Comparing Celgene & Gilead: Business Profiles, Ratios & Performance, Exercises of Accounting

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Joceline Castillo

ACCT 503

October 21st, 2018

Professor Hinton

Use this Excel spreadsheet to compute ratios; show your computations for all ratios on this tab, and also include your commentary. The 2014 financial statem ents used to calculate these ratios are available in the Investor Relations sections of the Tootsie Roll and Hershey w ebsites.

Interpretation and com parison betw een the tw o com panies' ratios (reading Chapter 13 w ill help you prepare the com m entary)

Earnings per Share of Com m on Stock (basic - com m on) As given in the income statement $2.57 $ 10.

Current Ratio Current Assets $10,868 = 3.67 $19,588 = 2.

This ratio w oud be best higher because it show s w hether a company has enough resources to meet short- term obligations, w hich is w hy Celgene has a higher advantage compared to Gilead. Current Liabilities $2,959 $9,

Gross (Profit) Margin Percentage Gross Margin $10,747 = 96.1% $26,129 = 87.2%

Gross profit margin is the percentage of revenue that the company w ill have after deducting the cost of goods sold. Celgene his the advantage by having close to 100%. Net Sales $11,185 $29,

Rate of Return (Net Profit Margin) on Sales Net Income $1,999 = 17.9% $13,502 = 44.4%

It is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment's cost. Gilead show s the higher ratio meaning they are in better standings then Celgene. Net Sales $11,185 $30,

Inventory Turnover Cost of Goods Sold $438 0.9 $4,261 2.

Gilead can turnover their products faster compared to Celgene because it show s how many times the entire inventory of a company has been sold during an accounting period, so its best to have higher numbers.

Average Inventory $498 times $1,771 times

Days' Inventory Outstanding (DIO) 365 Days 392 365 = 415 365 = 152

This ratio indicates how many days on average a company turns its inventory into sales. Gilead can move their products out of their w arehouse in less then half a year compared to Celgene having products for more then over a year meaning its best to have a low er ratio. Inventory Turnover 0.9 days 2.4 days

Accounts Receivable Turnover Net Credit Sales $11,185 = 7.4 $29,953 = 5.8 Celgene has the higher ratio here because they are effectively using their assets. Average Net Accounts Receivable $1,511 $5,

Days' Sales Outstanding (DSO) 365 365 = 49.6 365 = 62.9 It is best to have a low er ratio because this determines the effectiveness of a company's credit and collection efforts in allow ing credit to reputable customers, as w ell as its ability to collect from them, so Celgene does w ell in th Receivable Turnover Ratio 7.4 days 5.8 days

Asset Turnover Net Sales $11,185 = 0.40 $29,953 = 0.53 Gilead is having the ideal ratio on the high side because this ratio determines efficiency of use on assets in generating sales revenue or sales income to the company. Average Total Assets $28,086 $56,

Rate of Return on Total Assets (ROA) Rate of Return on Sales times Asset Turnover 17.9X.04 = 7.1% 45x.53 = 2.1% Celgene having the higher ratio puts them at an advantge because this show s that the company earns higher revenue before interest and taxes (EBIT) relative to its total net assets.

Debt Ratio Total Liabilities $21,486 = 76.5% $37,614 = 66.0% It is best to have a low ratio in this category like Gilead does because it measures the extent of a company's leverage. Total Assets $28,086 $56,

Tim es Interest–Earned Ratio Income From Operations $3,167 = 6.3 17,633 = 18.3 Best to have a high ratio because Gilead show s that is has the ability to honor its debt payments. Interest Expense $500 $

Dividend Yield on Com m on Stock Dividend per Share of Common Stock (Yahoo Finance 10/05/2018) $0.00 = 0.0% $10.08 = 11.3% It is best to have a high ratio because then investors w ill like w hat the company pays out in dividends each year relative to its share price so automatically Gilead w ins w ith its 11.3% (Please follow the Course Project instructions to calculate the current dividend yield.) Market Price per Share of Common Stock (Yahoo Finance 10/05/2018) $115.75 $89.

