Understanding Financial Reports

Understanding Financial Reports

Introduction

Financial analysis of every company plays a vital role in revealing the financial performance and position of that business in the market. This paper covers the financial analysis of Merck and Novartis with respect to some significant components of income statement, balance sheet, and financial ratios.

Balance Sheet

Components of Stockholder's Equity

Merck and Novartis, both the companies represent components of shareholders' equity in their balance sheet statements. However, the components of equity in both companies' balance sheet statements are different. Merck discloses their Equity Capital, Reserves, Gains/Losses recognized immediately in equity, Equity attributed to Merck KGaA shareholders (a German chemical and pharmaceutical company), and Non-controlling interest. On the other hand, Novartis' equity portion discloses their Total share capital, Reserves and its components, and Unappropriated earnings. Novartis reveals the details (components) of their Share Capital as well as Legal Reserves and Free Reserves in their financial notes to statements. Merck also represents some details about their Equity portion in the financial notes to statement, including equity of Merck GaA's shareholders and non-controlling interests (Merck Annual Report, 2012; Novartis Annual Report, 2012).

Preferred Stock Shares Outstanding

No, both the companies do not have preferred stock shares outstanding.

Treasury Shares

Merck reported no treasury shares in the last reporting year i.e. 2012. On the contrary, Novartis reported Treasury Shares in the least reporting year 2012, and also revealed details in their financial notes to statements. According to Novartis Annual Report (2012), the company acquired 4.6 million shares in 2012 with the intention to retain in Group Treasury. Novartis sold or exchanged around 8.0 million shares with associates because of options being exercised and transferred around 10.6 million shares to associates as part of equity-based compensation. Thus, the company acquired their shares mostly to cover future employee participation programs (Novartis Annual Report, 2012; Novartis - Media Release, 2012).

Income Statement

Basic & Diluted Earnings per Share

Merck and Novartis both reported their basic as well as diluted earnings per share. Basic and diluted earnings per share of Merck were 2.61 and 2.61 respectively in 2012 (Merck Annual Report, 2012). On the other hand, Novartis's basic and diluted earnings per share for 2012 were 3.93 and 3.89 respectively (Novartis Annual report, 2012). The notes to financial statement of Merck represents that the use of a theoretical number of shares takes into account the fact that the general partner's capital is not revealed by shares and as ...