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

$

5,377

$

1,520

Short-term investments

4,146

10,432

Accounts receivable (net)

6,574

8,775

Inventories

3,588

5,837

Other current assets

3,310

3,177

Current assets

22,995

29,741

Property, plant, and equipment (net)

9,846

18,287

Intangibles and other assets

15,422

68,747

Total assets

$

48,263

$

116,775

Liabilities and Shareholders' Equity:

Accounts payable

$

4,966

$

2,601

Short-term notes

1,139

8,818

Other current liabilities

7,343

12,238

Current liabilities

13,448

23,657

Long-term debt

2,955

5,755

Other long-term liabilities

4,991

21,986

Total liabilities

21,394

51,398

Capital stock (par and additional paid-in capital)

3,120

67,050

Retained earnings

30,503

29,382

Accumulated other comprehensive income (loss)

(590

)

195

Less: Treasury stock and other equity adjustments

(6,164

)

(31,250

)

Total shareholders' equity

26,869

65,377

Total liabilities and shareholders' equity

$

48,263

$

116,775

Income Statements

Net sales

$

41,862

$

45,188

Cost of goods sold

12,176

9,832

Gross profit

29,686

35,356

Operating expenses

19,763

28,486

Other (income) expense—net

(385

)

3,610

Income before taxes

10,308

3,260

Tax expense

3,111

1,621

Net income

$

7,197

$

1,639

*

Basic net income per share

$

2.42

$

0.22

*This is before income from discontinued operations.

Prepare the following ratios for both companies, and compare:

Accounts Receivables Turnover

Average Collection Period

Inventory Turnover

Average Days in Inventory

Profit Margin Ratio

Asset Turnover

Return on Assets

Return on Shareholders' Equity

.

Then answer the following questions:

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

		Johnson and Johnson (J&J)		Pfizer, Inc
(a)	Accounts Receivable turnover:-
a.	Net Credit Sales	$              41,862		$         45,188
b.	Accounts Receivable	$                6,574		$           8,775
	Ratio (a/b)	6.37	times	5.15	times
(b) Average collection period:-
a.	Number of Days in year	365		365
b.	Accounts Receivable turnover ratio	6.37		5.15
	Ratio (a/b)	57.32	days	70.88	days
(c) Inventory turnover:-
a.	Cost of goods sold	$              12,176		$           9,832
b.	Inventory	$                3,588		$           5,837
	Ratio (a/b)	3.39	times	1.68	times
(d) Average Days in inventory:-
a.	Number of Days in year	365		365
b.	Inventory turnover ratio	3.39	times	$             1.68	times
	Ratio (a/b)	107.56	days	$      216.69	days
(e) Profit Margin Ratio:-
a.	Gross Profit	$              29,686		$         35,356
b.	Net sales	$              41,862		$         45,188
	Ratio (a/b)	70.91%		78.24%
(f) Asset turnover:-
a.	Net Sales	$              41,862		$         45,188
b.	Total assets	$              48,263		$       116,775
	Ratio (a/b)	0.87	times	0.39	times
(g) Return on Assets Ratio:-
a.	Net income	$                7,197		$           1,639
b.	Total assets	$              48,263		$       116,775
	Ratio (a/b *100)	14.91%		1.40%
(h) Return on Shareholders' equity:-
a.	Net income	$                7,197		$           1,639
b.	Shareholders' equity	$              26,869		$         65,377
	Ratio (a/b *100)	26.79%		2.51%
1	Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory?
Ans	Johnson and Johnson (J&J) appears more efficient in collecting its accounts receivable and managing its inventory since its average collection period is 57.32 days while Pfizer, Inc's average collection period is 70.88 days and Average Days in inventory are 107.56 days better than 216.69 days as in case of Pfizer, Inc.
2	Which of the two firms had greater earnings relative to resources available?
Ans	Johnson and Johnson (J&J) had greater earnings relative to resources available since its return on assets is 14.91% while Pfizer, Inc's return on assets is 1.40%.
3	Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?
Ans	Johnson and Johnson (J&J) have achieved 14.91% rate of return on assets with 70.91% gross profit margin and turnover while Pfizer, Inc's return on assets is 1.40% with 78.24% gross profit margin.
4	From the perspective of a common shareholder, which of the two firms provided a greater rate of return?
Ans	Johnson and Johnson (J&J) provided a greater rate of return i.e. 26.79% from the perspective of a common shareholder.
5	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?
Ans	Johnson and Johnson (J&J) appears to be using leverage more effectively to provide a return to shareholders above the rate of return on assets as its rate of return on assets is 14.91% while its return on stockholders' equity is 26.79% which is due to leverage effect.

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