Microsoft Excel LibreOffice Calc

Merck & Co. Inc. (MRK)


Analysis of Inventory

High level of difficulty


Inventory Accounting Policy

Inventories are valued at the lower of cost or net realizable value. The cost of a substantial majority of U.S. pharmaceutical and vaccine inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, Merck considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.

Source: 10-K (filing date: 2019-02-27).


Inventory Disclosure

Merck & Co. Inc., balance sheet: inventory

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Finished goods 1,658  1,334  1,304  1,343  1,588 
Raw materials and work in process 5,004  4,703  4,222  4,374  5,141 
Supplies 194  201  155  168  197 
Inventories, approximates current cost 6,856  6,238  5,681  5,885  6,926 
Increase to LIFO costs 45  302  384  309 
Inventories 6,857  6,283  5,983  6,269  7,235 
Less: Inventories recognized as other assets (1,417) (1,187) (1,117) (1,569) (1,664)
Inventories, excludes inventories classified in Other assets 5,440  5,096  4,866  4,700  5,571 

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

Item Description The company
Inventories Amount after valuation and LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer. Merck & Co. Inc.’s inventories increased from 2016 to 2017 and from 2017 to 2018.

Adjustment to Inventory: from LIFO to FIFO

Adjusting LIFO Inventory to FIFO (Current) Cost

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Inventories
Inventories at LIFO (as reported) 6,857  6,283  5,983  6,269  7,235 
Add: Inventory LIFO reserve (1) (45) (302) (384) (309)
Inventories at FIFO (adjusted) 6,856  6,238  5,681  5,885  6,926 
Adjustment to Current Assets
Current assets (as reported) 25,875  24,766  30,614  29,764  33,173 
Add: Inventory LIFO reserve (1) (45) (302) (384) (309)
Current assets (adjusted) 25,874  24,721  30,312  29,380  32,864 
Adjustment to Total Assets
Total assets (as reported) 82,637  87,872  95,377  101,779  98,335 
Add: Inventory LIFO reserve (1) (45) (302) (384) (309)
Total assets (adjusted) 82,636  87,827  95,075  101,395  98,026 
Adjustment to Total Merck & Co., Inc. Stockholders’ Equity
Total Merck & Co., Inc. stockholders’ equity (as reported) 26,701  34,336  40,088  44,676  48,647 
Add: Inventory LIFO reserve (1) (45) (302) (384) (309)
Total Merck & Co., Inc. stockholders’ equity (adjusted) 26,700  34,291  39,786  44,292  48,338 
Adjustment to Net Income Attributable To Merck & Co., Inc.
Net income attributable to Merck & Co., Inc. (as reported) 6,220  2,394  3,920  4,442  11,920 
Add: Increase (decrease) in inventory LIFO reserve 44  257  82  (75) (236)
Net income attributable to Merck & Co., Inc. (adjusted) 6,264  2,651  4,002  4,367  11,684 

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

Merck & Co. Inc.’s inventory value on Dec 31, 2018 would be $6,856  (in millions) if the FIFO inventory method was used instead of LIFO. Merck & Co. Inc.’s inventories, valued on a LIFO basis, on Dec 31, 2018 were $6,857 . Merck & Co. Inc.’s inventories would have been $(1) higher than reported on Dec 31, 2018 if the FIFO method had been used instead.


Merck & Co. Inc., Financial Data: Reported vs. Adjusted


Adjusted Ratios: LIFO vs. FIFO (Summary)

Merck & Co. Inc., adjusted ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Current Ratio
Reported current ratio (LIFO) 1.17 1.33 1.78 1.55 1.77
Adjusted current ratio (FIFO) 1.17 1.33 1.76 1.53 1.75
Net Profit Margin
Reported net profit margin (LIFO) 14.71% 5.97% 9.85% 11.25% 28.22%
Adjusted net profit margin (FIFO) 14.81% 6.61% 10.05% 11.06% 27.66%
Total Asset Turnover
Reported total asset turnover (LIFO) 0.51 0.46 0.42 0.39 0.43
Adjusted total asset turnover (FIFO) 0.51 0.46 0.42 0.39 0.43
Financial Leverage
Reported financial leverage (LIFO) 3.09 2.56 2.38 2.28 2.02
Adjusted financial leverage (FIFO) 3.09 2.56 2.39 2.29 2.03
Return on Equity (ROE)
Reported ROE (LIFO) 23.30% 6.97% 9.78% 9.94% 24.50%
Adjusted ROE (FIFO) 23.46% 7.73% 10.06% 9.86% 24.17%
Return on Assets (ROA)
Reported ROA (LIFO) 7.53% 2.72% 4.11% 4.36% 12.12%
Adjusted ROA (FIFO) 7.58% 3.02% 4.21% 4.31% 11.92%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by current liabilities. Merck & Co. Inc.’s adjusted current ratio deteriorated from 2016 to 2017 and from 2017 to 2018.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Merck & Co. Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Merck & Co. Inc.’s adjusted total asset turnover improved from 2016 to 2017 and from 2017 to 2018.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Merck & Co. Inc.’s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Merck & Co. Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Merck & Co. Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Merck & Co. Inc., Ratios: Reported vs. Adjusted


Adjusted Current Ratio

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Current assets 25,875  24,766  30,614  29,764  33,173 
Current liabilities 22,206  18,614  17,204  19,203  18,766 
Ratio
Current ratio1 1.17 1.33 1.78 1.55 1.77
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Adjusted current assets 25,874  24,721  30,312  29,380  32,864 
Current liabilities 22,206  18,614  17,204  19,203  18,766 
Ratio
Adjusted current ratio2 1.17 1.33 1.76 1.53 1.75

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 25,875 ÷ 22,206 = 1.17

2 Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= 25,874 ÷ 22,206 = 1.17

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by current liabilities. Merck & Co. Inc.’s adjusted current ratio deteriorated from 2016 to 2017 and from 2017 to 2018.

