Financial Analysis of Pfizer - UMGC FIN Example Paper

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Instructions

1. Explain the DuPont system of analysis and discuss how analyst can use this process to gain insight about a firm’s performance?

2. Using the company (PFIZER) that you selected for the Company Analysis project, and the appropriate financial ratios, present a critical analysis of the firm’s borrowing potential and capacity to repay debt?

3. Is improving bond ratings an important objective for management of the company that you selected for the Company Analysis Project, and why?

4. Is it appropriate to consider short-term debt in addition to long-term obligations when evaluating financial leverage? Using data for the company that you selected for the Company Analysis Project, show what difference it makes? 

 

 

Financial Analysis - Pfizer

DuPont system of analysis is beneficial in giving the management of Pfizer the insights on the return on equity investments (ROE) of the firm. The insights into ROE elements gives the investors information about the financial activities that leads to significant changes to ROE. The investors will rely on results of DuPont analysis to make comparisons about the operational efficiency of Pfizer and other pharmaceutical companies in the industry. The metrics will assist in evaluation of the strengths and weaknesses facing the company. There are three main elements of ROE that helps to determine the progression of the returns of the firm, including operational efficiency, financial leverage, and asset use efficiency (Hargrave, 2021). The DuPont determines the improvement of ROE and whether the improvement of ROE is strong.

The appropriate financial ratios to evaluate the solvency position and capacity to repay debt can include the debt to equity ratio. The borrowing potential of Pfizer is high and the capacity to repay the debt is not adequate. The debt/equity ratio is important in determining the capacity of Pfizer to repay their debts. The debt/equity ratio of Pfizer increase from 0.51 in 2018 to 0.56 in 2019 (ReadyRatios, 2020). The ratio reveals that the percentage of debt increased from 51% in 2018 to 56%, which is a worse trend for the company. The total revenues of the business and profitability of Pfizer has been improving, which is a good indication of the ability of the company to repay the debts. The net margin ratio of Pfizer has been over 20% in the last three years.

Pfizer has an objective for improving the bond ratings because it helps them to borrow funds from external financial entities and the public debt markets easily. Good bond ratings is an indicator that the company has the financial capacity to repay the debts. The bond ratings also shows the investors the stability of the bonds of the company and creates a positive earnings outlook of the company. An improvement in the bond ratings usually leads to an increase in the bond prices. At such prices, the investors would be willing to purchase the bonds when the credit quality is better. Thus, the improvement in the bond ratings is necessary in understanding the demand for the bonds of Pfizer and the access to external funds to finance operations and capital investment.

The financial leverage of Pfizer also depends on the results of the short-term debt to determine the strength of the business to repay its long-term obligations. The current ratio of Pfizer increased from 0.88 in 2019 to 1.35 in 2020 (ReadyRatios, 2020). The increase in the current ratio is an indication of the improved capacity of the firm to repay its short-term debt. Similarly, the debt to equity ratio of Pfizer improved slightly from 0.57 in 2019 and 0.56 in 2020 (Wall Street Journal, 2021). Both capacity for Pfizer to repay both the short-term and the long-term debt of the company. The understanding of the short-term debt helps to evaluate the changes to the financial leverage of the business.

The lessons learnt from the discussions and analysis, includes the trend in return on equity, which evaluates the operational efficiency and net profit margin of the business. The information guides the decision-making of the internal management. The capacity to remain debt is critical because it improves the ability of the firm to repay its long-term debt and short-term obligations. The changes to the short-term debt as indicated by current ratio aligns with the viability of the business to improve long-term debt repayment.

References

Hargrave, M. (2021, March 16). How to use the DuPont analysis to assess a company's ROE. Investopedia. https://www.investopedia.com/terms/d/dupontanalysis.asp#:~:text=A%20DuPont%20analysis%20is%20used,efficiency%20of%20two%20similar%20firms. ReadyRatios. (2020). Pfizer, Inc. financial statements and comparison analysis of key ratios. ReadyRatios.com. https://www.readyratios.com/sec/PFE_pfizer-inc. Wall Street Journal. (2021). PFE | Pfizer Inc. Financial statements - WSJ. The Wall Street Journal. https://www.wsj.com/market-data/quotes/PFE/financials.