Company’s Background

For the purpose of financial analysis the two companies that have been selected are Pfizer Inc. (PFE.N) and Bristol Myers Squibb Co. (BMY.N). Both the companies are listed on the New York stock exchange and are operating within the pharmaceutical industry. Pfizer was incorporated in 1942. It is engaged in the business of development and manufacturing of various health products. Pfizer has around 13 brands and operates through its two major segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). Bristol Myers Squibb was incorporated in 1933. The product range of the company includes chemically synthesized drugs, small molecules and products manufactured from biological biologics processes (Reuters, 2018 a).

The results of the major financial ratios in relation to both the companies are as follows:

	PFE.N	BMY.N	Industry Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
P/E (TTM)	26.26	23.62	31.23
Beta	0.99	1.19	0.92
Total Debt to Equity (aka D/E) (MRQ)	74.88	55.9	12.74
Interest Coverage ratios (TTM)	8.93	–	35.11

The price earnings ratio is a prominent valuation ratio that depicts the relationship of stock price of the company with its earnings per share. It is calculated by dividing market price per share with the earnings per share (Tracy, 2012). It tells about the price that the potential buyer in the market is willing to pay on the basis of the current earnings on such shares (My Accounting Course, 2018). This ratio is used by the investors to determine the fair market value of the shares of the company on the basis of future predictions of earnings per share.  In the present case, the price earnings ratio of Pfizer is 26.26 times and this shows that investors of Pfizer’s are willing to pay $ 26.26 for each dollar of earnings. Bristol Myers on the other hand, has a price earnings ratio of 23.62 which implies that investors of Bristol Myers will be ready pay $23.62 for each dollar of earnings (Reuters, 2018 a). Thus, it can be said that the potential investors have higher growth expectations form Pfizer and therefore it has brighter future prospects than Bristol. The average industry ratio in this regards is 31.23 times and this shows that the investors are ready to pay $ 31.23 on an average for every dollar of earnings (Reuters, 2018 a). As the PE ratios of both the companies are lower than the average industry ratio it is clear that the investors of the both the companies have lower expectations from the future of the companies.

A company’s beta is the measure of a systematic risk. It is the measurement of volatility of the returns as compared to the whole market (Corporate Finance Institute, 2017). The company with higher beta has a higher risk and since it has the capacity to bear higher risk it also has the potential to generate higher returns for its investors. A beta has a significant impact on the share value of the company. Though, beta is calculated on the basis of the past returns but it is important to realise that past returns are not necessary to estimate the future returns potential of the company. Given that the beta for the stock market is 1 it has been identified that the average industry beta of pharmaceutical industry is 0.92 (Reuters, 2018, b). This shows that for each one 1% movement (increase or decrease) in the rate of return provided in the market, the investors of the companies operating in that industry will also expect 0.92% movement (increase or decrease) in the return. The lower beta than 1 shows that average companies are less risky than the entire stock market due to its variability. The beta of Pfizer is 0.99% and this implies that the investors will expect an increase (or decrease) of .99% in the returns with the change in the market return of 1% either on the upward side or downward side. When compared to the industry average the stock of the company is more risky than the average companies in the same industry but still it is less risky than the stock market (Reuters, 2018, a). The beta of Bristol Myers is highest among the three units under consideration. The beta of 1.19% shows that with each 1% increase (or decrease) in stock market return, the potential investors will expect an increase (or decrease) of 1.19% in the company’s return. This shows that Bristol riskier than Pfizer and also it is more risky than the average companies of the same industry. The variability of returns of Bristol is higher than both its core competitor Pfizer and the other companies in this industry.

Price-Earnings Ratio

This is the gearing ratio that shows the relative proportion of company’s assets that are financed using the external debt with that which are financed using the internal funds. This ratio is calculated using the total debt with the total equity of the firm. A higher debt equity ratio implies higher proportion of debt in the total capital structure of the company. The said ratio is used to measure the financial leverage of the company. The debt equity ratio of Pfizer shows that the company finances its assets using debt which is 77.88% of the total capital structure. This shows that the company is highly levered due to heavy proportion of external debt. For each dollar of equity the company has around 78 cents in leverage. On the other hand the debt equity ratio of Bristol Myer is 55.9% which shows that for each dollar of equity company has 60 cents of leverage. A debt equity ratio of 1 is generally preferable as it does not impose the financial risk on the company. When, both the companies are compared Pfizer has more financial risk than Bristol Myer as it has higher proportion of debt in comparison to the proportion of equity in their respective capital structures. However, looking at the debt equity ratio of the average firms of the same industry which is merely 12.74% it can be said that the average companies of the industry are not highly levered and Pfizer and Bristol are among those companies that are more prone to the risk of insolvency.

The interest coverage ratio is also a gearing ratio that is used to measure a company’s ability in relation to payment of interest element for the loan funds borrowed by such company. It is determined using the formula under which earnings before interest and tax is divided by the interest expense borne by the company in the given year. In case of Pfizer, the interest coverage ratio is 8.93 times which shows that the earnings of the company are 8.93 times higher than its interest obligations and hence it can easily afford making payments in respect of its interest obligations. However, in case of Bristol Myers, the interest coverage could not be determined as it is not available on Reuters. The interest coverage ratio of the average firms in the same industry is far better than Pfizer. This shows that the Pfizer is not earning sufficient profits as much as the other firms are earning in relation to its financial obligations towards interest on the loan sums.

If the above analysis is to be summarised, it can be said that in terms of market worthiness Pfizer is performing better than Bristol Myers but not better than then average firms of the pharmaceutical industry of New York. Due to the higher PE ratio of average firms the expectations of the investors in the same industry for the returns are higher than the company’s own potential. Further, in terms of beta it can be said that Bristol is more risky than Pfizer and the average firms of the industry. Therefore, only those investors which have the capacity to bear higher risk will invest in the stock of Bristol in the expectations of higher returns. In terms of financial risk, Pfizer is more risky than Bristol because it has more debt than its equity which makes its highly levered. Both the companies are less attractive to the potential investors before of their high leverage than the average firms of the same industry which are enjoying a minimum financial leverage.

References:

Corporate Finance, 2017. Beta. Available at: https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-beta-guide/ Accessed on: 26.11.2018

My Accounting Course, 2018. Debt Equity Ratio. Available at: https://www.myaccountingcourse.com/financial-ratios/debt-to-equity-ratio Accessed on: 26.11.2018

My Accounting Course, 2018. Price Earnings Ratio. Available at: https://www.myaccountingcourse.com/financial-ratios/price-earnings-ratio Accessed on: 26.11.2018

Reuters, 2018 a. Bristol-Myers Squibb Co (BMY.N). Available at: https://in.reuters.com/finance/stocks/financial-highlights/BMY.N  Accessed on: 26.11.2018

Reuters, 2018 b. Pfizer Inc. (PFE.N). Available at: https://in.reuters.com/finance/stocks/financial-highlights/PFE.N Accessed on: 26.11.2018.

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.