PURWANINGRUM

IPMI - MMFIM FSA

CASE 4-1 Integrated Analysis of Pfizer, Takeda Chemical, and Roche
1. Ratios for Takeda in 1999
ACTIVITY ANALYSIS
Invetory Turnover
No.of days
Account Receivable Turnover
No.of days
Account Payable Turnover
No.of days
Fixed Assets Turnover
Total Assets Turnover

1999
4,06
89,90
6,30
57,94
5,51
66
3,70
0,64

LIQUIDITY ANALYSIS
Avg.no.days inventory in stock
(plus) Days of receivable outstanding
Length of operating cycle
(minus) Payables outstanding
Length of cash cycle
Current ratio
Quick ratio
Cash ratio
Cash from operations ratio
Defensive interval no.of days
Projected Expenditure

SOLVENCY ANALYSIS
Short-term debt
Long-term debt
Total debt
Trade payables
Total debt (including trade)
Total equity
Total capital
Total capital (including trade)
Debt To equity
Debt To capital
Debt (including trade) To equity
Debt (including trade) To capital
Times interest earned
Capital expenditure ratio
CFO to debt

Unit
Times
Days
Times
Days
Times
Days
Times
Times

1999
89,96
57,93
147,89
66
82
3,26
2,73
1,93
0,37
417,28
669.772

1999
11.480
9.858
21.338
130.129
151.467
907.373
928.711
1.058.840
0,02
0,02
0,17
0,14
134,30
3,77
4,92

Unit
days
days
days
days
days
times
times
times
times
days
JPY

Unit
JPY
JPY
JPY
JPY
JPY
JPY
JPY
JPY
times
times
times
times
times
times
times

PROFITABILITY ANALYSIS
Gross margin
Operating margin
Pretax margin
Profit margin
ROA (preinterest)
After tax
Pretax
ROE
After tax
Pretax
ROTC (preinterest)
After tax
Pretax

1999
48,41%
16,84%
21,56%
10,86%
7,04%
10,84%
10,57%
20,97%
10,24%
15,78%

2. Comparison of Activity Ratio Analysis shows that:

a. Takeda has higher Inventory Turnover compared to Pfizer, which means it has better
inventory turn over, with average number of days inventory in stock 89 days compared
to Pfizer 251 days. Further info showed that in 1999 Pfizer changed its accounting
method from LIFO to FIFO, and since Japanese company use Just in Time procedure to
maintain the scale of Inventory, Takeda use average methode that affected the book
value higher than FIFO method.
b. Takeda has higher A/R turnover compared to Pfizer, it has better account receivables
turn over, with average number of days Receivables outstanding 58 days compared to
Pfizer 76 days. This also means Takeda manage to get the cash from customer faster
than Pfizer.
c. Takeda has higher Fixed Asset turnover than Pfizer (Takeda 3,7 times and Pfizer 3,32
times), it shows that Takeda has better efficiency in long-term (capital) investment.
d. However, Takeda has a total asset turnover lower than Pfizer (Takeda 0.64 times and
Pfizer 0.83 times), it means that Pfizer has better efficiency in overall investment.
ACTIVITY ANALYSIS
Inventory Turnover
No.of days
Account Receivable Turnover
No.of days
Account Payable Turnover
No.of days
Fixed Assets Turnover
Total Assets Turnover

TAKEDA
1999
4,06
89,90
6,3
58
5,5
66
3,70
0,64

PFIZER
1999
1,45
251
4,78
76
2,45
149
3,32
0,83

Unit
X
days
X
days
X
days
X
X

Comparison of Liquidity Ratio Analysis shows that:

Pfizers Operating Cycle is longer than Takedas. This is because Pfizers Inventory
Turnover and Receivable Turnover are lower than Takeda. This also because
Japanese company use Just in Time procedure to maintain the scale of Inventory to
be minimum, so that, its inventory days are minimal. Thus, Takeda has better length
of operating cycle than Pfizer.
On the other hand, Pfizers Cash Cycle is longer than Takedas, which implies Pfizer
has more time to pay its suppliers. But overall, total of cash cycle of Takeda is
better than Pfizer.
Current Ratio, Quick Ratio, and Cash Ratio show that Takeda is financially stronger
than Pfizer.
However, Pfizer has better defensive interval number of days than Takeda. Pfizer
could maintain the current level of operations with its present cash resourses
without considering any additional revenues in 237 days.
LIQUIDITY ANALYSIS
Avg.no.days inventory in stock
(plus) Days of receivable outstanding
Length of operating cycle
(minus) Payables outstanding
Length of cash cycle
Current ratio
Quick ratio
Cash ratio
Cash from operations ratio
Defensive interval no.of days

