Presented below are condensed financial statements adapted from those of two act
ID: 2528890 • Letter: P
Question
Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry—Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts).
* This is before income from discontinued operations.
Evaluate and compare the two companies by responding to the following questions.
Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.
Required:
1. For both companies, compute the ratios below.
2. Evaluate and compare the two companies.
($ in millions, except per share data) J&J Pfizer Assets: Cash $ 8,195 $ 3,980 Short-term investments 4,668 10,924 Accounts receivable (net) 7,154 9,355 Inventories 4,112 6,751 Other current assets 3,930 3,795 Current assets 28,059 34,805 Property, plant, and equipment (net) 11,270 19,711 Intangibles and other assets 16,446 69,771 Total assets $ 55,775 $ 124,287 Liabilities and Shareholders' Equity: Accounts payable $ 5,506 $ 3,141 Short-term notes 2,063 9,742 Other current liabilities 7,843 12,738 Current liabilities 15,412 25,621 Long-term debt 3,455 6,255 Other long-term liabilities 5,483 22,478 Total liabilities 24,350 54,354 Capital stock (par and additional paid-in capital) 3,720 67,650 Retained earnings 35,023 33,802 Accumulated other comprehensive income (loss) (670 ) 215 Less: Treasury stock and other equity adjustments (6,648 ) (31,734 ) Total shareholders' equity 31,425 69,933 Total liabilities and shareholders' equity $ 55,775 $ 124,287 Income Statements Net sales $ 44,002 $ 47,328 Cost of goods sold 12,680 10,336 Gross profit 31,322 36,992 Operating expenses 20,251 28,974 Other (income) expense—net (445 ) 3,670 Income before taxes 11,516 4,348 Tax expense 3,455 1,304 Net income $ 8,061 $ 3,044 * Basic net income per share $ 2.62 $ 0.42
Explanation / Answer
1. Receivables Turnover = Net credit Sales / Average Accounts receivables
J&J = 44002 / 7154 = 6.15 times Pfizer = 47328 / 9355 = 5.06 times
2. Average Collection Period = 365 / Receivable turnover ratio
J&J = 365 / 6.15 = 59.35 days Pfizer = 365 / 5.06 = 72.13 days
3. Inventory Turnover = Cost of goods sold / Average Inventory
J&J = 12680 / 4112 = 3.08 times Pfizer = 10336 / 6751 = 1.53 times
4. Average Days in Inventory = 365 / Inventory turnover ratio
J&J = 365 / 3.08 = 118.51 days Pfizer = 365 / 1.53 = 238.56 days
5. Profit Margin = Net Income / Net Sales
J&J = 8061 / 44002 = 18.32% Pfizer = 3044 / 47328 = 6.43%
6. Asset Turnover = Net Sales / Total Assets
J&J = 44002 / 55775 = 78.89 times Pfizer = 47328 / 124287 = 38.08 times
7. Return on Assets = Net Income / Total Assets
J&J = 8061 / 55775 = 14.45% Pfizer = 3044 / 124287 = 2.45%
8. Equity Multiplier = Total Assets / Shareholders Equity
J&J = 55775 / 31425 = 1.77 Pfizer = 124287 / 69933 = 1.78
9. Return on Shareholders' Equity = Net Income / Shareholders Equity
J&J = 8061 / 31425 = 25.65% Pfizer = 3044 / 69933 = 4.35%
Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory? - J&J is efficient in collecting account receivable as its collection period is lesser than Pfizer (59 vs 72 days). J&J is efficient in manageing inventory as well (118 days vs 238 days)
Which of the two firms had greater earnings relative to resources available? - J&J has greater earnings with a ROA of 14.45%
From the perspective of a common shareholder, which of the two firms provided a greater rate of return? - J&J has higher return on Shareholders equity. We can also refer to basic net income per share in the Income statement.
From the perspective of a common shareholder, which of the two firms appears to be using leverage more effectively to provide a return to shareholders above the rate of return on assets? - Leverage is almost same for both i.e. equity multiplier but J&J is earning higher return than Pfizer, so it is using leverage more effectively.
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