Sound management as opposed to “hype” will in the long run generate shareholder value. This philosophy has lead to a greater emphasis on financial fundamentals and benchmarking. Not benchmarking in a traditional sense, but benchmarking at the global level as markets become all the more international and firms create transnational and global strategies. How does a firm's asset structure vary compared to global benchmarks? Does it hold more cash and other short term assets, or does it concentrate its assets in physical plant and equipment? On the liability side, does a company have a higher percent of payables compared to the benchmarks, or does it hold a higher concentration of long-term debt? The structure of the income statement is more telling. Does the firm have a relatively higher costs of goods sold, operating costs, or income taxes compared to its global benchmarks? Are their returns on equity higher? Are profit margins greater? Are inventories held longer?

While these are the classic questions raised in most graduate MBA courses on managerial finance, in a globalizing economy the method to answer these questions may not be simple. If we consider that an industry spans multiple countries, continents and currencies, how can one perform benchmarking? This report does so by going beyond traditional analyses by considering companies competing in the same or similar industrial classification at a global level. Doing so, however, is not an obvious task. First, one needs to find firms competing in the same sector, but not necessarily competing directly with the company in local markets. These firms should not be perceived, therefore, to be direct competitors to the company in question, but simply those that have been classified by various sources (e.g. EDGAR or similar foreign filings), as competing to serve customers in the same link of the value chain, or broad industrial classification, as identified by SIC, NAICS or similar codes. Second, given the international nature of the task, one needs to control for exchange rate volatility. Finally, one needs use reasonably comparable financial line items or standards.

The goal of this report is to save the reader time. It is designed to assist consultants, financial managers, strategic planners, and corporate officers in gauging indicators of a company’s financial structure compared to firms competing or participating in the same economic sector, at the global level. West Pharmaceutical Services Inc., is it financially competitive? There is no absolute answer to this question. This report is not about whether a particular company or industry has performed well or poorly in the past or will do so in the future. Such conclusions are left to the reader. West Pharmaceutical Services Inc. neither sponsored nor endorsed the analysis that follows.

Limitations

Shim and Siegal (p. 60) stress that “while ratio analysis is an effective tool for assessing a company’s financial condition, its limitations must be recognized.” In particular, they find that (p. 59) “no single ratio or group of ratios is adequate for assessing all aspects of a company’s financial condition.” The authors note the following limitations associated with ratio analyses which apply to the global benchmarking and vertical analysis presented here (p.60):

·  Accounting standards or policies may limit useful comparisons across companies
·  Management accounting practices across companies and countries may not be performed in the same style
·  Ratios are static and do not reveal future trends
·  Ratios do not indicate the quality of the components used to calculate the ratios (i.e. ratios have ambiguous interpretations)
·  Reported ratios may not reflect real values
·  Companies may be highly diversified, limiting the comparability of their ratios to others
·  Industry averages or norms are approximate; finer industry definitions may be required for certain interpretations or comparisons
·  Financial statements and resulting ratios often mean different things to different people depending on their points of view or motivations.

Again, all figures are projections, so due caution is required. The above caveats, and the fact that statements made in this report are forward-looking, requires that this point be emphasized.  A number of intervening factors can have material effect on the ratios and gaps forecasted.  These include changes in a company's management style, exchange rate volatility, changes in accounting standards, the lack of oversight or comparability in accounting standards, changes in economic conditions, changes in competition, changes in the global economy, changes in source data quality, and similar factors.

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