Question 5. 5. (TCO F) Please review the following real-world ratios for Johnson & Johnson and Pfizer for the year ended 2012 and address the 2 questions below.
Ratio Name Johnson & Johnson Pfizer

Profit margin 16.1% 24.7%
Inventory turnover ratio 3.1 1.7
Average collection period 59.4 days 69.1 days
Cash debt coverage ratio .27 .16
Debt to Total assets 46.6% 127.5%
Required:
1) Please explain the meaning of each of the Pfizer ratios above.
2) Please state which company performed better for each ratio.
(Points : 36)

Ans:

1)
Ans:

Profit margin – It shows that the profit earned on sales. The Profit Margin Ratio’s objective is to detect consistency, or positive or negative trends, in a company’s earnings. It shows the relationship Net income to sales. The Pfizer has earned 24.7 % on its sales after covering all expenses.

Inventory turnover ratio – It shows the efficient usage of inventory. This shows how fast inventory is being turned over by both companies. A lower number (ratio) means inventory doesn’t sit for a lengthy period of time. Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. A low turnover rate may point to overstocking. The Pfizer has used its inventory 1.7 times to generate sales.

Average collection period – It shows how many days are needed to collect form customers. Average collection period measures the average amount of time that a receivable is outstanding. This is done by dividing the accounts receivable turnover into 365 days. Companies use the average collection period to assess the effectiveness of a company’s credit and collection policies. It takes 69.1 days for Pfizer to collect from customer.

Cash to debt coverage ratio – This ratio indicates a company’s ability to repay its liabilities from cash generated from operations without having to liquidate productive assets such as property, plant, and equipment. It is 16% of Cash to debt coverage ratio for Pfizer.

Debt to Total assets – It shows the amount of total assets financed by total liabilities. Debt to total assets ratio indicates the extent to which a company’s assets are financed with debt. For Pfizer it is around 127.5 %, it means that the company has more liabilities than total assets.

2)

Ans:

Profit margin – The Pfizer is doing better than Johnson as it has higher profit margin.

Inventory turnover ratio – The Johnson & Johnson is better than Pfizer as it has higher inventory turnover ratio.

Average collection period – The company Johnson & Johnson is doing better as it has collection period of 59.4 days.

Cash to debt coverage ratio – The company Johnson & Johnson is better has it has higher Cash to debt coverage ratio.

Debt to Total assets – The company Johnson & Johnson doing better as it has lower debt to total assets ratio.

Please review the following real-world ratios for Johnson & Johnson and Pfizer Answer