Would You Advise a Friend to Invest in Pfizer Company?

Running Head: Pfizer Inc. 1

Managerial Finance

Introduction

The formality of financial statements provided a great avenue to consider the health of a company and thus its activities in terms of positioning in the market. The value that it adds is the relevance of the statement to answering basic question functional of several variables that are interconnected for the business in a structured way that can easily be understood. Pfizer is a biotechnological and pharmaceutical specializing corporation that trades publicly. The data uses in the following discussion is obtained from NYSE and the currency calculated in USD.

Computation and Ratio Trend Analysis

The following is PFE data used in the calculations for debt ratio, gross profit margin, free cash flow, times interest earned, accounts receivable turnover, and inventory turnover (NYSE., n.d).

Debt Ratio

The debt ratio is given by Total liabilities ÷ Total Assets as obtained from the balance sheet for 2019, and 2020.

	2020	2019
Total Assets	154,229,000	167,594,000
Total Liabilities	90,756,000	104,042,000
Debt Ratio	0.59	0.62

Gross Profit Margin

Gross profit margin is given by gross profit ÷ total revenue as obtained from the income statement 2019, and 2020.

	2020	2019
Gross Profit	33,216,000	41,531,000
Total Revenue	41,908,000	51,750,000
Gross Profit Margin	0.79	0.80

Inconsideration f the fact that there is an observable decline in the ratio, it can be said that it is indicative of a relatively more risk due to arising problems that could be due to price change, unit volume sales, cost of labor, or a change in fixed overhead or variable overhead that has been incurred. The issue at hand is to delve into understanding the variable that could lead to this decline. Following the fact that COVI-19 affected the 2020 work environment. A reasonable drop by 0.01 is expected and fairly negligible but it needs to be watched (AccountingTools, 2021).

Free Cash Flow

Free Cash Flow is given by Operating Cashflow – Capital Expenditure as obtained from the cash flow Statement for 2019, and 2020.

	2020	2019
Operating Cash Flow	14,403,000	12,588,000
Capital Expenditure	-2,791,000	-2,594,000
Free Cash Flow	17,194,000	15,182,000

The impact is in consideration of this calculation is the determination of unconstrained cash in eth company. As such, looking at the stronger rise in its availability over one year, PFE can generate its internal growth and thus the realization of profits to its shareholders. The positive number is indicative of proper cash management and thus a balance in the return of investments hence no need for an increase in debt financing which is promising (Goel, 2015).

Times Interest Earned

Times interest earned is given by the ratio of earnings before interest and taxes (EBIT) and the earnings periodic interest expense obtained from the incomes statement for 2019 and 2020.

	2020	2019
EBIT	8,946,000	19,256,000
Interest Expense	1,449,000	1,574,000
Times Interest Earned	6.17	12.23

Considering that it is a solvency ratio, a higher ratio is indicative of a stringer ability of the company to make debts and interest payments hence a stronger performing company. As such, the decline from 2019 to 2020 shows that the company has become weaker compared to fulfill its payment. Therefore, there is more risk of investment if this number continues to fall. The fall is indicative of going bankrupt which is something that should be watched to determine the ability of creditors to provide additional funding for operation when required.

Accounts Receivable Turnover

Accounts receivable turnover is given as a ratio of net credit sales (gross credit sales – returns) and average accounts receivable with 2019 and 2020 data.

	2020	2019
Total Debt	38,274,000	52,145,000
Net Debt	36,490,000	50,840,000
Accounts Receivable	7,930,000	8,724,000
Net Credit Sales	1,784,000	1,305,000
Accounts receivable turnover	0.012	0.008

This is an indication of credit sales and receivables quality hence in 2019, credit was frequently collected as compared to 2020 which has seen lower credit collection scores. This shows a better performance in terms of the credit score and thus well-managed use of the borrowed funding.

Inventory Turnover 

Inventory turnover is given by the Cost of goods sold ÷ average inventory for the eyars 2019 and 2020.

	2020	2019
Cost of Goods Sold (Operating expenses)	25,063,000	24,456,000
Average inventory	8,046,000	8,283,000
Inventory Turnover	3.1	3.0

Characteristically, the higher turnover in 20220 indicates that the company is selling the PFE products quickly and thus a significant demand for the said product. This small rise shows a proper management of stock such that there is no overestimation of demand and thus no purchasing of too many good. In addition, there is a strong relationship between the sales and purchasing department hence optimization of resources.

