Abstract

Management of risk has always been an integral part of any business and it
has gained momentum in recent years due to globalization and
liberalization. One of the most important areas in day-to-day
management of a firm is to deal with the management of the
working capital, which is defined as all the short-term assets used
in daily operations. These consist primarily of cash, marketable
securities, accounts receivable, and inventory. The balances in
these accounts can be highly volatile as they respond quickly to
changes in the firm’s operating environment. The effective
management of working capital requires both medium-term
planning and immediate reactions to the fast changes taking in the
present business environment. Working capital management is the
functional area of finance that covers all the current accounts of
the firm. It is concerned with the adequacy of current assets as
well the level of risk posed by current liabilities. It is a discipline
that seeks proper policies for managing current assets and
liabilities and practical techniques for maximizing the benefits from
managing working capital. This paper addresses these issues by
over viewing the conceptual and theoretical bases for liquidity, risk
and profitability analysis of Square Pharmaceuticals Limited by
identifying specific problems for common-pool resources, outlining
alternative methodologies for their measurement. This paper
highlights how Square Pharmaceuticals Limited has achieved
adequate liquidity, risk minimization and profit maximization.

Introduction
The effective management of working capital requires both medium-term
planning and immediate reactions to the fast changes taking in the
present business environment. Working capital management is the
functional area of finance that covers all the current accounts of the firm.
It is concerned with the adequacy of current assets as well the level of
risk posed by current liabilities. It is a discipline that seeks proper policies
for managing current assets and liabilities and practical techniques for
maximizing the benefits from managing working capital. The firm’s
policies for managing working capital should be designed to achieve

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three goals, viz. adequate liquidity, minimization of risk, and
maximization of the profitability.

Origin of the report

We are lucky to say that our honorable course teacher M. Takibur
Rahman Lecturer, Department of Accounting and Information System,
Faculty of Business Administration and Management, assigned us a report
on “Liquidity, Risk and Profitability Analysis: A Case Study of Square
Pharmaceuticals Limited”. The data required for the preparing this report
has been collected from the annual reports of Square Pharmaceuticals
Limited for the period of 5 years from 2003-2004 to 2007-2008.

Purpose of the Report

The purpose of the study was to measure the Liquidity, Risk and
Profitability of Square Pharmaceuticals Limited over a period of (2003-
2004 to 2007- 2008) five years to compare then and to measure the
adequacy of the liquidity, risk minimization and profit maximization. The
major objectives of this study are specified as follows:

● To measure and evaluate the liquidity position of Square

Pharmaceuticals Limited.

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● To assess the correlation between liquidity and profitability

● To assess the trade-off between profitability and risk and

● To offer humble suggestions based on the above study.

Scope of the Study

This study has focused upon the liquidity position of Square
Pharmaceuticals Limited, the correlation between liquidity and
profitability, and trade-off between profitability and risk of Square
Pharmaceuticals Limited. We hope this study will help us to know
more clearly about the liquidity, risk and profitability of Square
Pharmaceuticals Limited.

Methodology of the Report

Working capital has played an important role in the analysis of economic
and operating performance of a company. The firm’s policies for
managing working capital should be designed to achieve three goals,
which are – adequate liquidity, minimizing risk, and maximizing profit.
The term “liquidity” has been subjected to alternative definition of

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various natures. It is an attribute that signifies the capacity to meet
financial obligations as and when required. The study was based on the
financial statements data of Square Pharmaceuticals Limited for the
period (2003-2004 to 2007- 2008) covering various aspects of operating
performance. Data of earlier periods were also used for studying the
relationship between liquidity and profitability. This report is based on
mainly secondary data. Initially, the work is started with data those were
available at Company’s Annual Report and company’s news letter.
Moreover, it becomes helpful to gather some more information from the
website of the company.

Later on, the work progressed through some depth interviews of good
range professionals trying to heat some expected area of the study. We
collect the necessary information over phone because of time constrains.

Then we analyze those data from many angles, in different aspect and
present the information in different segment according to their category,
in compact way. We highlight different important things, which we found
during our survey. After doing all of those we submit the report to the
proper authority.

