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Page 1: ACCT 2410 Intermediate Accounting Student Name: Sonenaly ... · Pfizer Financial Analysis Introduction Pfizer is one of the world premier biopharmaceutical manufacturers. The annual

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

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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.

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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 IndustryMedian

Gross Revenue in Millions (2014)

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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

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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 IndustryMedian

Net Profit Margin (2014)

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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.

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Appendix A

Financial Statements

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Consolidated Statements of IncomePfizer Inc. and Subsidiary Companies

58 

  2014 Financial Report

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

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

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

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

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

Less: Net income attributable to noncontrolling interests 32 69 28Net 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 $ 1.21Discontinued operations––net of tax 0.01 1.56 0.75

Net income attributable to Pfizer Inc. common shareholders $ 1.44 $ 3.23 $ 1.96Earnings per common share––diluted:    Income from continuing operations attributable to Pfizer Inc. common shareholders $ 1.41 $ 1.65 $ 1.20Discontinued 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 7,442Weighted-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.

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Consolidated Statements of Comprehensive IncomePfizer 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 currency translation adjustments $ (1,992) $ (535) $ (811)Reclassification adjustments(a) (62) 144 (207)  (2,054) (391) (1,018)Unrealized holding gains on derivative financial instruments, net 24 488 745Reclassification adjustments for realized (gains)/losses(b)  477 (94) (616)  501 394 129Unrealized holding gains/(losses) on available-for-sale securities, net (640) 151 74Reclassification adjustments for realized (gains)/losses(b)  222 (237) 356  (418) (86) 430Benefit plans: actuarial gains/(losses), net (4,173) 3,714 (2,136)Reclassification adjustments related to amortization(c)  195 581 473Reclassification adjustments related to settlements, net(c) 101 175 221Other 188 48 22  (3,690) 4,518 (1,420)Benefit plans: prior service credits and other, net 746 151 25Reclassification adjustments related to amortization(c)  (73) (58) (69)Reclassification adjustments related to curtailments, net(c) 8 1 (130)Other (9) (8) (3)  672 86 (177)

Other comprehensive income/(loss), before tax (4,988) 4,521 (2,056)Tax provision/(benefit) on other comprehensive income/(loss)(d)  (946) 1,928 (225)Other comprehensive income/(loss) before allocation to noncontrolling interests $ (4,042) $ 2,593 $ (1,831)

     Comprehensive income before allocation to noncontrolling interests $ 5,126 $ 24,665 $ 12,767Less: Comprehensive income attributable to noncontrolling interests 36 7 21

Comprehensive income attributable to Pfizer Inc. $ 5,090 $ 24,658 $ 12,746(a) Reclassified into Gain on disposal of discontinued operations—net of tax in the consolidated statements of income.(b) Reclassified into Other (income)/deductions—net in the consolidated statements of income.(c) Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and

development expenses, as appropriate, in the consolidated statements of income. For additional information, see Note 11. Pension and Postretirement Benefit Plans and Defined Contribution Plans.

(d) See Note 5E. Tax Matters: Tax Provision/(Benefit) on Other Comprehensive Income/(Loss).Amounts may not add due to rounding.

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

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Consolidated Balance SheetsPfizer Inc. and Subsidiary Companies

60 

  2014 Financial Report

As of December 31,(MILLIONS, EXCEPT PREFERRED STOCK ISSUED AND PER COMMON SHARE DATA) 2014 2013

AssetsCash and cash equivalents $ 3,343 $ 2,183Short-term investments 32,779 30,225Accounts receivable, less allowance for doubtful accounts: 2014—$412; 2013—$478 8,669 9,357Inventories 5,663 6,166Current deferred tax assets and other current tax assets 4,498 4,624Other current assets 2,750 3,689

Total current assets 57,702 56,244Long-term investments 17,518 16,406Property, plant and equipment, less accumulated depreciation 11,762 12,397Identifiable intangible assets, less accumulated amortization 35,166 39,385Goodwill 42,069 42,519Noncurrent deferred tax assets and other noncurrent tax assets 1,544 1,554Other noncurrent assets 3,513 3,596

Total assets $ 169,274 $ 172,101

Liabilities and Equity    Short-term borrowings, including current portion of long-term debt: 2014—$3,011; 2013—$2,060 $ 5,141 $ 6,027Accounts payable 3,440 3,234Dividends payable 1,711 1,663Income taxes payable 531 678Accrued compensation and related items 1,784 1,792Other current liabilities 9,024 9,972

Total current liabilities 21,631 23,366

Long-term debt 31,541 30,462Pension benefit obligations, net 7,885 4,635Postretirement benefit obligations, net 2,379 2,668Noncurrent deferred tax liabilities 24,981 25,590Other taxes payable 4,353 3,993Other noncurrent liabilities 4,883 4,767

Total liabilities 97,652 95,481

Commitments and Contingencies

Preferred stock, no par value, at stated value; 27 shares authorized; issued: 2014—717; 2013—829 29 33Common stock, $0.05 par value; 12,000 shares authorized; issued: 2014—9,110; 2013—9,051 455 453Additional paid-in capital 78,977 77,283Treasury stock, shares at cost: 2014—2,819; 2013—2,652 (73,021) (67,923)Retained earnings 72,176 69,732Accumulated other comprehensive loss (7,316) (3,271)

Total Pfizer Inc. shareholders’ equity 71,301 76,307Equity attributable to noncontrolling interests 321 313

Total equity 71,622 76,620Total liabilities and equity $ 169,274 $ 172,101

Amounts may not add due to rounding.

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

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Appendix B

Financial Ratios

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Pfizer’s Financial Ratios

Ratio 2014 2013

1. Liquidity

- Working capital (million)

- Working capital ratio

- Cash ratio

- Acid-Test Ratio

36,071

2.67

0.15

2.07

32,878

2.41

0.09

1.79

2. Efficiency

- Inventory turnover

- Days’ sales in inventory

- Gross profit percentage

- Account receivable turnover

1.62

222

81%

0.96

81%

3. Solvency

- Debt ratio

- Debt to equity ratio

0.37

0.30

0.42

0.30

4. Profitability

- Profit margin ratio

0.18

0.43

5. Investment Potential

- Market price per share of

common stock

- Earnings per share

- Price/earnings ratio

165

33

563

35

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Appendix C

Pfizer’s Information on Mergent Hoover

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