Chris is one of the youngest employees in his company who is about to retire. For instance, he has worked for about 18 years in the parent company, and as of now, he is at age 40. There are many choices that people who are close to their retirement age must make to ensure that their future is excellent. Chris is a risk lover because he has taken so much risk and is ready for any level of uncertainty that may come up. Besides, he has figured about investing in the existing stocks in the USA market. There are many stocks as such; the investor must always come up with the best investment strategy. Despite that, the world has been changing through technology and many other factors still investing in stocks is the only best option. As a financial manager, I have to consider all the clients’ dreams and have a variety of options in the stock market. Based on the in-depth research that was conducted, AbbVie Inc has the firm which has an outstanding performance in the market. In essence, this company has been performing well in the American Stock Exchange and seems the best option for the client.
The Rationale and Primary Reason for Stock Selection
AbbVie is one of the best pharmaceutical companies in the USA. The company has been growing, and its performance on the American Stock Exchange is unquestionable. There are so many companies in the stock exchange market; however, I choose this company because of its constant growth despite not being one of the biggest companies. The company has good management, and its share price is expected to grow continuously because of the company’s investment. The world is changing because of the application of options like technology and many other management systems that have created more opportunities for the company’s growth. Chris could have invested in many companies like Amazon, Apple Inc., or Microsoft, but this was the best option because the share price would constantly be growing. A growing company is always better than a fully established company because of the options available to the investor. Therefore, it is essential to factor in the elements that will help the investor come up with the best deals that will grow their wealth in the future. After retirement, every employee expects not to gamble with the nature of investments that they take.
Also, another major factor that contributed to the choice of AbbVie was the high stakes of investment. The company has a future expected trend of growth because of the policies of expansion. More significantly, now that the company is targeting the UK region, there is a higher probability that its revenue and shares will increase. As such, many investors will have their investment bid on the company. As a result, its share price is expected to grow at a significant margin in the future. The company has also been licensed to operate outside the USA market. As a result, it will be easy for the company to extend its market segments to other economies. However, the UK market is one of the biggest and most productive markets in medical and pharmaceutical technology. Hence, if the company has aimed at the European region, then there is higher expected growth in their policies and an investment option. Therefore, Chris is expected to rip meaningful revenues and profits from the company in the coming years.
Analysis of Financial Ratios
Financial ratios are arithmetic comparisons that show the connection that exists between accounts in financial statements to help stakeholders understand how well a firm is doing and areas for improvement. Financial ratios do not consider the size of a company but allow a comparison for identifying strengths and weaknesses. They are available in different categories, including profitability, liquidity, efficiency, and solvency, among others. From AbbVie’s financial statements, this paper will analyze its return on equity ratio, return on investment, current ratio, return on assets ratio, and quick ratio for the past three years.
Return On Equity (ROE)
ROE measures a company’s performance based on its past index by dividing net income by the total value of shareholder’s equity in percentage form. It is thus used in calculating the net profitability of a firm in the stock market and helps combine the balance sheet and income statement. AbbVie’s ROE informs its shareholders of how effectively their money is being used and helps in evaluating management effectiveness and profitability since it displays how income is generated from the effective utilization of investments.
The current ROE for AbbVie is at 52.25% and is higher compared to the past three years from their financial statements. (Marston, 2021) The consistent increase in its ROE has made its investors look for more investment opportunities. Its ROE is above 15% and hence considered desirable for providing dividends and funds for future expansion (Hashemian-Rahaghi et al., 2017). The value has proven that there is higher profitability for the company to perform better in the future. This makes it a better option for investors since it matches the rate of growth experienced in the world and assures the performance of the firm in the market.
Return On Assets (ROA)
ROA is a measure of how profitable a firm is in relation to its total assets. It gives an idea of how effectively a company manages and uses its assets to generate a profitability return and is expressed as a percentage. ROA is mainly applied when comparing the current and previous performance of a company without considering a company’s debt. A high ROA means that the management is doing better at generating earnings from its assets. The current ROA for AbbVie is at 14.72%; at the end of 2020, it was at 13.149%, 20.306% in 2019, and 19.153% in 2018. (Wollenberg et al., 2020) The current value means that AbbVie is generating 14 cents of return for every $1 of capital they invested. This means that the company is doing well in the market with a potential investment value making it an option for investors in the market.
Return On Investment (ROI)
ROI evaluates the profitability and efficiency of an investment and measures an investment’s return in relation to the cost of investment. The ratio is arrived at by dividing return by investment cost and then expressed as a percentage. ROI helps in developing important requirements of the organization in the future and creates a relationship between the company and other portfolios in the market. For the past three years, AbbVie had a ROI of 13.5%, 10.2%, and 3.91% in 2018, 2019, and 2020 respectively (Wollenberg et al., 2020). This means that it has an average of 9.2%, making it to be a good investment option with a good return.
The quick ratio helps gauge a firm’s short-term liquidity position and assesses the ability of a firm to use its liquid assets to meet its short-term obligations. It is also referred to as the acid test ratio since it indicates an organization’s ability to use easily convertible assets to cash to settle its current liabilities. Quick ratio assesses the capacity of a company to settle its liabilities without having to obtain extra financing or sell its inventory. A high quick ratio means that a company has better financial health and liquidity and will not struggle to pay its debts. The current quick ratio for AbbVie is 0.91, and 0.73 in 2020, meaning that it cannot fully repay its debts (Marston, 2021).
