ABC Company Financial Analysis

ABC Company Financial Analysis

Introduction

AmerisourceBergen Corporation is one of the largest pharmaceutical services companies in the United States. The firm distributes pharmaceutical products and services to health care providers, including hospital systems, physicians' offices, alternate care and mail order facilities, independent community pharmacies, and regional chain pharmacies. It also provides logistical expertise, contract packaging services, and product marketing services to its manufacturing customers. AmerisourceBergen was created out of the 2001 union of AmeriSource Health Corp. and Bergen Brunswig Corp.

Discussion

An income statement, or profit and loss statement, indicates the amount of profits generated by a firm over a given time period, often a year. In its most basic form, the income statement may be represented as follows (Wiley, 1988):

Thus, the income statement answers the question, How profitable is the business? In providing this answer, the income statement reports financial information related to five broad areas of business activity (Huddleston, 1982):

Revenue (sales)—money derived from selling the company's product or service

Cost of goods sold—the cost of producing or acquiring the goods or services to be sold

Operating expenses—expenses related to (1) marketing and distributing the product or service to the customer and (2) administering the business

Financing costs of doing business—the interest paid to the firm's creditors and the dividends paid to preferred stockholders (but not dividends paid to common stockholders)

Tax expenses—amount of taxes owed based on a firm's taxable income

Thus, we would expect that:

The higher (lower) a firm's revenues or sales, the higher (lower) its profits will be.

The lower (higher) the costs of producing a product, the higher (lower) its profits will be

The lower (higher) a company's operating expenses (which consist of marketing expenses, administration expenses, and depreciation expenses), the higher (lower) its profits will be.

The less (more) interest and preferred stock dividends a company pays, the higher (lower) its profits will be.

The less (more) taxes a company pays, the higher (lower) its profits will be.

In short, combining higher (lower) sales with lower (higher) costs and expenses yields a firm higher (lower) profits. All of these "income statement activities" are presented graphically in the figure below. We observe that the top portion of the figure , beginning with sales and continuing down through the operating income or earnings before interest and taxes, is affected solely by the first three activities listed—sales, cost of acquiring the firm's product or service, and operating expenses (Wiley, 1988).

To this point, ...