Profitability Analysis

The most important concern of shareholders is whether a company can earn a return for its owners. In order to attract new capital, a company needs to show its abilities to increase EPS and dividends and to generate returns on assets and on equity. The following ratios are good indicators for us to analyze the performance of Pfizer and its competitors. While profit margin ratios look at the margins that a company was able to generate, return ratios examine how well the company utilized available resources.

Pfizer, Inc. Gross Profit Margin Operating Profit Margin Pretax Profit Margin Net Profit Margin ROA ROE Earnings Per Share (Diluted) (USD) 2.66 Earnings Per Share (Basic) (USD) 2.67 Figure 1: Profitability ratios of Pfizer, Inc. 2006 89.18% N/A 27.03% 40.12% 16.64% N/A 2007 88.24% 18.62% 19.25% 16.89% 7.08% 11.94% 1.17 1.18 2008 90.11% 26.65% 20.05% 16.76% 7.16% 13.22% 1.20 1.20 2009 86.44% 23.73% 21.68% 17.29% 5.33% 9.59% 1.23 1.23 2010 81.65% 21.07% 13.90% 12.18% 4.05% 9.24% 1.02 1.03

Johnson and Johnson Gross Profit Margin Operating Profit Margin Pretax Profit Margin Net Profit Margin ROA ROE Earnings Per Share (Diluted) (USD) 3.73 3.63 Earnings Per Share (Basic) (USD) 3.76 3.67 Figure 2: Profitability ratios of Johnson and Johnson 2006 75.79% N/A 27.42% 20.78% 17.19% N/A 2007 75.47% 23.1% 21.76% 17.33% 13.96% 25.6% 2008 75.40% 25.65% 26.56% 20.31% 15.61% 30.17% 4.57 4.62 2009 74.86% 25.33% 25.45% 19.82% 13.66% 24.25% 4.40 4.45 2010 74.26% 27.01% 27.52% 21.65% 13.50% 24.88% 4.78 4.85

Merck & Co., Inc. Gross Profit Margin Operating Profit Margin Pretax Profit Margin Net Profit Margin ROA ROE Earnings Per Share (Diluted) (USD) 2.03 1.49 Earnings Per Share (Basic) (USD) 2.04 1.51 Figure 3: Profitability ratios of Merck & Co., Inc. 2006 83.39% N/A 28.02% 19.59% 9.92% N/A 2007 82.93% 17.18% 14.43% 13.54% 7.05% 18.33% 2008 83.58% 34.57% 41.64% 32.74% 16.34% 42.27% 3.64 3.66 2009 81.96% 17.62% 55.75% 47.04% 16.20% 33.15% 5.65 5.67 2010 80.61% 6.61% 3.59% 1.87% 0.79% 1.51% 0.28 0.28

Eli Lilly and Company 2006 2007 Gross Profit Margin 81.40% 81.79% Operating Profit Margin N/A 20.15% Pretax Profit Margin 21.78% 20.81% Net Profit Margin 16.97% 15.85% ROA 11.44% 12.09% ROE N/A 21.61% Earnings Per Share (Diluted) (USD) 2.45 2.71 Earnings Per Share (Basic) (USD) 2.45 2.71 Figure 4: Profitability ratios of Eli Lilly and Company 2008 83.31% -6.29% -6.42% -10.17% -7.39% -30.76% -1.89 -1.89 2009 85.54% 25.59% 24.54% 19.82% 15.28% 45.45% 3.94 3.94 2010 86.00% 28.30% 28.28% 21.97% 17.34% 40.82% 4.58 4.58

According to Figure 1, we can see that most of the profitability ratios of Pfizer calculated above show that the companys performance is deteriorating. Pfizers gross profit declines from 2008, and its net profit margin, return on assets and EPS also decreased from that year. It might be the subprime mortgage crisis which caused Pfizers deteriorated finance. The ratios and data in Figure 2 show that Johnson and Johnsons performance is improving. It is interesting that Johnson and Johnson got a better EPS after 2008. We

can assume that Johnson and Johnson has a health capital structure which let it earn profit when its competitors were losing their money. After 2008, Merck & Co., Inc. had the comparatively worse performance among these four companies. Especially in 2010, its ratios were the lowest. Eli Lilly and Companys ratios deteriorated significantly from 2007 to 2008. However, the companys performance became much better after 2008. After examining all the data above, we can conclude that Eli Lilly and Company can utilize its resources the most effectively among these four companies since it has the best ROA and ROE. In addition, Johnson and Johnsons ratios are more stable than any other companies and do not have significant fluctuation during the subprime mortgage crisis.