Determining the financial capacity of an organization is crucial for understanding its performance’s current and future aspects. Financial ratios are excellent instruments that allow the strategic management executives to establish the company’s potential regarding debt payments; assets use efficiency, and overall profitability (Walston, 2018). As such, liquidity, debt, and profitability ratios are essential to consider when evaluating the financial characteristics of a given enterprise or comparing its products to other industry firms. Merck and Pfizer are some of the most highly recognized and large-scale corporations in the sphere of pharmaceutical production.
They are well-known for their contribution to the development and distribution of medical products. Although both companies have been performing excellently in the recent year, the financial aspects analyzed in this work portray Pfizer as a better financially established organization. The calculations were based on the 2020 reports provided by Yahoo Finance (n.d.a; n.d.b). This paper focuses on the current ratio, days in accounts receivable, total debt to total assets ratio, operating margin, and return on assets of Merck and Pfizer enterprises, comparing their financial patterns.
Liquidity Performance: Short-Term Obligations and Expense Payments
A corporation’s liquidity characteristics are vital for understanding its current performance regarding asset-to-cash activities. Referred to as the ability to transfer available assets into cash quickly and efficiently, liquidity is integral for assessing a company’s potential to fulfill short-term debts and account for the necessary expenses (Walston, 2018). As such, the current ratio allows for ascertaining whether the enterprise’s available assets can provide enough funds to cover the present liabilities (Gupta et al., 2019). For Merck, the current ratio is 2020 was 1.02, which is slightly more than enough to balance the upcoming liability needs. In contrast, Pfizer’s current ratio for 2020 was 1.35, which is significantly higher.
Given the organization’s current ratios, it is evident that Pfizer possesses a better potential to pay its short-term obligations. Although a coefficient above 1 is sufficient for a successful payment, the remaining funds would be inadequate for covering other possible expenses (Gupta et al., 2019). In this regard, Merck’s index is rather low and provides the company with a smaller chance to recover quickly. Alternatively, Pfizer’s current ratio is greatly increased, meaning that the enterprise could finance its short-term debts and retain a higher amount of liquid cash for additional payments.
Another liquidity index, days cash on hand, is highly important for examining the corporation’s capability to fund its daily operations. Each business entity is required to provide the necessary financial support for its everyday activities, which demands that an appropriate amount of cash is available without relying on other cash inflows (Walston, 2018). Evidently, a higher number of days signifies that a given organization is more capable of accounting for its operating expenses (Gupta et al., 2019). Merck’s day’s cash on hand coefficient was 126 days in 2020, while Pfizer’s index was 214 days, which is about 1.7 times higher.
These results suggest that the day’s cash on hand ratio is significantly better for Pfizer, which might be able to fund its daily operating expenses without the support from cash inflows for a longer time. In contrast, Merck would be required to rely on income much sooner. Altogether, considering Pfizer’s higher current and days on hand indexes, this company demonstrates better liquidity indicators and can efficiently cover its short-term obligations and everyday operating needs. On the other hand, Merck might experience difficulties recovering from short-term debt payments and is more dependable on consistent cash inflow.
Financial Leverage and the Possibility to Acquire Additional Credit
The degree to which a company is financed by debt or acquired assets is a crucial financial indicator of its financial performance. Although any organization is financially leveraged to some extent, it is crucial to maintain a low rate of return for the purchased assets to ensure that the debt load remains adequate (Walston, 2018). In scenarios where a corporation is significantly leveraged by debt, it becomes challenging to maintain a financial balance and secure additional resources through credit services (Dinh & Pham, 2020).
The total debt to total assets ratio allows to establish is the enterprise is primarily funded by debt, assets, or equity and whether it can obtain extra credit without exceptional harm to the overall expenses. As such, the debt to assets ratio for Merck was 0.35 in 2020, and the same ratio for Pfizer was 0.25.
Considering the debt to assets index for the discussed companies, it is evident that both organizations are not heavily impacted by debt obligations. Given that an enterprise with a lower debt to assets coefficient is more capable of easily acquiring extra credit as it is less leveraged by its debt responsibilities, Pfizer can easily borrow supplementary resources without significant risk (Dinh & Pham, 2020). However, although both Merck and Pfizer may rely on their available assets to secure additional capital, Merck should approach this possibility more cautiously due to the higher proportion of debt leverage.
Determining Revenue to Expenses Excess: Profitability Ratios
In order to successfully maintain business operations, any corporation must consistently generate an appropriate amount of revenue. As such, profitability ratios allow to ascertain whether a company produces sufficient funds to cover its expenses and retain extra assets to be used for future growth (Walston, 2018). A vital index that clarifies the percentage of profits received from the operating activities is the operating margin. According to this coefficient, it becomes possible to determine if the corporation is adequately funded by its revenue or if it is sustained by other sources of cash inflow (Mamun, 2020). For Merck, the operating margin in 2020 was 15%, while for Pfizer, this index was 24%.
According to Merck’s and Pfizer’s indexes, Pfizer generates 9% more excess funds than Merck, suggesting that the former is a more sustainable business. It is reported that a medium operating margin for pharmaceutical companies in 2020 was approximately 14% (CSI Market, n.d.a). Therefore, although Merck’s coefficient slightly exceeds the average industry percentage and suggests that the company produces a favorable amount of funds, Pfizer performs significantly better, acquiring a better operating margin index.
Another profitability ratio that should be considered during financial analysis is the return on assets (ROA). This measure identifies the percentage of revenue acquired for each dollar of the funds that were invested (Walston, 2018). In general, it is expected that an organization’s financial standing and return levels will be higher if more earnings are produced for each dollar of its funds. As such, the greater the ROA percentage, the better the corporation applies its available resources (Mamun, 2020). Concerning the discussed enterprises, Merck’s ROA in 2020 was 6.8%, and Pfizer’s ROA was 8.6%. In 2020, the median ROA in the pharmaceutical industry was 3.72% (CSI Market, n.d.b).
Thus, taking into account the ROA ratios, Merck and Pfizer performed similarly in regard to profits accumulated for each dollar from the assets, rising substantially above the industry average. Nonetheless, it is essential to note that, although the difference between the ROA indexes is rather small, Pfizer still generates a higher percentage of ROA than Merck. Altogether, including the operating margin and the ROA coefficients, it is evident that Pfizer is highly more sustainable and slightly more profitable than Merck.
To conclude, the large pharmaceutical companies Merck and Pfizer’s specific financial ratios were discussed in this paper. The differences between the enterprises’ current ratios, days in accounts receivable, total debt to total assets ratios, operating margins, and returns on assets illustrate that Pfizer possesses a more advantageous financial standing. As such, the organization is more likely to successfully cover its current liabilities while retaining additional funds to account for extra expenses. In comparison, even though Merck can pay the short-term debts, the remaining finances would be exceptionally low. Furthermore, the debt to assets ratio reveals that Pfizer is less financially leveraged by credit; Merck, in contrast, is more dependent on the debt services’ assets, which decreases its capability to attain extra monetary resources.
Finally, the profitability indexes highlight that Pfizer’s sustainability and per dollar profit aspects are superior to those of Merck, suggesting that it is easier for Pfizer to accumulate revenue. From this perspective, although Merck’s coefficients remain within the desired limits and illustrate that the company is financially stable, only lacking sufficient liquid assets for short-term obligations, Pfizer is stronger from a financial viewpoint. Therefore, according to the statistics for 2020, Pfizer outperformed Merck, demonstrating better stability and profitability.
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