TAKEDA
1999
89,96
57,93
147,89
66
82
3,26
2,73
1,93
0,37
417,28

PFIZER
1999
251
76
328
149
179
1,22
0,9
0,48
0,33
273

Unit
days
days
days
days
days
X
X
X
X
days

Comparison of Solvency Ratio Analysis shows that:

Pfizer has a higher Debt to Equity Ratio than Takeda, which might imply that Pfizer
is riskier than Takeda because a higher proportion of debt relative to equity
increases the riskiness of the firm. However, since most of Pfizers Debt is shortterm, its still safe and reasonable.
Times interest earned of Takeda is strongly better than Pfizer, which implies that
debt is properly used, as evidenced by high times interest earned.
Capital expenditure ratio of Takeda is higher than Pfizer. It indicates Takeda has
enough cash left for debt repayment or dividends after capital expenditures.
CFO to Debt of Takeda is also higher than Pfizer. It implies that Pfizer may have a
long-term solvency problem, as the firm does not generate enough cash internally
to repay its debt.

SOLVENCY ANALYSIS
Short-term debt
Long-term debt
Total debt
Trade payables
Total debt (including trade)
Total equity
Total capital
Total capital (including trade)
Debt To equity
Debt To capital
Debt (including trade) To equity
Debt (including trade) To capital
Times interest earned
Capital expenditure ratio
CFO to debt

TAKEDA
1999
11.480
9.858
21.338
118.852
140.190
907.373
928.711
1.047.563
0,02
0,02
0,15
0,13
172,99
3,77
4,91

Unit
Yen
Yen
Yen
Yen
Yen
Yen
Yen
Yen
X
X
X
X
X
X
X

PFIZER
1999
5.001
525
5.526
1.820
7.346
8.887
14.413
16.233
0,62
0,38
0,83
0,45
19,83
2,06
0,56

Unit
USD
USD
USD
USD
USD
USD
USD
USD
X
X
X
X
X
X
X

Comparison of Profitability Ratio Analysis shows that:

Takeda has lower gross, operating and profit margin than Pfizer, it could means that
Takeda was unable to sell its product at high price which might be due to Japanese
government regulation.
Pfizer has higher Gross Margin, which could mean that Pfizer was able to sell their
product at higher price compare to Takeda. This is in-line with the Net Profit margin
of Pfizer which is also higher than Takeda.
Pfizer also has higher Operating Margin than Takeda. It means that Pfizers
operational efficiency is better than Takeda.
ROA, ROE, ROTC (pretax and after tax) Pfizer is better than Takeda, which shows
that Pfizer have higher return than Takeda.
PROFITABILITY ANALYSIS
Gross margin
Operating margin
Pretax margin
Profit margin
ROA (preinterest) After tax
ROA (preinterest) Pretax
ROE After tax
ROE Pretax
ROTC (preinterest) After tax
ROTC (preinterest)Pretax

TAKEDA
1999
48,41
16,84
21,56
10,86
7,04
10,84
10,57
20,97
10,24
15,78

PFIZER
1999
84,4
28,88
27,42
19,74
17,33
24,07
36,15
50,21
25,45
35,34

Unit
%
%
%
%
%
%
%
%
%
%

3. DISAGGREGATION OF PRETAX ROA AND ROE 1999

A. Return on Assets
B. Return on Equity
Preinterest and
Assets
Interest
Postinterest
Tax Margin X Turnover = Preinterest ROA on Assets
=
ROA
X
Leverage
=
Pretax ROE
EBIT
Sales
EBIT
Interest Expense
EBIT
Average Total Assets
EBT
Sales
Average
Average
Average Total Average Total
Average
Average
(%)
X Total Assets = Total Assets (%) - Assets (%) = Assets (%)
Common Equity = Common Equity (%)
16,84% X

0,64 =

10,84% -

0,08% =

10,76% X

1,51 =

16,26%

ROA measures the return to all capital providers (creditor & shareholder) and is calculated on
pre-interest basis. This calculation uses Earning before interest & tax (EBIT) to calculate the
ratio.
ROE measures return to the firms shareholder and is calculated after deducting the returns
paid to creditors (interest), therefore the ROE is calculated in post-interest basis. This
calculation uses Earning before tax (EBT) to calculate the ratio.
DISAGGREGATION OF ROE (AFTER TAX) 1999
A.Three-Component Disaggregation of ROE
(Profitability X Turnover)
Net Income
Sales
Sales
X Average =
Total Assets
10,86% X

