GlaxoSmithKline Pharmaceuticals Ltd’s (GSK) 2010 annual report shows its cash balance exceeding its balance sheet size. In 2010, GSK ended the year with a cash balance of Rs2,003 crore, which includes fixed deposits with banks. Add other liquid investments of Rs118 crore and this figure swells to aboutRs2,120 crore, compared with its balance sheet size of Rs1,956 crore.

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This may seem impossible, but is an effect caused by the way companies present the assets side of the balance sheet. Instead of including current assets, which includes cash, debtors and advances, they include net current assets, which is derived after deducting current liabilities and provisions. If we rearrange the balance sheet, by moving current liabilities up to the liabilities side, GSK’s balance sheet size would go up to Rs2,800 crore. Still, its cash and investments would make up for three-fourths of its balance sheet size.

GSK’s cash bounty could have been useful if the company was hungry for acquisitions, or had to invest heavily in factories. Its growth strategy requires investment in people and promotions, but not in fixed assets. Addition to gross fixed assets was just Rs30 crore in 2010. It adopts a mix of own manufacturing and procurement (including branded products from the parent), which allows it to stay light on the assets front.

Acquisitions in the domestic pharmaceutical space are few, as companies find valuations to be expensive. GSK’s key acquisitions have, thus, been a result of global acquisitions by its parent. Its cash, meanwhile, keeps rising. In 2010, GSK earned a 35% operating profit margin and its return on capital employed (ROCE) was 41%. That is healthy, but could have been better. ROCE shows how well a company is utilizing its capital. It is computed by dividing the capital employed in a company—net worth plus debt—by its earnings before interest and tax (excluding other income).

How could a lower cash figure help GSK? Suppose the company had returned Rs1,000 crore to shareholders, through a buy-back in 2010. Its capital employed would have fallen by an equivalent amount, and its ROCE would have jumped to 56%. It may not attempt something as dramatic in scope, but GSK’s shareholders would be happy if the company can find some way of depleting its cash pile.

Graphic by Naveen Kumar Saini/Mint

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