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Instructions:
Company Pfizer
1. Prepare a critical analysis of the statement of cash flows in the
Form 10K report for the company that you selected for the Company
Analysis Project. Using actual financial data, explain the strengths and
weaknesses of the company's cash flows over the past (most recent) 3
years?
2. Calculate the most important cash flow ratios for the company that
you selected for the Company Analysis Project for the past 3 years and
compare the ratios to the firm's principal competitors? What strengths
and weaknesses are noted in the analysis?
3. For the company that you selected for the Company Analysis Project,
explain the differences in cash flows and net income for each of the
most recent 3 years?
Example Finance and Accounting Paper on Pfizer for UMGC
Pfizer Cash Flow Analysis
The cash flow statement analysis envisions the determination of the inflow and outflow
of cash on a firm's three main activities: operating, financing, and investing. The first, operating
activities, concerns the day-to-day functioning of a company. In the last three years, the Pfizer
Company has had cash inflows from operating activities, translating to productive operating
activities. The company reported $15,827 in 2018, $12,588 in 2019 and $14,403 in 2020 (Pfizer,
2021). There was a decline in cash flows from operating activities by 21 % in 2019 and 9% in
2020.
Pfizer had the highest cash flows from operations in 2018 attributable to high write-offs
and depreciation, a non-cash deduction, and huge cash flows from discontinued operations. The
net income from both continued and discontinued operations is a strength for this company,
where both offer a substantial amount of cash flow through the years.
Pfizer's investing activities had a cash inflow of $4,525 in 2018, and cash outflows of
$3,948 in 2019, and $4,271 in 2020. However, the amount that went to discontinued operations
as a percentage of net cash flows from investing activities 1.33% in 2018, 2.4% in 2019, and
1.91% in 2020, summing up to 5.64% of the total cash flows of investment activities went to
discontinuation of operations. Also, proceeds from long-term investments constitute a strength
for this company.
Pfizer's financing activities yield net cash outflows for the three years, amounting to
$9,649 in 2018, $8,485 in 2019, and $2,0441 in 2020. One strength of its financing activities is
the redemption of short-term securities bringing in huge cash. In 2020, the proceeds from such
redemption yields $11,807 in 2020, $9,183 in 2019 and $17,581 in 2018 (Pfizer, 2021). The
other notable strength in financing was net cash flow from discontinuations of financial activities
in 2020, which amounted to an inflow of $11,991 (Pfizer, 2021).
However, the company’s weakness comes with the huge loan repayments, which draw
money from this company. For the three years, it has paid a sum of $35,012. Besides, it makes
cash dividends to shareholders every year, which reduces cash at its disposal. Finally, exchange
rate loss reduces the company’s cash flows since, for the three years, it has paid an aggregate of
$156 to cover the effects of exchange rate fluctuations.
Cash Flow Ratios Analysis
Table 1: Cash flow ratios for Pfizer, Bristol Myers, and Merck & Co.
Note
OCF: Operating Cash flow.
CL: Current Liabilities
CFO: Cash flows from Operating Activities.
TL: Total Liabilities.
In the three years, Pfizer’s liquidity ratio, which expresses the company's short-term
solvency, deteriorates from 0.5561 in 2018 to 0.3374 in 2019 but later improves to 0.4968 in
2020. Among its peers, it is bettered by Bristol Myers at 0.6632 while bettering Merck & Co at
0.4951 in 2018. In 2019, Merck & Co took the lead position with an improved liquidity ratio of
0.6049, while Bristol Myers follows closely at 0.4485. Lastly, Bristol Myers takes top position in
2020 with a ratio of 1.021 while Merck & Co.’s has the lowest value of 0.3752. Overall, Pfizer
has a weaker position and lags in ensuring that it has sufficient cash flow to settle its obligation.
With respect to long-term ability to settle its liabilities, Pfizer has a solvency ratio of
0.1506, which declines to 0.1210 in 2019 and later improves to 0.1744 in 2020. Compared to its
competitors, Pfizer is better by Merck & Co with 0.2589 and Bristol Myers with 0.3388 in 2018.
In 2019, Merck & Co recorded the highest ratio of 0.2302 while Bristol Myers records a lower
value of 0.102. Finally, in 2020, only Bristol Myers with 0.18 performs slightly better than Pfizer
while Merck & Co only records 0.1549. Pfizer’s solvency ratios also need to improve since they
are low while the competitors rank better throughout the analysis period.
For cash return on equity (ROE), Pfizer’s ratio in 2018 is 0.2259, which later improves to
0.2494 in 2019 dipping to 0.2296 in 2020. On the other hand, Merck & Co records values of
0.4063, 0.5169, and 0.3709 in 2018, 2019, and 2020 respectively. Bristol Myers records 0.50,
0.1588, and 0.3709 for the three years, respectively. Comparatively, Pfizer falls behind the other
two competitors, which means that its owners' pay off as per the cash flows returns is lower than
its peers.
As depicted by the cash flow ratios, the company's main strength is that Pfizer fairs
relatively strong against its competitors, which means that the company puts to good use the cash
flow available. As such, the company is in a good position to attract investments from capitalists
and investors. In terms of weakness, Pfizer has a lot of ground to cover to realize attractive ratio
values, which are interpreted to mean a stable operating position.
Differences in Cash flows and Income
For the three years, the net incomes are higher than the net cash flows from all activities.
In 2018, the difference was as a result of Tax Cuts and Job Acts impact, deferred taxes
from continuing operations, benefit plan contributions, increase in assets, increase in trade
receivables, other tax accounts and purchases of equipment, payment of dividend and payment of
principal for short term borrowings (Pfizer, 2021) All these items accounts for the substantial
difference between the company’s net income and cash available for use. For example, the
purchase of equipment cost $1,984, and loan repayments were $437, which all reduced the cash.
The TCJA impact ($323), trade receivables, and assets increased, thus reducing cash
available as compared to the reported net income. These are transactions that were initially left
out in the preparation of the profit statement. Also, there was the purchase of equipment,
payment of cash dividends, acquisitions, and payment of short-term and long-term debts. For
example, the principal for long-term debts was $201 (Pfizer, 2021).
In 2020, deferred taxes, trade receivables, and assets increased, reducing the cash
balance. Besides, there was also the purchase of equipment, payment of cash dividends, payment
for short-term borrowings, payment for long-term debts. For example, the payment for cash
dividends amounted to $8,440, and the payment for long-term debts amounted to $4,003, which
all reduced the cash available for use (Pfizer, 2021).
References
Das, S. (2018). Analysis of cash flow ratios: A study on CMC. Accounting, 4(1), 41-52.
Pfizer Inc (2021). - Financials - Annual Reports.
https://investors.pfizer.com/financials/annual-reports/default.aspx.
Bristol Myers Squibb (2021). Annual Reports.
https://www.annualreports.com/Company/bristol-myers-squibb-co
Merck. (2021). Financial information.
https://www.merck.com/investor-relations/financial-information/
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