Chapter 4, Problem 4.13P

Use of ratios to compare two companies in the same industry

• LO4–10

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	0,432
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.