Financial Analysis Essay

Submitted By urluckee
Words: 872
Pages: 4

Financial analysis (ratios)

Subject: Accounting

Below are the relevant and significant ratios of Novarties and Merck companies. These are both in the pharmaceutical industry and health care products.

Novarties
Merck
Profitability ratios
2012
2011
2012
2011
Net profit margin
18.64%
18.99%
13.05%
13.05%
Return on stockholders' equity
15%
14%
11%
9%
Earnings per share
3.86

1.67

Gross profit rate
72.87%
72.64%
65.21%
64.89%
Price/Earnings ratio
19.79

28.74

Liquidity ratios:

Current ratio
1.73
1.08
1.90
2.04
Quick ratio
0.51
0.47
1.54
1.66
Inventory turnover
2.10
2.31
4.72
4.98
Leverage ratios:

Debt-to-assets
0.40
0.43
0.50
0.48
Debt-to-equity
0.66
0.77
1.00
0.93

The answer is affirmative. These financial indicators or performance and financial health are significant because they show the profitability, short term liquidity, as well as long term solvency, and leverage ratio of debt to equity.
Their profitability ratios show that Novarties has a higher profitability of 19% over that of Merck with only 13% for the same year. Their return on stockholders’ equity of Merck however is very much higher by several times. These ratios indicate the efficiency of management in the use of their respective resources. We should relate also the total amount of revenues and net income of both companies because they are of different sizes. One company may have the objective of maximizing volume whereas the other is to maximize net income on revenues.
The liquidity ratios show different conclusions. In terms of current ratios Merck showed a higher current ratio than that of Novaties. This is also true on the quick ratio which shows the same trends.
The turnover ratio is very revealing. While the turnover ratio of Novarties is lower than that of Merck the net profit margin is higher. This means that the company is maximizing on its gross margin rate rather than on volume of sales. Merck strategy it seems is to maximize volume. The inventory turnover rate is much higher than that of Novarties. A higher turnover rate means that the shelf life of items for sale is much lower than when the turnover rate is lower. Merck has an equal sourcing of funds on both debt and equity as shown by the 1:1 debt equity ratio. Novarties on the other hand has a low debt equity ratio which means that it has more equity financing than on debt instruments.
Analysis of Novarties two year results
Profitability analysis
The net profit has decreased from 18.99% to 18.64% in 2012. However the gross profit margin increased. This means that the cause of reduction in net profit rate must be the increase in general and administrative expenses. We have no data on the earnings per share of the preceding year for this company.
Liquidity analysis
The liquidity ratios pertain to the short term capacity of the company to pay its debts when due for the next year. In this case the company has a good and improved current ratio as well as quick ratio. However its inventory is much lower in 2012 which means that the shelf life of the goods for sale is longer. This requires a higher investment on inventory than when the turnover is faster.
The leverage ratios
The leverage ratios refer to the long term solvency capacity of the firm to pay its total debts when these fall due after one year.
The debt to equity ratio of the company has vastly…