Question.3041 - This is Straightforward assignment, conduct a financial analysis of Boston Scientific (BSX) and compare it to one of its competitors of your choice, and to the industry. Most of the ratios can be found on at www.reuters.com. Select Markets/Stocks and type in the ticker. If you need any financial statement information not available on Reuters, you will find it onwww.finance.yahoo.com. Enter the ticker symbol and then click on Income Statement or Balance Sheet under the Financials heading on the left for the financial statements themselves. You probably won’t be able to find Lease Payments or Debt Payments, so you don’t need to calculate the ratios that depend on those numbers. I would like a 2-page (and no longer, please!) writeup of your comparison. Since space is short, please don’t try to list the ratios and their differences. Rather, I’d like your qualitative assessment of BSX’s position relative to the industry and the competitor, with the ratios as supporting. You may have a table at the end listing the ratios if needed. You don’t need to define any of them. For example, here is a bad way to describe the two companies: “…Company X’s days sales outstanding ratio is 35 while Company Y’s DSO is 45. Company X’s times interest earned ratio is 2.7 while Company Y’s TIE is 1.2….” Rather, I’d like for you to decide what the ratios mean and use them to illustrate your point. Something like the following is better: “Company X is managing its supply chain better than Company Y and better than the industry. Company X’s inventory turnover is 15x per year while Company Y only manages 10x per year and the industry average is 11x. This efficiency is also reflected in Company X’s total asset turnover of 6x versus Company Y’s TATO of 5x and the industry average of 4x. …” So look over the ratios, draw some conclusions in your mind about the two companies and the industry, formulate carefully your thoughts, and then tell me about them.
Answer Below:
Ratio Comparison: One of the close competitors of Boston Scientific Corporation (BSX) is Johnson and Johnson (JNJ.N). Ratio analysis of BSX with JNJ and the industry is done below. Starting from the liquidity ratio (measure of company’s short term liquidity position), the quick ratio (considered as the best measure for liquidity) of BSX i.e. 1.38, stands poor as compared to the competitor JNJ (1.76) as well as the industry (1.60). Even the current ratio (1.90) of the company is lower than the competitor JNJ (2.10), though it is close to the industry (1.98). This primarily indicates the company does not enjoy the liquidity premium in the market and is not holding much of cash in the books or is having large amounts of accounts payable in the accounts as compared to the industry. Moving forward to the profitability ratios (which measures the company’s ability to generate earnings relative to sales, assets and equity), in terms of gross margin ratio, BSX (67.82) was closer to the competitor JNJ (67.49) but far better than the industry standards (49.90). This indicates the company’s ability to get goods at better pricing from their supplier or getting at better timing, as a result of which the cost of goods sold is lower and gross margin higher. Unfortunately the operating profit margin (OPM) of the BSX stands incomparable to JNJ and industry as BSX OPM is negative while that of rest is positive. This can be due to much higher selling and administrative expenses, research and development expenses etc. which resulted into operating loss for BSX. Looking one step further, the operating expenses of BSX stood at 121% of the revenues whereas same were at 44% of the revenue for JNJ. (calculated from source www.yahoo.finance.com). BSX needs to control its expenses on the above mentioned fronts. As a result of the above expenses, the net profit margin of BSX (- 63.48) is also into negatives. Talking about the efficiency part of the company, the revenue per employee of BSX (297,667) stands way below than the competitor (537,539) and the industry (1,469,857). This ratio again supports our conclusion drawn above that the company operates at higher overhead costs as compared to industry. It needs more number of employees (higher administrative costs) to generate the similar amount of sales (to the industry). Our analysis is further confirmed by the low receivable turnover, inventory turnover and asset turnover ratios. All the above mentioned ratios are lower than the competitor and the industry except in case of receivable turnover which is higher than the industry (only). The low ratios imply BSX needs to re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. The lower inventory turnovers also imply that products of the company tend to stay in the warehouse for longer as compared to industry. Lastly looking on the debt side of the company, the interest coverage ratio of BSX (3.03) is much lower than JNJ (26.81) and the industry (40.56). This indicates its inability to pay its interest cost on the debt borrowed. It’s a point of concern as this shall come as a hindrance when the company further plans to raise debts. Below is a table, briefly mentioning the ratios as compared to JNJ and Industry: Ratio BSX JNJ Industry Current Ratio 1.90 2.10 1.96 Interest Coverage 3.03 26.81 40.56 Gross Margin 67.82 67.49 49.90 Operating Margin -61.51 18.94 -11.61 Rev/ Employee 297,667 537,539 1,469,857 Receivable Turnover 5.61 6.10 5.06More Articles From Finance
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