Limitations of the Report

As a student of faculty of Business Administration and Management, 8th
semester, this is our initiative for making a report on “Liquidity, Risk and
Profitability Analysis: A Case Study on Square Pharmaceuticals Limited”
through using its Annual Report and the necessary information which is
provided by the employee of this organization. Beside this we have faced
the following hindrances in preparing this report:

● Lack of knowledge and experience

● Short of time

● Lack of computer facilities

● Lack of sufficient privileges

● Lack of communication facilities

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This is our truthful declaration that the report is prepared on both
secondary data and primary data as well. But in some cases, we found
the problem of shortage of necessary data and that cases we will take
hypothetical data, so there is a little chance of misappropriation.

Liquidity, Risk and Profitability

Adequate liquidity

Liquidity is an attribute that signifies the capacity to meet financial

obligations as and when required. Liquidity management is a routine
function of finance which deals with the effective management of the two
components of working capital, viz. the current assets and the current
liabilities. The current assets may be defined as the money and other
assets that are readily convertible into cash. Cash itself is, by definition,
the most liquid form of assets; other assets having varying degree of
liquidity depending on the case with which they can be converted into
cash. The current liabilities include all types of liabilities which will mature
for payment with in a period of one year such as bank overdraft, trade
creditors, bills payable, outstanding expenses, etc.

The importance of liquidity to meet the current obligations as and when

they become due for payment can hardly be over emphasized. In fact,
liquidity is a prerequisite for the very survival of the firm. The suppliers
and short-term creditors are interested of the short-term solvency of the
firm. It is a constraint which must be satisfied both directly, in that firms
must settle their debts, and indirectly, in that they must also report an
ability to continue to do so. If in the annual accounts, a firm reports poor
liquidity, this may cause such a fall in confidence that its state becomes a
self-fulfilling prophecy, as creditors demand immediate payment, the
classic example being ‘a run on the bank’.

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Minimization of Risk

A firm should maintain adequate level of working capital to meet the

current obligations and maintain business operations. It should ensure
that it does not suffer from lack of liquidity. The failure of a firm to meet
its obligations due to lack of sufficient liquidity is highly risky as it will
result in bad credit image, lose of creditors confidence high-cost
emergency borrowing, unnecessary legal battles or even closure of the
firm. At the same time if the level of working capital is more holding cost
of current assets would be more, again would badly affect the
profitability. In other words, the working capital should not be either too
high or too low. A well-monitored minimum level of working capital at a
calculated risk is always good for better profitability.

Maximizing Profitability

Profitability is the relationship between profits and capital, i.e. the static
resources set aside to rearm those profits, if profitability exceeds the cost
of the firm’s capital that is the weighted average cost of firm’s equity and
borrowed money, and it can call it successful. The investment of excess
cash, minimization of inventories, speedy collection of receivables, and
elimination of unnecessary and costly short-term financing all contribute
to the maximization the profitability.

Liquidity, Risk and Profitability Trade-off

In connection with the trade-off between liquidity, risk and profitability, a

firm can adopt three types of working capital policies:

 Conservative policy
 Aggressive policy, and
 Moderate policy.

Conservative Policy

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In the case of conservative policy, a firm will hold a relatively high
proportion of working capital total assets to pay safe. As the rate of
return on current assets is normally less than the rate of return on lower
profitability but at t he same time firms it will signify lower risk of failure
to meet the current obligations.

Aggressive Policy

Here, the firm opts for a lower level of working capital thereby investing
in current assets at a lower proportion to total assets. When a firm adopts
this policy, the profitability is high but at high risk in meeting the current
obligations on an achieving the desired level of turnover.

Moderate Policy

A working capital policy adopted in between the conservative policy and

aggressive policy is termed as moderate policy. In this case, the
investment in current assets is neither too high nor too low. The
profitability and risk are also moderate.

Expressed in terms of ratios, conservative policy and aggressive policy

will result in low current ratio with different degrees of financial flexibility.

The problem of liquidity is less dependent on particular circumstance and

it is easier to make useful generalizations. There are two distinct
requirements for liquidity—

1. Profitability and

2. Care and thoroughness in administration

Effective credit management and better control over the inventory are
required to control the cost of working capital. It is only if a firm is
profitable that in the long run it will receive in cash more than it pays out.
This is more clearly imaginable in the case of a trading business which
buys and sells mostly on cash basis. If such a firm makes loses it is
paying out in cash more than it receives from sales. It can only sustain its

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cash balances by injections of capital or by selling fixed assets, processes
which cannot be continued for a long time.

