Financial Ratios Analysis

Essay by rishi30University, Master'sA+, October 2006

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In order to determine the financial health of Wyeth, financial analysts and investors depend highly on ratios. Ratios are important profit tools in financial analysis that help financial analysts apply plans that improve profitability, liquidity, financial structure leverage, and interest coverage (Saksonova, 2006). Although ratios are compiled on past records, financial ratios can give us a hint of the future problems.

Company - Wyeth ( WYE)

Ratio Analysis:

Leverage Ratios:

Leverage ratios demonstrate how much debt the company is using to finance its assets and operations. These ratios are of particular interest to investors and indicate a level of risk. Wyeth is more leveraged (46 cents of every dollar of long-term capital is in the form of long-term debt) in comparison to the industry and health care sector. A significant proportion of Wyeth's capital structure is financed by long-term, interest bearing debt, which makes them more vulnerable. If Wyeth does not generate enough cash to pay debts (principal and interest), Wyeth is at risk towards their creditors and this is a cause of concern, as this will affect their inflow of working capital.

Wyeth is at further risk if returns on their investments fall below the cost of borrowing. [Good]However, this does create an advantage in that the interest paid on the debt is deductible in determining income subject to income taxes (Mergent Online, 2005). [Good]

Despite the above, Wyeth does have the ability to meet their annual interest payments with a satisfactory times interest earned ratio. Wyeth's debt equity ratio is declining indicating the issuance of shareholders equity to raise more capital. [Good]

Liquidity Ratios:

Liquidity ratios measure a company's short-term ability to generate cash to pay current maturing obligations or in cases of emergency. These ratios are also of particular interest to investors. Wyeth has a...