DuPont Analysis of ROE

First, there is a need to calculate the Return of Equity (ROE) which is given by

(Net income ÷ Equity)

Which can be calculated as

Net income ÷ [(Shareholder Equity 2019 + Shareholder Equity 2020)/2].

	2020	2019
Net Income	11,138,000	9,616,000
Total Equity	63,473,000	63,447,000
ROE	0.18	0.15
Equity	63,460,000

DuPont Analysis is given by the ratio of net income and equity in the given year which can be found by (Net income ÷ Sales or Revenue) X (Sales ÷ Assets) X (Asset ÷ Equity) that can also be considered as Return on Sales X Asset Turnover X Leverage (Hargrave & Drury, 2021).

	2020	2019
Net Sales or Total revenue	41,908,000	51,750,000
Net Income	11,138,000	9,616,000
Total Assets	154,229,000	167,594,000
Return on Sales	0.27	0.19
Asset turnover	0.27	0.31
Financial Leverage	2.43	2.64
Du Point Analysis	0.18	0.16

There is a significant decline in the return of sales and asset turnover from 2019 to 2020 which affects the decomposition of the return of equity and thus operational efficiency in the competitive market. The indication is that the company has grown relatively weaker from 2019 to 2020 and thus a threatened opportunity in terms of investment. PFE, therefore, is not making better use of its assets and its profit margins are declining hence a higher risk investment (Hargrave & Drury, 2021).

Discussion

Based on the provided data revenue in 2020 is lower than in 2019, the gross profit is also lower, the operating cash flow is higher, but the gross profit margin has also reduced. There is an indication that the company profitability is deteriorating compared to the last year. Relatively the significance is low and thus a promising potential for better recovery in 2021. According to the TTM financial data of PFE, currently, the gross profit is at 35,444,000 a notable trend of increasing recovery from last year. Based on expected fluctuations and the socio-economic difficulties in the current market, PFE is on track to maintaining profitability in the long run.

In terms of liquidity, the company has realized a higher cash flow in 2020 compared to the previous year. This is indicative of financial management within the organization and thus a better chance of recovery n the long run. At the same time, it is showing signs of self-funding easily available and thus the decrease in TIE is not alarming. However, from the creditors' viewpoint, the decreased solvency is relatively a ‘cautionable’ look at the company as there is twice the increased risk due to the halved TIE between 2019 and 2020. The assessment would need a higher commitment to allow borrowing especially with the reduction in total assets.

Suggestion for Ratio Improvement

PFE is a biochemistry funding and recognition of the market niche at this time is essential There is a need for the company to assess its employees and product branding. The most telling aspect of the ratio is a change in the volume of sales. This means that there were fewer products sold and thus a definitive recognition of an issue with the product or its distribution. It is important that the company reassess the product branding and its reachability to their specific niche and thus reevaluation of sales strategy. This can be done through market analysis and revitalization of the marketing hence a newer approach to service and product delivery. However, this implementation can only be completed after verification and auditing to determine whether there were no errors in the financial statements.

Conclusion

The financial ratios are tale-tell signs of the health of the company and based on the PFE data, there is a decline in its performance from 2019 to 2020. This decline shows the fluctuation that is expected due to the pandemic. However, the numbers to observe are the gross profit margin and the debt ratio. A significant decline in these two causes tension in the stock exchange and affects the stock pricing hence shareholder position in investment and the evaluation of return of investment. However, the significance is low and a further performance evaluation in five years needs to be assessed to determine the actual performance health. A significant decline that is progressive over the years could be detrimental but a fluctuation in the last two years is expected especially because of the COVID-19 crisis.

References

AccountingTools. (2021). Gross profit analysis. Gross profit analysis — AccountingTools

Goel, S. (2015). Financial Ratios. Business Expert Press.

Hargrave, M. & Drury, A. (2021). DuPont Analysis. Investopedia. https://www.investopedia.com/terms/d/dupontanalysis.asp

NYSE. (n.d). Pfizer Inc. (PFE). https://finance.yahoo.com/quote/PFE/balance-sheet?p=PFE