Profitability may be necessary but it is not sufficient. A firm must be

careful to ensure that it does not commit its payment that it cannot
cover. As stated early liquidity means short-term solvency of the firm to
meet its financial obligations as and when there is— to measure the
liquidity, two important ratios are generally used by firms. Which are as
follows —

Current Ratio

It is the relationship between the current assets and current liabilities and
shows the proportion of current assets available per unit of current
liability. It is worked out using the following formula—

Current Assets
Current Ratio =
Current Liabilitie s

A worthwhile target for the current ratio is 2:1. Firms with inventories
which are easily realized, such as food retailers can manage with
significantly lower ratios, but there is no excuse of going mush below
unless, a firm sees liquid investments as a sound home for its resources.
The current ratio cannot be judge except in relation to the needs of a
particular commercial situation. Anything between 1:1 and 4:1 could be
acceptable. Comparison must be made with industry norms and those
competitors whom one respects. In the absence of other data, 2:1 is not
unreasonable.

Quick Ratio

The quick ratio establishes the relationship between quick or liquid assets
and current liabilities. Quick assets mean current assets excluding
inventory. The exclusion of inventory is for the reason that it is not easily
and readily convertible into cash. A high quick ratio is an indication that
the firm has liquidity and easiness to meet the current obligations. On the
other hand, if the quick ratio is low, it is a clear indicator of illiquidity. The

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quick ratio is a more rigorous and penetrating test of the liquidity position
when compared to the current ratio. It is calculated as follows—

Quick Assets
Quick Ratio =
Current Liabilitie s

Normally a quick ratio of 1:1 is considered satisfactory.

Profitability Ratios

There are two major categories of profitability ratios:

i. Profit in relation to sales and

ii. Profit in relation to investments.

One of the major drawbacks of the profits in relation to sales is that it

ignores the money invested by the firm to earn the profit. So, the profit in
terms of investment is the best measure to assess the profitability, which
is calculated as follows—

EBIT
Pr ofiability =
Capital Employed

Many a time, when gauging how well business is going, the observers
and analysts look solely at profitability. If course, profit is a major
consideration, being in an unprofitable business is a personal tragedy for
the owners, managers and other stakeholders. Nevertheless, poor or
below average profitability situations can be changed, but, not unless
effective working capital management practice are established. It is
because, through the firm is profitable, but illiquidity persists for a long
time may leads to insolvency and may lead to closure of the firm. Based
on these theoretical backgrounds, a modest attempt has been made to
study the liquidity, profitability and risk trade-off of Square
Pharmaceuticals Limited, a popular pharmaceutical industry in
Bangladesh.

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OVERVIEW OF SQUARE PHARMACEUTICALS GROUP

Square Pharmaceuticals Ltd is the flagship company of Square Group. In

stark contrast to its present stature, Square had a rather humble
beginning. In 1958, the Company started out as a small scale
pharmaceutical venture at Pabna, a small town in Northern Bangladesh.
It was a partnership effort of four young and enterprising men under the
leadership of the Chairman, Mr. Samson H Chowdhury, whose
determination and passion saw it through the turmoil of the early days.

In 1964, the Company was turned into a Private Limited Company. After
the independence of Bangladesh, 1975 was quite a significant year for
Square as it established a technical collaboration with Janssen
Pharmaceuticals of Belgium; a subsidiary of Johnson & Johnson, USA. In
its relentless quest for higher technology, Square signed a technological
collaboration agreement with F. Hoffman-La Roche & Co. Ltd in 1982.

1985 was another historical year for Square as the Company gained the
market leadership for the first time in Bangladesh pharmaceuticals
market and since then it has been maintaining its position as the leading
pharmaceutical Company of the country. In 1987, Square became the
first Bangladeshi company to export its product abroad.

The Company stepped into a new era when it was transformed into a
Public Limited Company in 1991 and subsequently it was publicly listed at
both the stock exchanges in the year 1995. Square Pharmaceutical Ltd
has been successfully retaining its market leader position in Bangladesh
for the last consecutive 22 years and its current market share is
approximately 16%.

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10
CORPORATE INFORMATION

Corporate Focus:-

Our vision, our mission and our objectives are to emphasize on the
quality of product, process and services leading to growth of the
company imbibed with good governance.

Corporate Governance:-

Top Management: Board of Directors

As per provisions of the Article of Association, Board of Directors holds

periodic meetings to resolve issue of policies and strategies, recording
minutes/decisions for implementation by the Executive Management.

