Financial Statement Analysis and Assignment for Merck And Novartis

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By studying the financial statements of Merck and the Novartis Group, it is possible to determine much of each company’s financial condition for 2012, particularly for the balance sheet, income statement, financial ratios, and other important information needed to make a good financial analysis of each company. The reporting styles for each company are different, with Novartis Group providing less detailed financial information than Merck.

Starting with the balance sheet, each company discloses different components of stockholders’ equity. Merck’s annual report contained all of the relevant financial information necessary to understand and analyze the stockholders’ equity. For Merck, total stockholder equity was $53.02 billion. Other information reported includes the capital stock, treasury stock, paid-in capital, and retained earnings. The capital stock was listed at 3.577 billion shares of common stock and 550 million shares of treasury stock ( Merck 117). Additionally, paid-in capital was listed at $94 million in 2012 (131). Retained earnings was reported at $39.985 billion (82). Earnings per share was $2.03 or $2.00 assuming dilution (130).

For the Novartis Group, total stockholder equity was $69.093 billion in 2012 (Novartis AG “Statement of cash flows” 2012). The company was much less forthcoming about the different components, giving only a general overview of equity in its annual report and spreading out information in different reports and releases elsewhere, making information difficult to find.

At the end of 2012, Novartis did not have any issues of preferred stock outstanding. Therefore, there was no data available to compare against the common stock that the company issues. Merck did not have preferred stock issued at the end of 2012, either. Neither company differentiated its stock nor gave any differences in voting rights to stockholders as a result of just issuing common stock. Furthermore, it does not appear as if either company has issued preferred stock in 2011 or 2010.

Merck reported total treasury shares in 2012 worth $24.7 billion. Novartis reported total treasury shares worth $92 million. Neither company gave a specific reason for the purchase amount or for the holdings, though they are both deducted from stockholder equity. However, it is likely that both companies are keeping their treasury stock to be able to generate cash as needed in the future, which is the most common reason why a company would hold onto or add to the stock it owns.

Since the basic earnings per share show an accurate approximation of the amount of a company’s profits that are assigned to a single share of its stock, it is a useful tool to use. Merck’s basic earnings per share for 2012 was $2.00 or $2.03, depending on the accounting method (130). For Novartis, the earnings per share was listed at $0.84 in 2012 ( Novartis AG “Condensed financial report” 2012, 2).

Merck reported the discontinuation of a few programs in different phases of development, including clinical development of MK-0524B (Merck 20). Novartis listed its Medical Nutrition and Gerber Business units as discontinued, “following their divestment in 2007” (2). Neither company gave extensive information about what impact, if any, the discontinuation of these programs or divisions would have on future company performance, nor were they especially dealt with in the financial statements made available.

Novartis does not tie a dollar amount or make specific detail about stock compensation plans, but it does seem to have an employee vested stock option. The value of such shares are not given, so it is unknown if they are using the fair value or intrinsic value method. Merck did not release information about a stock compensation plan in its annual report or in the immediately available data on its investing portion of its website.

Financial Ratios

(Financial ratios table omitted for preview. Available via download)

The financial ratios are given above in order to provide a snapshot of each company. These include the most common ratios used to evaluate a company and are indicators of the company’s health and performance (Draker).

Information in the footnotes of both statements includes explanation of accounting principles, extenuating information for making sense of the numbers, and additional information used to make the calculations. Whether the balance sheet, income statement or other measures such as ratios are the most informative depends on how the information is being used. For low-level investors, the ratios offer a snapshot of the company’s health and performance using some simple but nevertheless informative tools, such as the current ratio, return on equity, and debt to assets. However, the balance sheet is more granular and can be more informative in understanding how the company allocates its resources.

The accounting standards used by both organizations are GAAP, which stands for “generally accepted accounting principles.” GAAP principles are a combination of best practices, most commonly used methods, and the standards and procedures set forth by policy and regulatory boards (Walther 2012). However, Merck did report EPS in non-GAAP methodology, citing “management believes this information enhances investors’ understanding of the Company’s results” (Merck 61). Merck gives no mention of what standards and practices are used by external auditors and does not even mention if they use external auditors. In fact, the only mention of auditors is internal, used to “monitor the adequacy and application of internal controls” (138). Likewise, Novartis uses GAAP accounting standards but did not mention external auditors in its report. This does not mean the companies do not use auditors, only that such information was not included in the 2012 annual reports. In a separate document, Novartis makes mention of its practices regarding audits, only to mention that a group of internal auditors monitors the external auditors, not divulging what those external auditors do (Novartis Group “US securities and exchange commission form 20-f 2012” 2012, 255).

The annual statements found on each company’s website differs in terms of the focus of the information and what the companies wish to promote and highlight. Merck presents most of its financial data up front, which helps investors understand how money is being used. Novartis presents its key financial information and data in the back of the report, highlighting instead much of what the company has done in a more narrative or idea-based fashion. Merck provides more key pieces of financial data, such as different components of stockholder equity, in digestible chucks, whereas Novartis assembles all of its data whole, leaving it to investors and those doing due diligence—research to check to make sure a company is accounting for itself in a reputable and lawful manner—to search multiple other documents, such as supplementary filings and similar in order to find some of the more granular and specific data and dollar amounts. Some of this may be that Novartis is a Swiss-based company, which has different laws for what must be included. Novartis provides almost all of the same information as Merck but does so in different filings outside of the annual statement. Both provide some good data on projects the company has undertaken, but it is clear that Merck is less interested in telling the story of the company than Novartis is. For prospective investors, one format may be appealing than the other; however, for those only interested in the numbers, the Merck annual report is easier to understand and seems more transparent, though again some this “transparency” may be due to cultural bias and the differences required by each country for what information must be disclosed in the annual report and similar. The statements are similarly comparable, though again Merck is more informative from the perspective of someone looking for raw financial data.

Key Financial Data for Merck and Novartis from 2011–2013

(Financial data table omitted for preview. Available via download)

As can be seen in the table above, information included from the balance sheet for both companies included total assets, total liabilities, information from product liability lawsuits, total stockholder equity, and net tangible assets. From the income statement, information about gross profit, operating income or loss (in this case it was all income), net income, and net income applicable to common shares was included. From the statement of cash flow, net income, cash from operations, cash from investing, and cash from finance data was included for the years 2010-2012.

Novartis is most profitable, showing more revenue in growth over time than Novartis. Both have continued to grow, though some years were challenging, especially in financing and investing departments. The difference in profitability between the two companies is evident in the way resources were managed and the strategic use of income and debt, as well as the differences in revenue sales and investments. This information is available through the balance sheets, annual financial reporting, and the supplemental data and disclosures both companies have given.

References

Drake, P. (n.d.). Financial Ratio Analysis. Retrieved from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf.

Merck. (2012). United states securities and exchange commission form 10-k. Retrieved from http://www.merck.com/investors/financial-reports/annual-reports-and-proxy-statements.html.

Novartis Group. (2012). Condensed financial report—supplementary data. Retrieved from http://www.novartis.com/downloads/investors/financial-results/quarterly-results/2013-01-interim-financial-report.pdf.

Novartis Group. (2012). Securities and exchange commission form 20-f 2012. Retrieved from http://www.novartis.com/downloads/newsroom/corporate-publications/Novartis-20-F-2012.pdf.

Novartis Group. (2012). Novartis group annual report 2012. Retrieved from http://www.novartis.com/downloads/investors/reports/novartis-annual-report-2012-en.pdf.

Walther, l. (2012). Principles of Accounting. Chapter 16. Retrieved from http://www.principlesofaccounting.com/.