Financial Reports Balance Sheet Merck Discloses on

Financial Reports Balance Sheet Merck discloses on its balance sheet the following components of stockholders' equity: capital stock, retained earnings, additional paid-in capital, treasury stock and accrued gains/losses. Novartis reports retained earnings, additional paid-in capital and treasury stock only. Neither of these companies has any preferred shares outstanding. Both companies report treasury shares. Merck notes in its annual report that the Board "approved the purchase of up to $5.0 billion of Merck's common stock for its treasury.

The treasury stock purchases have no time limit and will be made over time on the open market, in block transactions or in privately negotiated transactions." There are no reasons given for the purchase of treasury stock but there have been regular purchases of treasury stock over the past several years at Merck. For its part, Novartis does outline in its annual report the point of its treasury stock purchases.

It notes that "These shares will be kept as treasury shares principally for future employee participation program purposes." As with Merck, Novartis makes regular purchases of share for treasury stock, though at some point it is expected that the company will need to give those shares out as part of this employee rewards program that it has. Income Statement The basic earnings per share (EPS) for Merck is $2.03 and the diluted earnings per share is $2.00. For Novartis, the basic EPS was $3.93 and the diluted earnings per share was $3.89.

Merck does not report any discontinued operations. It has special income, but does not record any discontinued operations. Novartis also does not record any discontinued operations. The company records income from minority shares but nothing is noted about discontinued operations. With respect to stock compensation plans, both companies have these. Merck paid out $335 million in equity-based compensation in 2012, $369 million in 2011 and $509 million in 2010.

There was also "$370 million in unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a weighted-average period of 1.8 years. There are no more specific details given, but these aggregate numbers are assumed to apply to the C-suite and other high-ranking officials within the company. Novartis has share awards included in a number of its different plans.

The Novartis Equity Plan Select for North America, the long-term performance plan, the Novartis Equity Plan Select outside of the North America and the Equity Plan Select all include share awards. In addition, "selected associates may exceptionally receive special awards of restricted shares or RSUs. These provide an opportunity to reward outstanding achievements or exceptional performance and aim at retaining key contributors." There is an internal process for determining who receives such share awards.

Worldwide, there are 787 associates that were given this award in 2012, for a total dollar value of $24 million. Merck Novartis Gross Margin 65.21% 67.42% Net Profit Margin 13.05% 16.51% ROE 0.12 0.14 Current ratio 1.80 1.16 Quick ratio 1.54 0.88 Inventory Turn 2.52 2.78 Debt-to-Assets 50% 44% Debt-to-Equity 80% Times Covered 20.79 17.88 In the footnotes to financial statements, there are details about each of the line items. Thus, the footnotes talk about policies, and they also discuss the breakdown of different items.

So for example, there might be a line about long-term debt, but then the notes will talk about what each of the debt issues is, when it matures and the rate that it pays. All of the different items are like this. The notes can be incredibly valuable, and put the entire set of financial statements into perspective. Ratio analysis is a highly useful.