Executive Management

The Executive Management is headed by the Managing Director, the

Chief Executive Officer (CEO) who has been delegated necessary and
adequate authority by the Board of Directors. The Executive Management
operates through further delegations of authority at every echelon of the
line management.

The Executive Management is responsible for preparation of segment

plans/sub-segment plans for every profit centers with budgetary targets
for every item of goods & services and are held accountable for

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11
deficiencies with appreciation for exceptional performance. These
operations are carried out by the Executive Management through series
of committees, sub-committees, ad-hock committees, standing
committees assisting the line management.

ABOUT SQUARE PHARMACEUTICALS LIMITED

Square today symbolizes a name – a state of mind. But its journey to the
growth and prosperity has been no bed of roses. From the inception in
1958, it has today burgeoned into one of the top line conglomerates in
Bangladesh. Square Pharmaceuticals Ltd., the flagship company, is
holding the strong leadership position in the pharmaceutical industry of
Bangladesh since 1985 and is now on its way to becoming a high
performance global player.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company

in Bangladesh and it has been continuously in the 1st position among all
national and multinational companies since 1985. It was established in

Page
12
1958 and converted into a public limited company in 1991. The sales
turnover of SPL was more than Taka 7.5 Billion (US$ 107.91 million) with
about 16.92% market share (April 2006– March 2007) having a growth
rate of about 23.17%.

SQUARE Pharmaceuticals Limited has extended her range of services

towards the highway of global market. She pioneered exports of
medicines from Bangladesh in 1987 and has been exporting antibiotics
and other pharmaceutical products. This extension in business and
services has manifested the credibility of Square Pharmaceuticals
Limited.

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13
 VISION, MISSION, AND OBJECTIVES

Vision Mission

We view business as a means to Our Mission is to produce and

the material and social wellbeing of provide quality & innovative
the investors, employees and the healthcare relief for people,
society at large, leading to maintain stringently ethical
accretion of wealth through standard in business operation also
financial and moral gains as a part ensuring benefit to the
of the process of the human shareholders, stakeholders and the
civilization. society at large.

Objectives Corporate Focus

Our objectives are to conduct Our vision, our mission and our
transparent business operation objectives are to emphasize on
based on market mechanism within the quality of product, process
the legal & social frame work with and services leading to growth
aims to attain the mission reflected of the company imbibed with
by our vision good governance practices.
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14
CHRONOLOGY SINCE INCEPTION

Page
15
1974 Technical Collaboration with Janssen Pharmaceutica, Belgium, a
: subsidiary of Johnson and Johnson International, USA.

1982 Licensing Agreement signed with F. Hoffmann-La Roche Ltd.,

: Switzerland.
1985 Achieved first position in the Pharmaceutical Market of
: Bangladesh among all national and multinational companies.

1987 Pioneer in pharmaceutical export from Bangladesh.

:
1991 Converted in to a Public Limited Company
:
1995 Chemical Division of Square Pharmaceuticals Ltd. starts
: production of pharmaceutical bulk products (API).

1997 Won the National Export trophy for exporting pharmaceuticals.

:
1998 Agro-chemicals & Veterinary Products Division of Square
: Pharma starts its operation.

2001 US FDA/UK MCA standard new Pharmaceutical factory goes into

: operation built under the supervision of Bovis Lend Lease, UK.

2004 Signing of agreement with ROVIPHARM, Vietnam to manufacture

: and market SQUARE products under license in Vietnam.

2004 Secured the top position for the best published accounts and
: report for 2003 in the manufacturing category for transparency
and excellence in corporate reporting.

2005 New State-of- the-Art Square Cephlosporins Ltd. goes into

: operation; built under the supervision of TELSTAR S.A. of Spain
as per US FDA/ UK MHRA requirements.

2007 Square Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA

: approval.

Liquidity, Risk and Profitability Analysis of Square

Pharmaceuticals Limited

Page
16
Liquidity Position of Square Pharmaceuticals Limited

The determinants of liquidity and risk measurement (current assets,

current liabilities, quick assets, current ratio, and quick ratio) are
presented in the following table.