Taxes
Financing
Net Income
EBT
EBT
X
EBIT
X

0,50 X

0,99 X

0,64 =

B. Five-Component Disaggregation of ROE

(Profitability X Turnover)
Operations
EBIT
Net Income
Sales
Sales
=
Sales
X Average =
Total Assets
21,69% =

10,86% X

0,64 =

Net Income
Average
Total Assets

X
Solvency
=
ROE
Average Total Assets
Net Income
X
Average
=
Average
Common Equity
Common Equity

7,00% X

X
Net Income
Average
Total Assets

1,51 =

Solvency

10,57%

ROE

Average Total Assets

Net Income
X
Average
=
Average
Common Equity
Common Equity

7,00% X

1,51 =

Three-component disaggregation of ROE is breaking down the ROE into three categories:
Profitability : measured by Profit Margin.
Activity : measured by Asset Turnover.
Solvency : measured by Financial Leverage.
Profit Margin could also be broken down to see the effect on profit from the following:
Tax effect : measured by comparing Net Income to pre-tax earning (EBT).
Financing (interest) effect : measured by comparing EBT to earning before interest &
tax (EBIT).
Operation effect : measured by comparing EBIT to total Sales.
The resulting calculation of after-tax ROE is 10.57% compared to 16.26% before-tax.
4. Comparison of 1999 after-tax ROE between Pfizer and Takeda shows that Pfizer has higher
ROE (36.15%) than Takeda (10.57%). This big difference can be examined by further
comparison of three-component disaggregation of ROE as follows:

10,57%

A.Three-Component Disaggregation of ROE

(Profitability X Turnover)
Net Income
Sales
Sales
X Average =
Total Assets
TAKEDA
1999
10,86% X
0,64 =
PFIZER
1999
19,74% X
0,83 =
Difference
(0,09)
(0,19)

Net Income
Average
Total Assets

X
Solvency
=
ROE
Average Total Assets Net Income
X
Average
=
Average
Common Equity
Common Equity

7,00% X

1,51 =

10,57%

16,46% X
(0,09)

2,2 =
(0,69)

36,15%
(0,26)

Difference between ROE for Pfizer and Takeda lies on profitability ratios (net income/sales),
which comes from effects of taxes and operations.
Other factor that diffirentiate those firms is the composition of Cost Of Good Sold to Sales
(using common size balance sheet).
5. (i) Changes in Roches ROE from 1999 to 2000
Five-Component Disaggregation of ROE
(Profitability X Turnover)
Effects of:

Financing
EBT
EBIT

0,76

2000

0,91

Difference

20%

1999

Taxes
Net Income
EBT

Operations
EBIT
Sales

1,18

23,29%

1,33

24,87%

13%

7%

Net Income
Sales

Average Total Assets

X
Average
=
Common Equity

ROE

Sales
Average
Total Assets

20,91%

0,44

9,13%

2,60

23,71%

30,16%
44%

0,41

12,36%
35%

2,57

31,70%

-6%

Net Income
Average
Total Assets

Solvency

Net Income
Average
Common Equity

-1%

34%

The key Ratio: Profitability Ratio (Sales/ Avereage Total Assets) shows the largest difference
that can make significant difference on ROE, which is caused by the effect of Taxes, while
Turnover Ratio and Solvency Ratio remains stable.
(ii) Difference between the 1999 ROE for Pfizer and Roche
Five-Component Disaggregation of ROE
(Profitability X Turnover)
Effects of:

ROCHE
1999
PFIZER
1999
Difference:

Taxes
Net Income
EBT

0,76
0,72 X
-0,04

Financing
EBT
EBIT

1,18
0,95 X
-0,23

Operations
EBIT
Sales

23,29%

28,88%

0,06

Net Income
Sales

Sales
Average
Total Assets

20,91%

0,44

9,13%

19,74%

0,83

16,46%

-0,01

0,39

Net Income
Average
Total Assets

0,07

Solvency

Average Total Assets

X
Average
=
Common Equity

ROE
Net Income
Average
Common Equity

2,60

23,71%

2,2

36,15%

-0,40

Key Ratio:
Difference between ROE for Pfizer and Roche lies on asset turnover, which describe asset
management of Pfizer is better than Roche.

0,12