Review of the Financial Statements of Merck and Novartis Companies

In module 2 case study I am to do the following intellect pecuniary underwrites and continue to review the pecuniary statements of Merck and Novartis to learn additional instruction. The speech pattern of this Case is to review the income statement, fit sheet and computation of dimensions. Review the financial statements for the companies and answer the following questions for the last reporting year What components of railway lineholders fairness does each of the companies disclose?Merck & smart set IncThe components of the investment trustholders faithfulness honey oil stock (authorized and issued), other paid-in capital, retain earnings, accumulated other comprehensive loss, and treasury stock. Novartis planetary Ag. The components of the stockholders equity be sh atomic number 18 capital, treasury shargons, reserves, and non-controlling sake. Do the companies have preferred stock shares groovy? If so, what special features do these shares contain? Merck & Comp whatsoever Inc. Merck has authorized 20,000,000 shares of preferred stock in 2012.All preferred stock from the AMI a merger in 1998 is cosmos converted to either cash or shares of Merck stock. Novartis world(prenominal) 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 & federation Inc. Yes Merck reported treasury shares they reported the barter for of treasury shares on the balance sheet in the equity segmentation and too on the summary of reciprocal stock and treasury stock transactions.In this case no they didnt disclose any reasons for reacquiring shares other than those from the merger. Novartis external 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 fellowship? Merck & caller-out Inc. Basic earnings per common stock $ 2. 03 cut earnings per common stock $2. 00 Novartis International Ag. Basic earnings per common stock $3. 93. Diluted earnings per common stock $3. 89Have 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 honorable value or intrinsic value methods? What was the value of compensation write off streakd for any outstanding stock option plans? Merck & Company Inc. Yes they are reporting under the fair value method.The value of the compensation write off 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 t he high society. What casing of story are the ratios telling the analyst? Profitability ratios ? Gross meshing coast = Gross income/sales. The gross moolah margin is a financial ratio which is a measurement of a companys manufacturing and distri bution efficiency during the employment process.A company uses its gross income to fund such company activities as question and development and marketing, which are important for generating future sales. A prolonged deny in the gross profit margin is a red flagstone for possible impending negative pressure on sales and, ultimately, earnings. You engage to know the trend of the company before you net make an synopsis of whether or not the gross profit margin is good or not, in this case Novartis has a bettor gross profit than Merck. Merck & Company Inc. 8,739/47,267 = . 185 Novartis International Ag. 11,243/56,673 = . 198? terminal profit margin = Net income/ sale Net profit is the profit that is generated from all phases of the b usiness, including interest and taxes. This is the bottom line that garners to the highest degree of the attention in discussions of a companys profitability. The net profit margin (net margin) equalizes net income to sales. A consistently high net margin is often indicative of a company with one or more(prenominal) 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 ? bring to on stockholders equity = net income/ shareholders equity Return on equity (ROE) is equal to a fiscal years net income. It measures the rate of return on the ownership interest of the common stock owners and measures a companys efficiency at generating profits from every unit of shareholders equity. Return on equity for intimately companies certainly should be in the double digits inv estors often look for 15% or high, while return of 20% or more is considered excellent.Neither of these companies is with child(p) 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 = menses assets/current liabilities The current ratio is a financial ratio that measures whether or not a firm has full resources to represent 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 Ag124,216/30,946 = 4. 013 ? Quick ratio= current assets-inventory/current liabilities Generally, the quick ratio should be 11 or higher however this varies widely by industry. In general, the higher the ratio is, the greater the companys liquidity (i. e. , the better able to meet current obligations using liquid asse ts). 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= summarise debt/total assets Debt to asset ratio is a financial ratio that indicates the part of a companys 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 = . 327Novartis International Ag5,945/124,216 = . 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 propor tion of shareholders equity and debt used to finance a companys assets. Novartis used fewer loans to finance the companys 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 companys 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 fused statements of income Novartis International Ag. Only had a consolidated statements of income What type of information do you escort in footnotes to the financial statements? Additional information provided in a companys 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 not es 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 partition all the well-favoured 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 lonesome(prenominal) 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 wad still do it and later on change it or guess 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.