Rate of Return on Com m on Stockholders' Equity (ROE) Net Income - Preferred Dividends $1,999 = 31.9% $13,501 = 70.2% Gilead has the higher ratio meaning that they are successful in generating income for the benefit of common stockholders, w hich w ill then lead to more investments. Average common stockholders' equity $6,259 $19,

Free Cash Flow = 16,669-11,985 = $ 4,684.00Gilead is the w inner w ith the higher ratio beause more cash is produced through its operations rather then from the cost of expenditures on assets.

Price-Earnings Ratio (Multiple) Market Price as of 5/30/2014 for Nike and as of 12/31/2014 for Under Armour $115.75 = 45 $89.15 = 9 (Please see the Course Project instructions for the dates to use for this ratio.) EPS $2.57 $10.08 It is like a 401(K) plan for investors. Investors for Gilead know that if they invest $9 into the company they w ill receive $1 back so that is w hy having a low er ratio is best.

The comparison of the ratios is an important part of the project. A good approach is to briefly explain what the ratio tells us. Indicate whether a higher or lower ratio is better. Then compare the two companies on this basis. Remember that each ratio below requires a comparison.

Celgene Gilead

Net Cash Provided by Operating Activities minus Cash Payments Earmarked for Investments in Plant Assets

You all get the chance to play the role of financial analyst below. The summary should

be a comparison of each company's performance for each major category of ratios

listed below. Focus on major differences as you compare each company's performance.

A nice way to conclude is to state which company you feel is the better investment and

why.

Measuring Ability to Pay Current Liabilities: Celgene has the advantage for the current ratio. Celgene has

$3.67 in current assets for every dollar in current liabilities, while Gilead has only $2.12 in current assets

for every dollar in current liabilities.

Measuring Turnover: Gilead has the advantage for the inventory turnover and accounts receivable

turnover ratios. Gilead turns over its inventory 2.4 times to Celgene's 0.9 times, but Celgene has the

advantage with accounts receivable with Celgene turns over its accounts receivable 7.4 times compared

to Gilead's 5.8 times.

Measuring Leverage: Overall Ability to Pay Debts: Gilead has significantly less debt than Celgene as

evidenced by Gilead's 66% debt-to-asset ratio as compared to Celgene's 76.5% debt-to-asset ratio. Gilead

can cover its interest expense 18.3 times with income before interest and taxes, while Celgene can only

cover its interest expense 6.3 times with their income before interest and taxes. Gilead has the advantage

for each of these ratios.

Measuring Profitability: Gilead has the advantage for profitability ratios. GIlead has a significant edge in

return on common stockholders' equity, with a 70.2% return on common stockholders' equity, as

compared to Celgene's 31.9% return on common stockholders' equity. Though Gilead has a lower gross

profit rate compared to Celgene, Gilead has a significant advantage for asset turnover and lower debt

ratio.

Analyzing stock as an investment: Gilead returns a 11.3% dividend yield to its investors, while Celgene

has nothing to offer. Gilead has a higher positive free-cash flow of $4.68 million, whereas Celgene has

positive free-cash flow of $3.74 million. Free-cash flow can be used to undertake acquisitions, pay

additional dividends, pay down debt, or buy back stock.

Conclusion: Gilead is the safer investment when you examine the ability to pay current liabilities and

overall liabilities, but Celgene has the advantage for the turnover ratios. For the conservative investor,

Gilead looks like the way to go because of its strong current and times interest–earned ratios. For the

growth-oriented investor, Celgene is the way to go because of its stronger profitability ratios and large

amount of free-cash flow.

Your textbook and any information that you use to profile the companies should be cited as a reference below.

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000816284/e5e39811-52ff-441b-a94e-d7a318424cab.pdf

file:///Users/jocelinecastillo/Downloads/GileadSciences_10K_20170227.pdf

https://finance.yahoo.com/quote/CELG/key-statistics?p=CELG

https://finance.yahoo.com/quote/GILD/key-statistics?p=GILD&.tsrc=fin-srch

Gilead Sciences, Inc. (n.d.). Retrieved October 20, 2018, from http://www.fundinguniverse.com/company-

histories/gilead-sciences-inc-history/

https://online.vitalsource.com/#/books/9781323829295/cfi/6/2!/4/2@0:

History of Celgene Corporation. (n.d.). Retrieved October 21, 2018, from https://www.c

erence below.

m https://www.celgene.com/about/history/