Analysis of the financial health of companies is crucial for predicting the future performance of stocks. There are several aspects of financial health assessment, including calculation of free cash flows, liquidity, profitability, efficiency, and leverage analysis. The present paper identifies two stocks from two different stock exchanges, calculates free cash flows for 2015 and 2016, and conducts ratio analyses of liquidity, asset management efficiency, and profitability for 2017 and 2018. Strengths and weaknesses of the two companies’ financial performance for the analyzed years are provided.
NYSE and NASDAQ
New York Stock Exchange (NYSE) and NASDAQ are the most famous stock exchanges in the world, as they account for the highest volume of stock exchange in North America and worldwide. NYSE is the oldest stock exchange known as the largest equities-based exchange in the world (Hayes, 2021). NASDAQ is an electronic marketplace for trading stocks preferred by many technology giants are present. The major difference between the two stock exchanges is that NYSE trades securities with the help of designated market makers, while NASDAQ has many market makers that compete with one another (Hayes, 2021). NASDAQ is a part of the Intercontinental Exchange (ICE), while NASDAQ is the key player in the NASDAQ-OMX Group (Hayes, 2021). At the same time, it should be mentioned that NASDAQ is a dealer market, while NYSE is an auction. Thus, while these stock exchanges serve the same purpose, there are significant differences between them. Amazon is one of the giants traded on NASDAQ, while Pfizer is a well-known pharmaceutical company traded on NYSE. The present paper will focus on the appraisal of the financial performance of these two firms.
Free Cash Flow Calculation
Calculations of free cash flows are a crucial step in appraising a company’s financial performance. According to Higgins (2018), free cash flow is a fundamental determinant of the value of a business. It is a missing step in the profitability analysis, as it helps to determine how much a company has in cash to invest in its future projects (Higgins, 2018). Calculation of free cash flow can provide an investor with detailed insights about outflows of cash, which cannot be seen in the income statement. Free cash flow is calculated by subtracting capital expenditures from net income available to common shareholders (Higgins, 2018). The formula is the following:
The calculations for the free cash flow of Amazon and Pfizer in 2015 and 2016 are provided below. The data was acquired from Amazon’s and Pfizer’s annual reports for 2016.
The analysis demonstrated that both firms demonstrated a stable performance in terms of free cash flows in 2015 and 2016. The companies had a significant surplus in cash that they could used for investments in prioritized projects and development of the companies. Additionally, both companies increased their free cash flows in 2016 in comparison with 2015, which demonstrated a positive trend in the companies’ financial health.
Both companies were assessed using financial ratios for determining liquidity, asset management efficiency, and profitability. Profitability was assessed using the net profit margin and return on assets, liquidity was measured using the current ratio and the quick ratio, and asset management were measured using the total asset turnover ratio and inventory turnover ratio. The formulas used for calculations are provided below.
The required financial data and results of the calculations are provided in Table 1 below.
Table 1. Ratio analysis (Amazon, 2019; Pfizer, 2019)
|Selected Financial Data|
|Net Profit Margin||0.41||0.21||0.02||0.04|
|Return on Assets||0.12||0.07||0.02||0.06|
|Asset Turnover Ratio||0.31||0.34||1.35||1.43|
|Inventory Turnover Ratio||1.48||1.50||6.98||8.10|
The analysis demonstrates that both companies had their strengths and weaknesses when compared to each other. Pfizer outperformed Amazon in terms of profitability in both 2017 and 2018. In particular, Pfizer’s net profit margin in 2017 was astounding 41%, while Amazon’s margin was only 6%. However, both companies had a comparable return on assets in 2018. It should also be noticed that Amazon demonstrated a considerable improvement in terms of profitability in 2018 in comparison with 2017, while Pfizer experienced a decline in both ratios. Pfizer also outperformed Amazon in terms of liquidity in 2017 and 2018, as both current and quick ratios were above 1. This demonstrated that Pfizer had enough current assets to cover its short-term liabilities even after the deduction of inventories. Amazon’s quick ratio was below the benchmark of 1, which may be a sign of increased risk for the companies, as it may need to attract outside capital to cover its current expenses. As for asset management, Amazon outperformed Pfizer in both inventory turnover and total asset turnover ratios. This demonstrates that Amazon uses the company’s assets more efficiently. Additionally, Amazon can turn its inventories into cash relatively faster.
The analysis of the financial statements of Amazon and Pfizer revealed that both companies demonstrated a stable financial performance during the analyzed years. In particular, both companies had sufficient free cash flows in 2015 and 2016, and their financial performance was adequate in 2017 and 2018. Even though the companies were compared to each other, it may be inappropriate since they operate in different industries and they have different benchmarks for the financial ratios.
Amazon. (2017). Annual report 2016. Annual Reports.
Amazon. (2019). Annual report 2018.
Hayes, A. (2021). The NYSE and NASDAQ: How they work. Investopedia.
Higgins, R. (2018). Analysis for financial management (12th ed.). McGraw-Hill Education.
Pfizer. (2017). Annual report 2016.
Pfizer. (2019). Annual report 2018.