Merck Analysis

Merck Analysis

For the year ended 2010, Merck had a higher gross margin than the industry which means that the firm was performing better than the industry average. However from 2006 to 2010 Merck's gross margin trailed Pfizer and GlaxosmithKline, two of their top competitors. GlaxosmithKline not only had higher gross margins but also higher operating margin for all five years. The Industry's operating margin was higher than Merck's in 2010 and Pfizer's and Abbot's operating margin fluctuated through the years which resulted in Merck's been higher at times. Higher operating margin meant that the firm had more revenue left after paying for expenses. Higher operating margin put the firm in a better position of repaying debt. If the company can afford to pay its debts then they are more likely to get credit to finance investing needs.

Another ratio that showed how well the company could pay for its short term obligation is the current ratio. The current ratio measures liquidity and Merck and their competitors was on the same level, with the exception of Pfizer. Pfizer was a little bit more than all the company's for four of the five years that was looked at.

Return on assets (ROA) is one of the most important ratios because it examines the company's profitability relative to its assets. By calculating ROA, the company figures out how effectively assets are being used to generate revenue for the firm. Merck's ROA varied throughout the five year period, having the highest ROA among its competitors in 2008 and 2008 which was approximately 16% for both years. However by 2010, all four companies' ROA fallen but Merck had the sharpest decline which was only equal to 0.79%.

Debt to equity is also a very important ratio because to measures the how much of the company's assets are financed by debt and equity. A high ratio is not necessary a bad thing because financing allows a company to invest in new opportunities which will bring growth to the firm; provided that they are profitable. High debt/equity ratio could cause some problem in the firm if enough revenue is not being generated to make payment on debts and also interest payments for financing.

Reference

Morningstar 2011. Retrieved from http://www.morningstar.com/