Title: Case 4- Financial Statement Analysis pt

Addressed to: Professor Todd Martin

Class Subject: Accounting 315
Class Time: Tuesdays & Thursdays 12:30 PM 1:45 PM
Student Name: M. Heidenreich
Student ID: 132-12272

To: Professor Todd Martin

From: Maggie J Heidenreich
Date: 4/14/2016

As requested, the following is my recommendation and supporting analysis for the

best action to be taken regarding your Wyeth stock. Two companies financials,
Company A and Company B, were provided for my analysis. This letter is structured
as three separate parts to assist in clarity. The sections are as follows: Company
Identification, Stock Recommendation, and Analysis. Appendices follow the letter for
your own reference.

Company Identification
I have identified that Wyeth is Company A. Wyeth is defined as a company
that engages in the development, manufacture, and sale of prescription
drugs. From this description, we can make a few assumptions with regard to
the financial statements which would identify Wyeth. The first assumption
made is that the Research and development expenses for a company that
develops pharmaceuticals would be higher than that of a firm which sells the
drugs once approved. Company B has no R & D expense while Company A
has consistent expenses in this area, (See appendix B) Furthermore, Wyeth
must go through a process to get the drugs approved by the FDA and
successfully go through the patent process. Once a patent is attained, the
company is then able to charge a higher mark-up on products while at the
same time production costs are low. These high sale prices and low
production costs would result in Wyeth having a lower COGS to that of
Cardinal Health. As a service business, Cardinal Health would maintain fairly
high production or operational costs as they must pay for the consulting
business labor force throughout the services or products life cycle. The
financial statements again support that Company A is Wyeth, with their COGS
levels remaining around 24 % while Cardinal Health has GOGS levels that
remain at about 94% of their sales. (See Appendix A)

Stock Recommendation
I, as your financial consultant, am obliged to analyze further back into both of
the given companies histories to identify trends in the industry as well as
companies tendencies. However, if you would like to make your stock
decision now, with the given the information provided I recommend that you
buy additional stock in Wyeth.

Analysis

This is my analysis to support the following recommendation to buy

additional Wythe stock investment. The analysis looks through the lens of
both profitability and risk to ensure the best returns are realized.
Wyeth is rising is profitability though not significantly. Their ROA and PM
remains fairly stagnant which we can assume is standard for this type of
industry as patented drugs would commonly deliver, on average, consistent
return. These businesses usually are not lacking in demand and constantly
researching and developing new products. Ratios that portray a glimpse into
a companys level of risk are improving significantly for Wyeth. The current
ratio measures the ability for a company to pay its short term debts. Wyeths
Current ratio rises 73% while that of Capital Heath is falling; indicating
financial health issues for Capital. (See Appendix C) Wyeth appears to have
successful financial management processes in place with this significant
increase in their Current Ratio as well as a failing debt to equity ratio. The
Change in Debt to Equity illustrates that Wyeth is using less borrowed money
to fund its expenditures; indicating financial health for the company and a
less risky investment for you.
In addition to expected levels of profitability and the falling risk, Capitals
financial statements lead me to believe that there are also changes in the
medical industry which will skyrocket Wythes customer demand and therefor
price of service. Capital is becoming more and more dependent of debt to
finance its operations, while seeing a slight decline in probability measures.
The two companies appear to be in convergence, with pharmaceutical sales
becoming more profitable while mainstream over the counter products are
declining in profitability. This makes sense as brick and mortar stores are
being forced to lower prices to compete with online retailers, these stores
then demand lower priced from the companies on their supply chain
including Capital Health. Wyeth is protected from these factors as most
prescribed medications are protected by patents and paid for through
insurance policies. With limited competition drug companies can charge
significantly higher rates. More and more mediations are being classified as
controlled substances as I was informed by a chemical dependence physician
employed at Kootenai Health in Coeur dAlene, ID. With more medications
being prescribed that are a controlled substance Wyeth is likely to rise is
profitability and continue to drive down their GOGS; in turn raising the stock
price and your investments value.

If you have any questions or convers regarding my analysis, please feel free to
contact me during my scheduled financial advising hours as stated in our contract
and I wish you the best of luck in your financial endeavors.

Sincerely,

Maggie Heidenreich
Vandal Financial Student Advisor
Heid5519@vandals.uidaho.edu

Appendix A Financial Statements (Provided)

Appendix B- Financial Statements (Calculated)

Appendix C Ratio Analysis