P 5-12 Use of ratios to compare two companies in the same industry
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).
Required:
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.
1. Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory?
2. Which of the two firms had greater earnings relative to resources available?
3. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?
4. From the perspective of a common shareholder, which of the two firms provided a greater rate of return?
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?
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
And so on……………………..
