P4-13 Use of ratios to compare two companies in the same industryLO4-10 Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry-Johnson and Johnson (J&J) and Pfizer, Inc. (S in millions, except per share amounts). Required: Evaluate and compare the two companies by responding to the following questions. Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate. 1. Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory? 2. Which of the two firms had greater earnings relative to resources available? 3. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover? 4. From the perspective of a common shareholder, which of the two firms provided a greater rate of return? Page 234 5. From the perspective of a common shareholder, which of the two firms appears to be using leverage more effectively to provide a return to shareholders above the rate of return on assets? Balance Sheets ($ in millions, except per share data) Pfizer Assets: Cash Short-term investments $ 17,305 $ 1,305 1,982 8,525 Accounts receivable (net) 14,481 8,724 Inventory 9,020 8,283 Other current assets 2,486 5,966 Current assets 45,274 32,803 Property, plant, and equipment (net) 17,658 13,967 Intangibles and other assets 94,796 Total assets $157,728 120,719 $167,489 Liabilities and Shareholders' Equity: Accounts payable Short-term notes Other current liabilities $ 8,544 $ 4,220 1,202 16,195 26,218 16,889 Current liabilities 35,964 37,304 Long-term debt 26,494 35,955 Other long-term liabilities 35,799 30,783 Total liabilities 98,257 104,042 Common stock (par and additional paid-in capital) 3,120 87,896 Retained earnings 110,659 97,670 Accumulated other comprehensive income (loss) (15,891) (11,640) Less: Treasury stock and other equity adjustments (38,417) (110,479) 59,471 Total shareholders' equity Total liabilities and shareholders' equity Income Statements Net sales Cost of goods sold Gross profit $157,728 $ 82,059 63,447 $167,489 $ 51,750 Operating expenses Other (income) expense-net Income before taxes Income tax expense Net income Basic net income per share 27,556 10,219 54,503 41,531 34,650 20,271 2,525 3,578 17,328 17,682 2,209 1,384 $ 15,119 5.72 $ 16,298 2.92