Table-1: Liquidity Position of Square Pharmaceuticals Limited

(Figures in Thousand Taka)

Year Current Quick Current Curren Quick

Assets Assets Liabilities t Ratio Ratio
2004-2005 3,242,50 2,097,590 1,949,949 1.66 1.08
2
2005-2006 4,031,68 2,689,320 2,260,755 1.78 1.19
5
2006-2007 3,682,51 2,138,319 2,555,566 1.44 0.84
1
2007-2008 4,411,83 1,385,100 3,500,845 1.26 0.40
6
2008-2009 3,843,51 1,744,758 2,640,869 1.46 0.66
3
Total 19,212,0 10,055,08 12,907,984 7.60 4.17
47 7
Overall Average 3,842,40 2,011,017 2,581,597 1.52 0.834
9
Growth Rate (%) 18.54 (16.82) 35.43 (12.05) (38.89)
Standard Deviation 386,142 435,077 519,832
Co-efficient of Variation 10 22 20
(%)

The liquidity position of Square Pharmaceuticals Limited is presented in

the Table-1. Liquidity position of Liquidity Position of Square
Pharmaceuticals Limited (2004-2005 –2008-2009) shows that the size of
current assets has increased from 3,242,502 thousands in 2004-2005 to
3,843,513 thousands in 2008-2009, registering a growth rate of 18.54%,
the quick assets have shown a nominal growth rate is (16.82) % from

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2,097,590 thousands to 1,744,758 thousands, whereas, the current
liabilities is increased by 35.43% during the same periods. As a result, the
current ratio has declined from 1.66 in 2004-2005 to 1.52 in 2008-2009
and quick ratio has reached 0.66 in 2008-2009 from 1.08 in 2004-2005.

Figure-1: Current Assets, Quick Assets and Current Liabilities of Square

Pharmaceuticals Limited

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Figure-2: Current Ratio and Quick Ratio of Square Pharmaceuticals
Limited

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19
Above figure-1 shows the components of working capital and figure-2
shows the movement of current ratio and quick ratio. It is worth noted
that the current ratios were almost consisted during the study period,
although the current ratios of 2006-2007 and 2007-2008 were decreased
in compare to the previous year, but in 2005-2006 and 2008-2009 were
increased in compare to the previous year. In case of quick ratios it
decreased in 2008-2009 in compare to the 2004-2005 (1.08 to 0.66) but
it increased in compare to the pervious year 2007-2008 (0.40 to 0.66).

The standard deviation and the co-efficient of variation of current

liabilities were 519,832 and 20% respectively, whereas the standard
deviation of current assets and quick assets were 386,142 and 435,077
with co-efficient of variation of 10% and 22% respectively.

Figure-3: Average of current assets, quick assets and current liabilities

of five years, and current and quick ratio of Square Pharmaceuticals
Limited.

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Liquidity and Profitability Analysis of Square Pharmaceuticals
Limited

Liquidity and profitability are two contradictory term, though one cannot
be effective without other. But excess of one may slowdown of the other.
Management should maintain adequate liquidity and profitability. For the

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21
measurement of the liquidity and profitability position of Square
Pharmaceuticals Limited we use the different indicator shown in the
following table. Current assets, total assets, and current assets to total
assets ratio has been used for liquidity indicator, and return on capital
employed has been used for measuring the profitability indicator.

The spearman’s Rank correlation between current assets to total assets

ratio (CTTR) and return on capital employed is displayed in the following
table-2. Applying the following formula:

6∑D 2
Correlatio n Coefficien t (r) = 1 −
n(n 2 −1)

6 ×4
Correlatio n Coefficien t (r) = 1 −
5(5 2 −1)

= 0.80

Rank correlation coefficient during the study period was 0.80, indicating
moderate degree of positive correlation between two variables, viz.
liquidity and profitability.

Table-2: Rank Correlation between CTTR and ROCE of Square

Pharmaceuticals Limited

(Figures in Thousand Taka)

Year Current Total Capital EBIT CTT Ran ROC Ran D D2

Assets Assets Employ R k E k
ed
% R1 (%) R2
2004 3,242,50 5,957,98 5,568,7 2,172,5 54.4 1 39.0 1 0 0
- 2 3 90 93 2 1
2005
2005 4,031,68 9,298,98 6,402,0 1,580,2 43.3 2 24.6 3 -1 1
- 5 7 15 04 5 8
2006
2006 3,682,51 10,486,9 7,333,2 1,825,7 35.1 3 24.9 2 1 1
- 1 40 58 52 2 0
2007

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2007 4,411,83 12,703,1 8,417,0 1,709,3 34.7 4 20.3 5 -1 1
- 6 27 41 06 3 1
2008
2008 3,843,51 13,251,2 9,949,3 2,368,4 29.0 5 23.8 4 1 1
- 3 43 98 37 0 0
2009

∑D 2
=4

In order to test the hypothesis, it is necessary to know the sample

coefficient of correlation. The appropriate test static to be used here is by
applying the following formula:

r
t= × n −2
1−r2
0.80
t= × 5 −2
1 − 0.80 2
= 2.31

Testing the significance of correlation coefficient,

H0: there is statistical relationship between the two variables, viz. liquidity
and profitability, and

H1: Alternative hypothesis that there is no statistical relationship between

the two variables.

