Comparison Of Medtronic's Financial Statements To Baxter's Financial Statements

Medtronic's Ratings

Earning Power

I would rank Medtronic's earning power at a 9 on a scale of 1 (very weak) to 10 (very strong). Medtronic has successfully demonstrated their ability to grow and provide substantial return to their owners.

Medtronic's net earnings have steadily increased from $984.0 million in 2002, to $1599.8 million in 2003, to $1959.3 million in 2004. Their total assets have increased 13.7% from $12,405.5 million in 2003 to $14,110.8 million in 2004. These measures show that Medtronic has been successful in generating profits and increasing their net assets. These measures have steadily been increasing and therefore this type of progress can reasonably be expected to persist in the future.

Total liabilities have also increased by 11.8% from $4,499.1 million in 2003 to $5,033.8 million in 2004. This can viewed as a way of financing the continued operations that support Medtronic's success.

Medtronic paid $0.23 per share to owners in 2002. This amount equaled $278.8 million. In 2003, the company paid $0.25 per share, equal to $304.2 million. In 2004, the shareholders were paid $0.29 per share equaling $351.5 million. These amounts show that Medtronic has been paying substantial returns to its owners, and they have also been increasing the dividends paid per share.

Medtronic's gross profit has increased from $4758.1 in 2002, to $5774.9 to 2003, to $6834.3 in 2004. The gross margin in 2004 was 75% showing that the selling price of the inventory exceeds the cost by 75%. This shows that Medtronic has been steadily earning profits from the sales of their products and services. Also, the receivable account was turned over 4.84 times in 2004 meaning that Medtronic has been receiving payment from its debtors and earning profits this way as well.

When looking at two of the profitability ratios, the return on equity and the return on assets, as compared to other leading companies in the industry, we can see that Medtronic is doing very well.

Medtronic General Electric's

Medical Systems Group St Jude's Medical, Inc Guidant Becton Dickinson & Co.

Return on Equity .23 .15 .16 .11 .21

Return on Assets .15 .10 .12 .07 .11

We can see that Medtronic is producing desirable profits that can be used to pay dividends to the shareholders and the company's creditors.

Solvency

I would rank Medtronic's solvency at a 7 on a scale of 1 to 10. The amount of cash generated from operating activities has steadily increased from 2002 to 2004. This shows that the company has been successfully selling services to finance asset purchases and debt payments. The net earnings have been increasing as well, and so have the earnings per share. These measures show that Medtronic has been able to produce cash to meet debts as they come due.

When looking at the statement of cash flows, we see that Medtronic received significant amounts of cash from the sale and maturity of marketable securities ($1473.2 million) and the issuance of common stock ($241.4 million) which together make up 40% of current liabilities. This also shows that the company is able to pay their debts as they come due.

The current ratio for 2004 is 1.25. The fact that this is above 1 shows that the company has more than enough current assets to be liquidated if need be to meet their current liabilities. An even more rigid test of a company's ability to meet its current liabilities is the quick ratio which Medtronic held a .92 rating for 2004. This could be better if it were above 1, but being so close to 1 shows that when not taking certain current assets that are not as readily liquid into consideration, Medtronic should still be able to easily access 92% of the needed funds to cover their current liabilities if need be.

When comparing the annual funds available to meet interest to the annual interest expense we find that the interest coverage available is 999.89, a very large number. This can signal high solvency. There are plenty of funds available to pay the annual interest expense. We can also look at how often the accounts payable is turned over which was 7.32 times in 2004. This account only made up 8% of the current liabilities for this year. These two facts show that the accounts payable does not seem to be a significant form of financing. The company is not relying heavily upon accounts receivable and is probably not having a difficult time generating cash to pay to suppliers.

One last measure used to determine the ranking provided for Medtronic's solvency was the debt/equity ratio. Using this ratio, we see that the average total liabilities only make up 56% of the total Stockholder's equity. This shows that the company's debt is bout half of the company's total book value.

All of these measures are consistent with the idea that Medtronic is able to produce cash to meet debts as they come due. If the current and quick ratio proved that the company was carrying a large percentage of current assets as compared to current liabilities, and if the debt didn't make up a majority of the stockholder's equity, the ranking would have been higher.

Earning Quality and Persistence

When ranking Medtronic's earning quality and persistence I would give the company a ranking of 8 on a scale of 1 to 10.

Net operating income is considered to be made up of usual and frequent activities and is therefore considered to be persistent. This has steadily increased over the past three years and can reasonably be expected to continue in the future. In 2002, the amount was $1590.2 million, increasing by $488 million to have generated $2078.2 million from operating activities for the fiscal year ending in 2003, and increasing even more by $767.6 million to have generated $2845.8 million from operating activities for the fiscal year ending in 2004.

The earnings per share have also been increasing which shows that the company has been persistent in earning money for its shareholders. The earnings per share were at $.81 in 2002, $1.31 in 2003, and $1.61 in 2004

The average market price to earnings ratios is 20-25 times the earnings. The price to earnings ratio for Medtronic was above average for both 2003 and 2004. The price to earnings ratio for 2003 was 29.91 and the price per earnings ratio for 2004 was 31.34.