Review of the Financial Statements of Merck and Novartis Companies

In module 2 case study I am to do the following understanding financial reports and continue to review the financial statements of Merck and Novartis to learn additional information. The emphasis of this Case is to review the income statement, balance sheet and computation of ratios. Review the financial statements for the companies and answer the following questions for the last reporting year: What components of stockholders’ equity does each of the companies disclose?

Merck & Company Inc

The components of the stockholders equity common stock (authorized and issued), other paid-in capital, retained earnings, accumulated other comprehensive loss, and treasury stock. Novartis International Ag. The components of the stockholders equity are share capital, treasury shares, reserves, and non-controlling interest. Do the companies have preferred stock shares outstanding? If so, what special features do these shares contain? Merck & Company Inc. Merck has authorized 20,000,000 shares of preferred stock in 2012.

All preferred stock from the AMI a merger in 1998 is being converted to either cash or shares of Merck stock. Novartis International Ag. Novartis did not report any preferred stock. Do either of the companies report treasury shares? If so, do the companies disclose the reason for reacquiring the shares? Merck & Company Inc. Yes Merck reported treasury shares; they reported the purchase of treasury shares on the balance sheet in the equity section and also on the summary of common stock and treasury stock transactions.

In this case no they didn’t disclose any reasons for reacquiring shares other than those from the merger. Novartis International Ag. Yes Novartis reported treasury share; No they did not disclose reasons for reacquiring shares Income Statement. What are the basic and diluted earnings per share for each company? Merck & Company Inc. Basic earnings per common stock $2. 03 Diluted earnings per common stock $2. 00 Novartis International Ag. Basic earnings per common stock $3. 93. Diluted earnings per common stock $3. 89

Have the companies reported any discontinued operations? Merck & Company Inc Merck has not reported any discontinued operations Novartis International Ag. Novartis reported no discontinued operations for 2012. Do the companies disclose any stock compensation plans? If so, are they reporting such plans under the fair value or intrinsic value methods? What was the value of compensation expense measured for any outstanding stock option plans? Merck & Company Inc. Yes they are reporting under the fair value method.

The value of the compensation expense measured was approximately $72 million to the holders and $4 million Merck common shares issued. Novartis International Ag. Novartis did not disclose any stock compensation plans Financial Ratios Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst? Profitability ratios: ? Gross profit margin = Gross income/sales. The gross profit margin is a financial ratio which is a measurement of a company’s manufacturing and distribution efficiency during the production process.

A company uses its gross income to fund such company activities as research and development and marketing, which are important for generating future sales. A prolonged decline in the gross profit margin is a red flag for possible impending negative pressure on sales and, ultimately, earnings. You need to know the trend of the company before you can make an analysis of whether or not the gross profit margin is good or not, in this case Novartis has a better gross profit than Merck. Merck & Company Inc. 8,739/47,267 = . 185 Novartis International Ag. 11,243/56,673 = . 198?

Net profit margin = Net income/ sale Net profit is the profit that is generated from all phases of the business, including interest and taxes. This is the “bottom line” that garners most of the attention in discussions of a company’s profitability. The net profit margin (net margin) compares net income to sales. A consistently high net margin is often indicative of a company with one or more competitive advantages. Furthermore, a high net margin provides a company with a cushion during downturns in its business. In this case Novartis has a better net profit margin than Merck.

Merck & Company Inc. 6,299/47,267 = . 133 Novartis International Ag. 9,618/56,673 = . 170 ? Return on stockholders’ equity = net income/ shareholders equity Return on equity (ROE) is equal to a fiscal year’s net income. It measures the rate of return on the ownership interest of the common stock owners and measures a company’s efficiency at generating profits from every unit of shareholders’ equity. Return on equity for most companies certainly should be in the double digits; investors often look for 15% or higher, while return of 20% or more is considered excellent.

Neither of these companies is great for their ROE but they are close, Novartis being higher. Merck & Company Inc. 6,299/53,020 = . 119 (12%) Novartis International Ag. 9,618/69,219 = . 139 (14%) Liquidity ratios: ? Current ratio = current assets/current liabilities The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. While Merck is able to pay back its debt, Novartis can pay its debt more easily and have a lot left over. Merck & Company Inc 34,857/18,348 = 1. 900.

Novartis International Ag: 124,216/30,946 = 4. 013 ? Quick ratio= current assets-inventory/current liabilities Generally, the quick ratio should be 1:1 or higher; however this varies widely by industry. In general, the higher the ratio is, the greater the company’s liquidity (i. e. , the better able to meet current obligations using liquid assets). The quick ratio is also known as acid test ratio. Both companies have a quick ratio but Novartis has a better quick ratio than Merck. Merck & Company Inc. 34,857-7,305/18,348 = 1. 501 Novartis International Ag. 124,216-6,744/30,946 = 3. 796?

Inventory turnover = COGS/Inventory The inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. Merck & Company Inc Inventory not specified on the 10K. Novartis International Ag. 18,756/6,744 = 2. 781. Leverage ratios: ? Debt-to-assets= Total debt/total assets Debt to asset ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. Novartis has a lower debt than Merck. Merck & Company Inc. 18,348 + 16,348 = 34,696 34,696/106,132 = . 327

Novartis International Ag: 5,945/124,216 = . 048 ? Debt-to-equity= total debt/total shareholders’ equity The debt to equity ratio, usually abbreviated as D/E, is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets. Novartis used fewer loans to finance the company’s assets than Merck. Merck & Company Inc. 34,696/536,020 = . 065. Novartis International Ag. 5,945/69,219 = . 086 ? Times-covered ratio= earnings before interest and taxes/ interest Times interest earned (TIE) is a measure of a company’s ability to honor its debt payments.

The times interest earned ratio is also referred to as the interest coverage ratio. Merck & Company Inc. Only had a consolidated statements of income Novartis International Ag. Only had a consolidated statements of income What type of information do you find in footnotes to the financial statements? Additional information provided in a company’s financial statements. Notes to the financial statements report the details and additional information that are left out of the main reporting documents, such as the balance sheet and income statement.

This is done mainly for the sake of clarity because these notes can be quite long, and if they were included, they would cloud the data reported in the financial statements. Do you find the balance sheet, income statement or other measures such as ratios the most informative? Comment on the advantages and disadvantages of using ratios for analysis. I find that the balance sheet and the income statement have the standings of how the company did per quarter but the ratios show comparison of how they did. The ratios are good because you breakdown all the big numbers and just use percentages and analysis what is important.

The balance sheets show the breakdown of all the individual accounts consolidated so both are good. A disadvantage of depending on the statements are that they can mislead you indifferent ways, if you only look at the numbers and do not look at the foot notes you may make a bad decision. Bad information can also be given through the statements, although this is illegal people still do it and later on change it or say it was a mistake but you may not catch that. Ratios can also have disadvantages like if they are not computed correctly you may have the wrong percentages or you may have nothing to compare them to.