acct 2410 intermediate accounting student name: sonenaly ... pfizer financial analysis introduction

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  • ACCT 2410 Intermediate Accounting

    Student Name: Sonenaly Hemsouvanh

    Term Project

    Pfizer Financial Analysis

    Introduction

    Pfizer is one of the world premier biopharmaceutical manufacturers. The annual sales is $49.61B

    in 2014. In this report, I am using the actual financial numbers from Pfizer 2014 annual report to

    analyze the company financial ratio. Based on the results, I compared the numbers with few

    competitors and with the average industrial numbers. I have divided the analysis into five main

    parts, which is liquidity, efficiency, solvency, profitability, and investment potential.

    Financial Analysis

    1. Liquidity

     Working Capital Ratio

    Working capital ratio indicates the company's ability to pay current liability for current

    assets. Pfizer has a working capital ratio of 2.67 (2014), and 2.41 (2013). The company has

    sufficient capacity to pay its liability compared to its current assets both in two years.

    Compared to the industry, the ratio is 2.16, which Pfizer falls in the industry standard.

    Generally the company has a good position.

    Calculation:

    Working Capital Ratio (2014) = 57,702/21,631 = 2.67

    Working Capital Ratio (2013) = 56,244/23,366 = 2.41

  •  Cash Ratio

    It indicates the company's ability to pay its liabilities from cash and cash equivalent. The

    cash ratio of Pfizer is not strong which is 0.15 in 2014 and 0.09 in 2013. It shows that Pfizer

    cannot quickly repay its short-term debt. When compared to its competitors 2.16.

    Calculation:

    Cash Ratio (2014) = 3,343/21,631

    Cash Ratio (2013) = 2,183/23,366

     Acid Test Ratio

    This ratio is the company's ability to pay its current liability when it comes due immediately.

    The acid test ratio is 2.07 and 1.79 in 2014 and 2013 respectively. This means that Pfizer is

    able to use its quick assets to pay its liability. Moreover, the industry ratio of 1.33 also

    indicates that Pfizer has more capable to pay its current liabilities than some of its

    competitors.

    Calculation:

    Acid Test Ratio (2014): (3,434 + 32,779 + 8,669) / 21,631 = 2.07

    Acid Test Ratio (2013): (2,183 + 3,225 + 9,357) / 23,366 = 1.79

    2. Efficiency

     Gross Profit Percentage

    The gross profit percentage in both years is 81% which is good, the higher the better. The

    company is sufficient to pay all expenses and provide for profits. One reason that Pfizer has

    high gross profit percentage is because of high revenue. The graph shows Pfizer’s gross

    revenue and its few competitors. See Figure 1.

  • Calculation:

    Gross Profit Percentage (2014) = 40028/49625 = 81%

    Gross Profit Percentage (2013) 41998/51584 = 81%

    Figure 1: Gross Revenue of Pfizer and its Competitors (2014)

     Account Receivable Turnover

    Since the receivable turnover is numbers of time the company collect average receivable in

    a year, the higher numbers mean high efficiently collection. Pfizer does not have a high

    account receivable turnover which is 0.96. It means that the company can collect its

    average receivable once a year. It indicates inefficiency in collecting outstanding sales.

    Calculation:

    Account Receivable Turnover (2014) = 8,669/9,013 = 0.96

    3. Solvency

     Debt Ratio

    The debt ratio of Pfizer is low which is 0.37 in 2014 and 0.42 in 2013. The higher ratio, the

    high risk the company has. However, Pfizer still has the ratio above the benchmark from the

    81.14%

    62.00% 67.66% 67.67%

    50.46%

    0.00%

    10.00%

    20.00%

    30.00%

    40.00%

    50.00%

    60.00%

    70.00%

    80.00%

    90.00%

    Pfizer Merck Novartis Sanofi Industry Median

    Gross Revenue in Millions (2014)

  • industry which is 0.2, and above some of its competitors like Novartis and Sanofi. See

    Figure 2.

    Calculation:

    Debt Ratio (2014) = 21,631/57,702 = 0.37

    Debt Ratio (2013) = 23,366/56,244 = 0.42

    Figure 2: Debt Ratio (2014)

     Debt to Equity Ratio

    This ratio measures the risk of the company. It is the proportion of shareholders' equity and

    debt used to finance a company's assets. The lower number is the low risk. Pfizer considers

    high risk compared to other competitors, Novartis (0.29), Sanofi (0.32), and Industry Median

    (0.06).