The table value of ‘r’ at 5 percent level of significance for 4= (n-1) degree
of freedom is 2.776, where as, the calculated value is 2.31 Since the
computed value is less than the table value, the null hypothesis H0 is
accepted and concludes that there is a linear relationship between
liquidity and profitability.

Figure: Assets, Capital and EBIT of Square Pharmaceuticals Limited

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Figure: Rank Correlation between CTTR and ROCE of Square
Pharmaceuticals Limited

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24
Risk versus Profitability

In order to analyze the trade-off between risk and profitability, the risk
analysis of working capital management has been done to assets the
extent of current assets maintained by Square Pharmaceuticals Limited,
adequate enough to meet the current obligations and also to support the

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25
given level of operation. Enterprises are said to follow and aggressive
approach when the current assets are financed only by short-term
sources and a conservative approach when current assets are financed
by both short-term and long-term sources. The risk faced by a firm can be
measure with the following formula:

( Ej + Lj ) − Aj
Rk =
Cj

Where,

Rk= Risk factor

Ej= Equity + Retained earnings

Lj= Long-term loan

Aj= Fixed assets

Cj= Current assets

The above measure indicates the extent of current assets financed by

long-term funds after fixed assets are financed in full. Based on the
above formula, the following inferences can be drawn—

 Value of Rk is zero or less would mean that the firm is following an

aggressive policy and normally profitability would be high,
 Value of Rk is 1 or close to 1 would mean that the firm is following a
conservative approach and normally profitability would low.

6∑38
Correlatio n Coefficien t (r) = 1 −
5(5 2 −1)

Coefficient Correlation (r) = -0.90

Value of t:

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26
 r
t= × n −2
1−r2
− 0.90
t= × 5 −2
1 − −0.90 2
= − 3.58 or / t / = 3.58

Table-3 reveals that Square Pharmaceuticals Limited has followed the

modest conservative approach during the study period. The risk factors
of Square Pharmaceuticals Limited are positive in all years in the study
period.

Table-3: Rank Correlation between Risk and ROCE of Square

Pharmaceuticals Limited

(Figures in Thousand Taka)

Year Equity Long- Fixed Current Rk Rank ROCE Ran D1 D12

and RE term Assets Assets k
Loan R3 (%)
R2
2004 5,568,79 389,193 2,715,481 3,242,50 1.0 5 39.01 1 -4 16
- 0 2 0
2005
2005 6,402,01 602,350 5,267,302 4,031,68 0.4 4 24.68 3 -1 1
- 5 5 3
2006
2006 7,333,25 492,569 6,804,429 3,682,51 0.2 3 24.90 2 -1 1
- 8 1 8
2007
2007 8,417,04 602,585 8,291,291 4,411,83 0.1 1 20.31 5 4 16
- 1 6 7
2008
2008 9,949,39 449,758 9,407,730 3,843,51 0.2 2 23.80 4 2 4
- 8 3 6
2009
38

The correlation coefficient (r) for ranked data of risk and profitability is
worked out as -0.90 indicates that there is an aggressive association
between two variables, viz. risk and profitability. It’s a common theorem
that risk and profitability are positively correlated, but in our study, it is

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found that the correlation coefficient r is negative, means that risk and
profitability are negatively correlated.

The table value of t at 5 percent level of significance for 4 degrees of

freedom is 2.776 where as the calculated value of t is 3.58.

The test statistic is –

H0: there is a positive association between risk and profitability, and

H1: there is not positive association between two variables.

Since the calculated value of t is greater than the tabulated value, null
hypothesis is rejected and concludes that there is negative relationship
between two variables and Square Pharmaceuticals Limited has made a
negative impact on its profitability that means, if risk is increased then
the profitability of the company would be decreased.

Figure:

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Page
29