Integrated Analysis
 

INTRODUCTION:

Ratio analysis should not be simply a mechanical exercise but a means to an end. It can be used in two different ways. The first method is to compute a number of ratios and then look for changes over time or differences among companies. Such analysis leads to an understanding of the level and trend of profitability as measured by return on equity (ROE). The second method is to start with ROE and then, by analyzing the components that comprise this measure, explain changes over time or differences among companies. Click on the logos above to get the relevant financial statements. 

Case objectives:

1. Compute the financial statement ratios for two companies in the same industry, using the following categories: activity, liquidity, solvency, and profitability.
2. Discuss the factors that limit the usefulness of such comparisons.
3. Show how ratios can be aggregated to explain differences in ROE among companies.
4. Show how “top-down” ratio analysis can be used to explain changes in ROE for a company
over time as well as differences between companies.

Note:

In the book, in page 115, Exhibit 4-1 panel B presents "Comparative income statements".  A better way of classifying is presented in  Pfizer-Takeda-Comparative-Income-Statements

Takeda operates in the same industry as Pfizer. Note that the Takeda statements are prepared in Japanese yen and in accordance with Japanese GAAP.

Required
1. For Takeda, compute ratios for 1999 in the following categories, using the Pfizer exhibits cited as a guide:
• Activity (Exhibit 4-4) • Liquidity (Exhibit 4-6) • Solvency (Exhibit 4-8) • Profitability (Exhibit 4-10)

2. Using your answers to Question 1 and the corresponding Pfizer data, compare the ratios of the two companies in each of these categories. Discuss factors that limit the usefulness of this comparison and additional data that would be needed to improve it.

3. Prepare an integrated ratio analysis of ROE of Takeda for 1999, using (1) Exhibits 4-12, (2) 4-14, (3) Method 2 (ROA to ROTC to ROE) and (4) Method 3 (ROOA to ROTC (net) to ROE) with financial assets separately considered.  Use the Pfizer analysis as  guides.

4. Compare the 1999 ROE of Pfizer and Takeda, and determine the key ratios that explain the difference in ROE. Discuss other factors that might explain the differences in ROE and any additional data needed to adjust for these factors.

5.  What has happened to Pfizer after 1999?  Get financial statement data from Compustat for the period 1999 to 2010 and compute the Profitability ratios including ROE, ROTC, ROA ROOA, and ROTC (Net).   How did Pfizer grow?  Did EPS increase with growth?  Comment on all the changes that happened from 1999 to 2009?  Most importantly did the growth add vale to stockholders?

Statements form 1998 to 2011

Do not do this question before checking with me

Roche also operates in the same industry as Pfizer and Takeda. Its financial statements are denominated in Swiss francs (CHF) and prepared according to IAS GAAP.

9. Using the top-down approach suggested by the discussion relating to Exhibit 4-13, determine the key ratios. This can be accomplished in three steps.

a. Compute the four important turnover ratios (listed in Exhibit 4-13) for Roche and compare with Pfizer.

b. Prepare the common-size income statement of Roche for 2000 and 1999 and comment on changes.

c. Apply the five-component disaggregation of ROE illustrated in Exhibit 4-14 to Roche in the years 2000 and 1999.   Explain the key changes and compare with Pfizer.