Adjusted Net Profit Margin

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income attributable to Merck & Co., Inc. 6,220  2,394  3,920  4,442  11,920 
Sales 42,294  40,122  39,807  39,498  42,237 
Ratio
Net profit margin1 14.71% 5.97% 9.85% 11.25% 28.22%
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Adjusted net income attributable to Merck & Co., Inc. 6,264  2,651  4,002  4,367  11,684 
Sales 42,294  40,122  39,807  39,498  42,237 
Ratio
Adjusted net profit margin2 14.81% 6.61% 10.05% 11.06% 27.66%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Net profit margin = 100 × Net income attributable to Merck & Co., Inc. ÷ Sales
= 100 × 6,220 ÷ 42,294 = 14.71%

2 Adjusted net profit margin = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Sales
= 100 × 6,264 ÷ 42,294 = 14.81%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Merck & Co. Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Total Asset Turnover

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Sales 42,294  40,122  39,807  39,498  42,237 
Total assets 82,637  87,872  95,377  101,779  98,335 
Ratio
Total asset turnover1 0.51 0.46 0.42 0.39 0.43
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Sales 42,294  40,122  39,807  39,498  42,237 
Adjusted total assets 82,636  87,827  95,075  101,395  98,026 
Ratio
Adjusted total asset turnover2 0.51 0.46 0.42 0.39 0.43

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Total asset turnover = Sales ÷ Total assets
= 42,294 ÷ 82,637 = 0.51

2 Adjusted total asset turnover = Sales ÷ Adjusted total assets
= 42,294 ÷ 82,636 = 0.51

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Merck & Co. Inc.’s adjusted total asset turnover improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 82,637  87,872  95,377  101,779  98,335 
Total Merck & Co., Inc. stockholders’ equity 26,701  34,336  40,088  44,676  48,647 
Ratio
Financial leverage1 3.09 2.56 2.38 2.28 2.02
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Adjusted total assets 82,636  87,827  95,075  101,395  98,026 
Adjusted total Merck & Co., Inc. stockholders’ equity 26,700  34,291  39,786  44,292  48,338 
Ratio
Adjusted financial leverage2 3.09 2.56 2.39 2.29 2.03

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Financial leverage = Total assets ÷ Total Merck & Co., Inc. stockholders’ equity
= 82,637 ÷ 26,701 = 3.09

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Merck & Co., Inc. stockholders’ equity
= 82,636 ÷ 26,700 = 3.09

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Merck & Co. Inc.’s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income attributable to Merck & Co., Inc. 6,220  2,394  3,920  4,442  11,920 
Total Merck & Co., Inc. stockholders’ equity 26,701  34,336  40,088  44,676  48,647 
Ratio
ROE1 23.30% 6.97% 9.78% 9.94% 24.50%
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Adjusted net income attributable to Merck & Co., Inc. 6,264  2,651  4,002  4,367  11,684 
Adjusted total Merck & Co., Inc. stockholders’ equity 26,700  34,291  39,786  44,292  48,338 
Ratio
Adjusted ROE2 23.46% 7.73% 10.06% 9.86% 24.17%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 ROE = 100 × Net income attributable to Merck & Co., Inc. ÷ Total Merck & Co., Inc. stockholders’ equity
= 100 × 6,220 ÷ 26,701 = 23.30%

2 Adjusted ROE = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Adjusted total Merck & Co., Inc. stockholders’ equity
= 100 × 6,264 ÷ 26,700 = 23.46%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Merck & Co. Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income attributable to Merck & Co., Inc. 6,220  2,394  3,920  4,442  11,920 
Total assets 82,637  87,872  95,377  101,779  98,335 
Ratio
ROA1 7.53% 2.72% 4.11% 4.36% 12.12%
Adjusted: from LIFO to FIFO
Selected Financial Data (US$ in millions)
Adjusted net income attributable to Merck & Co., Inc. 6,264  2,651  4,002  4,367  11,684 
Adjusted total assets 82,636  87,827  95,075  101,395  98,026 
Ratio
Adjusted ROA2 7.58% 3.02% 4.21% 4.31% 11.92%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).

2018 Calculations

1 ROA = 100 × Net income attributable to Merck & Co., Inc. ÷ Total assets
= 100 × 6,220 ÷ 82,637 = 7.53%

2 Adjusted ROA = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Adjusted total assets
= 100 × 6,264 ÷ 82,636 = 7.58%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Merck & Co. Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.