The current ratio measures the capacity to pay short-term responsibilities by a company and informs about how current assets can be maximized on the balance sheet to meet current debts and other payments. The current ratio is considered acceptable when it matches or slightly exceeds the industry average. The current ratio for AbbVie for 2021 is 1.01, meaning it has good short-term financial strength at the moment (Marston, 2021). The company experienced a ratio of 0.98, 3.18, and 0.84 in the years 2018, 2019, and 2020 respectively (Wollenberg et al., 2020).
The Company’s Financial Health
After analyzing financial ratios, the financial health of AbbVie can be said to be good. The company can meet its obligations and maximize opportunities. Its current ROE is high hence higher profitability; its ROA is at 14.2%, meaning the firm is performing well in the market (Hashemian-Rahaghi et al., 2017). AbbVie’s ROI shows that it is producing good returns when compared to the cost of the investment; the current ratio is at the recommended level hence its ability to meet its short-term obligations. These ratios proved that the organization is doing well and is in good financial health.
The Risk Level of Stock and Minimizing Strategies
The risk level of stock describes the loss of money one may experience when investing in a stock. Investing money has a high level of risk and one needs compensation if one take that risk (CNN Money, 2017). From the investor’s point of view, the risk level of stock can be determined by identifying the value of the stock with the probability of it going high in the future. In the case of AbbVie, its current value of a stock is $116. 44, which is a drop from the previous one, $116. 88 (Gorbatov et al., 2020). If an investor wants to gain profitability, investing in stock would be better if the risk/reward ratio is in their favor. Calculation of risks and rewards is done by dividing the net profit by the cost of one’s maximum risk. An acceptable ratio is one that yields more profit. The ratio for AbbVie is quite low, making it have high levels of risk due to fluctuations in the market.
There are key strategies that can be used in reduced such perceived risks during investment. One can use an asset allocation strategy that requires caution when deciding where to invest depending on short-term losses and profits (The Motley Fool, 2018). An investor needs to be keen when weighing investments in their portfolio to ensure that it meets a particular objective for success. Portfolio diversification helps in reducing risks since, through it, one can review and ensure that risk and reward levels match their long-term goals. Dollar-cost averaging is a strategy that can be employed to help loosen the effects of fluctuations in the market (CNN Money, 2017). This is so since the strategy is done in a systematic manner to remove emotions when making financial decisions.
The above stock serves as a good investment opportunity for investors in the market due to several reasons. The stock has the capability of ensuring high profitability in the future after assessing its current value. The chances of experiencing losses are minimal, so the stock can meet certain objectives in investors for them to realize success (Lev & Srivastava, 2019). This stock can be invested in since it is in a business model that is easy to understand and the company is a good brand.
Finance is the essence of every organization and depends on accounting information that is recorded, classified, summarized, and communicated for analysis and interpretation. According to Marston, financial statements originate from accounting and they provide useful information to stockholders and other users of this information for decision-making (2021). Financial ratios prepared from these statements help in forecasting the results of past, current, and future events and assist in confirming and correcting previous expectations (Wollenberg et al., 2020). Gorbatov et al. claim that financial reports need to provide timely and dependable information from different users, including management, suppliers, shareholders, and creditors, among others (2020). This information serves the purpose of making wise and effective decisions for investment and expansion, among others. Accounting information used for making financial decisions is usually considered to be the end result that continually assesses and reveals quantitative data concerning a company’s financial position and performance (Hashemian-Rahaghi et al., 2017). Welc asserts that financial ratios are essential to analysts and are meant to offer information on the association between distinct values in financial statements (2020). They can be used to evaluate a firm’s performance and that of its competitors.
CNN Money. (2017). Stocks: Investing in stock.
Gorbatov, S., Lane, A. M., & Richmond, T. J. (2020). Performance management at AbbVie. Performance Management Transformation: Lessons Learned and Next Steps, 43.
Hashemian-Rahaghi, S. R., FanFah, C., & Abed-Ashtiani, F. (2017). Production efficiency and financial performance in the pharmaceutical industry: A case of top 24 companies. Available at SSRN 3437210.
Lev, B., & Srivastava, A. (2019). Explaining the recent failure of value investing. NYU Stern School of Business.
Marston, J. (2021). Impact of mergers and acquisitions on the financial performance of pharmaceutical companies: A quantitative study (Doctoral dissertation, City University of Seattle).
The Motley Fool. (2018). 13 steps to investing foolishly.
Welc, J. (2020). Evaluation of financial statement reliability and comparability based on auditor’s opinion, narrative disclosures and cash flow data. In Reading Between the Lines of Corporate Financial Reports (pp. 139-168). Palgrave Macmillan, Cham.
Wollenberg, A., Flohr, C., Simon, D., Cork, M. J., Thyssen, J. P., Bieber, T.,… & Vestergaard, C. (2020). European Task Force on Atopic Dermatitis (ETFAD) statement on severe acute respiratory syndrome coronavirus 2 (SARS-Cov-2)-infection and atopic dermatitis. Journal of the European Academy of Dermatology and Venereology.
Financial Analysis Table. (Author, 2021)
|Financial Ratio||AbbVie’s value in 2021|