    Calculation:

    Debt to Equity Ratio (2014) = 21,631/71,622 = 0.30

    Debt to Equity Ratio (2013) = 23,366/76,620 = 0.30

  • 4. Profitability

     Profit Margin Ratio

    Under Pfizer’s net profit margin for FY2013 was 43%. This is good because Pfizer spend

    67% of the money generated by sales. In FY2014, the net profit margin is 18% which is

    worse than in 2013, however, it is far higher rate compared to the industry which is 0.86%.

    See figure 3.

    Calculation:

    Profit Margin Ratio (2014) = 9,135/49.605 = 18%

    Profit Margin Ratio (2013) = 22,003/51,584 = 43%

    Figure 3: Net Profit Margin (2014)

    18.46%

    24.48%

    19.04%

    12.87%

    0.86%

    0.00%

    5.00%

    10.00%

    15.00%

    20.00%

    25.00%

    30.00%

    Pfizer Merck Novartis Sanofi Industry Median

    Net Profit Margin (2014)

  • 5. Investment Potential

     Price/Earnings Ratio

     Pfizer has high price/earnings ratio which anticipates rapid growth in the market

    compared to its competitors and the average industry ratio of 20. The investor can expect

    high return from the sales of the company’s stocks.

    Calculation:

    Price/Earnings Ratio (2014) = 165/5 = 33

    Price/Earnings Ratio (2013) = 563/16.3 = 35

    Conclusion

    In conclude, Pfizer is one of the interesting company to invest in equity because Pfizer has high

    especially liquidity ratios show Pfizer’s able to pay its short-term debts obligations especially

    working capital ratio and acid-test ratio. Second reason to invest in Pfizer is that the company

    has high efficiency and high profitability which are measured by high gross profit percentage

    (81%) and profit margin ratio (0.18) in 2014. Those ratios are above the industry standard and

    some of its competitors. However, Pfizer need to work on debt collection to increase numbers of

    times in collect its debts in a year. I see a lot of potential gains in this company. I strongly

    recommend our company to invest in equity in Pfizer based on the above analysis.

  • Appendix A

    Financial Statements

  • Consolidated Statements of Income Pfizer Inc. and Subsidiary Companies

    58

    2014 Financial Report

    Year Ended December 31, (MILLIONS, EXCEPT PER COMMON SHARE DATA) 2014 2013 2012 Revenues $ 49,605 $ 51,584 $ 54,657 Costs and expenses:

    Cost of sales(a) 9,577 9,586 9,821 Selling, informational and administrative expenses(a) 14,097 14,355 15,171 Research and development expenses(a) 8,393 6,678 7,482 Amortization of intangible assets 4,039 4,599 5,109 Restructuring charges and certain acquisition-related costs 250 1,182 1,810 Other (income)/deductions––net 1,009 (532) 4,022 Income from continuing operations before provision for taxes on income 12,240 15,716 11,242

    Provision for taxes on income 3,120 4,306 2,221 Income from continuing operations 9,119 11,410 9,021

    Discontinued operations: Income from discontinued operations––net of tax (6) 308 794 Gain on disposal of discontinued operations––net of tax 55 10,354 4,783

    Discontinued operations––net of tax 48 10,662 5,577 Net income before allocation to noncontrolling interests 9,168 22,072 14,598

    Less: Net income attributable to noncontrolling interests 32 69 28 Net income attributable to Pfizer Inc. $ 9,135 $ 22,003 $ 14,570

    Earnings per common share––basic: Income from continuing operations attributable to Pfizer Inc. common shareholders $ 1.43 $ 1.67 $ 1.21 Discontinued operations––net of tax 0.01 1.56 0.75

    Net income attributable to Pfizer Inc. common shareholders $ 1.44 $ 3.23 $ 1.96 Earnings per common share––diluted: Income from continuing operations attributable to Pfizer Inc. common shareholders $ 1.41 $ 1.65 $ 1.20 Discontinued operations––net of tax 0.01 1.54 0.74

    Net income attributable to Pfizer Inc. common shareholders $ 1.42 $ 3.19 $ 1.94

    Weighted-average shares––basic 6,346 6,813 7,442 Weighted-average shares––diluted 6,424 6,895 7,508

    Cash dividends paid per common share $ 1.04 $ 0.96 $ 0.88 (a) Exclusive of amortization of intangible assets, except as disclosed in Note 1K. Basis of Presentation and Significant Accounting Policies: Amortization of

    Intangible Assets, Depreciation and Certain Long-Lived Assets. Amounts may not add due to rounding.

    See Notes to Consolidated Financial Statements, which are an integral part of these statements.

  • Consolidated Statements of Comprehensive Income Pfizer Inc. and Subsidiary Companies

    2014 Financial Report

    59

    Year Ended December 31, (MILLIONS) 2014 2013 2012

    Net income before allocation to noncontrolling interests $ 9,168 $ 22,072 14,598

    Foreign cur