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	$	10,641			$	5,801
Short-term investments		5,037				11,293
Accounts receivable (net)		7,589				9,790
Inventories		4,520				7,459
Other current assets		4,395				4,260
Current assets		32,182				38,603
Property, plant, and equipment (net)		12,338				20,779
Intangibles and other assets		17,214				70,539
Total assets	$	61,734			$	129,921
Liabilities and Shareholders' Equity:
Accounts payable	$	5,911			$	3,546
Short-term notes		2,756				10,435
Other current liabilities		8,218				13,113
Current liabilities		16,885				27,094
Long-term debt		3,830				6,630
Other long-term liabilities		5,852				22,847
Total liabilities		26,567				56,571
Capital stock (par and additional paid-in capital)		4,170				68,100
Retained earnings		38,738				37,117
Accumulated other comprehensive income (loss)		(730	)			230
Less: Treasury stock and other equity adjustments		(7,011	)			(32,097	)
Total shareholders' equity		35,167				73,350
Total liabilities and shareholders' equity	$	61,734			$	129,921
Income Statements
Net sales	$	45,607			$	48,933
Cost of goods sold		13,058				10,714
Gross profit		32,549				38,219
Operating expenses		20,617				29,340
Other (income) expense—net		(490	)			3,715
Income before taxes		12,422				5,164
Tax expense		3,727				1,549
Net income	$	8,695			$	3,615	*
Basic net income per share	$	2.77			$	0.57

* 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.

For both companies, compute the ratios below.

	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 (#.#)% % %

2. Evaluate and compare the two companies.

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.

		J & J	Pfizer
Receivables Turnover	Net Sales / Accounts Receivable	6 times	5 times
Average Collection Period	360 / Receivables Turnover	60 days	72 days
Inventory Turnover	Cost of Goods Sold / Inventory	2.89 times	1.44 times
Average Days in Inventory	360 / Inventory Turnover	124.57 days	250 days
Profit Margin	Net Income / Net Sales	19,07 %	7.39 %
Asset Turnover	Net Sales / Total Assets	0.74 times	0.38 times
Return on Assets	Net Income / Total Assets	14.08 %	2.78 %
Equity Multiplier	Total Assets / Total Shareholders Equity	1.76	1.77
Return on Shareholders Equity	Net Income / Total Shareholders Equity	24.73 %	4.93 %

2. J & J appears to be more efficient in collecting its accounts receivable and managing its inventory.

J & J has greater earnings relative to resources as its Return on Assets is higher.

From the perspective of a common shareholder, obviously J & J provided a greater rate of return, as its Return on Shareholders Equity is far greater than that of Pfizer.

Equity Multiplier of both firms is almost equal, and the return to shareholders exceeds the rate of return on assets for both J & J and Pfizer.