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).

Balance Sheets ($ 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

* 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.
  

	J&J		Pfizer
Receivables Turnover (#.##)		times		times
Average Collection Period (#)		days		days
Inventory Turnover (#.##)		times		times
Average Days in Inventory (#)		days		days
Profit Margin (#.##)%		%		%
Asset Turnover (#.###)		times		times
Return on Assets (#.#)%		%		%
Equity Multiplier (#.##)
Return on Shareholders' Equity (#.#)%		%		%

Analysis
Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory?
Which of the two firms had greater earnings relative to resources available?
Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?
From the perspective of a common shareholder, which of the two firms provided a greater rate of return?
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?

Answer 1

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.