Johnson and Johnson Financial Ratio Analysis

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Introduction

Financial reporting entails the preparation of financial statements, which are communication documents to companies’ stakeholders. The financial statements are mainly the income statement, the balance sheet, and the statement of cash flows.

However, in their current form, the financial statements do not provide sufficient information for decision-making purposes. Analysis of such financial information is thus necessary to enable the company’s stakeholders to make decisions regarding their future engagements with the company. Ratio analysis is one such form of analysis that is done using the financial statement items (Cornett, Adair, & Nofsinger, 2011). The trends in these ratios from one financial year to another are indicators of the possible levels of performance in the future and give decision-makers a ground on which to base their decisions.

This essay shall analyze some financial ratios for Johnson and Johnson pharmaceutical companies for the last three financial years. The trends in those ratios shall be studied and recommendations given regarding possible steps to improve or maintain the current level of financial success.

Financial Ratios

Financial ratios are classified into several categories that include liquidity, gearing, activity, profitability, and investor ratios (Gibson, 2009). Each category of ratios is of interest to a specific category of stakeholders of the company. This essay shall discuss and compute six ratios for Johnson and Johnson pharmaceutical company for the three financial years ended 31st December 2011, 2012, and 2013. The ratios are the profit margin, debt to asset ratio, price-earnings ratio, inventory turnover, current ratio, and the time’s interest earned ratio.

Profit margin expresses the net profit as a percentage of sales (Gibson, 2009). The higher the profit margin, the better it is for the company. The debt to asset ratio is an indicator of the amount of borrowed resources expressed as a fraction of total assets. A higher debt to asset ratio indicates that the company is highly geared, which is not desirable for the company. The price-earnings ratio indicates an investor’s confidence in the performance of the company in the future.

A high price-earnings ratio suggests that investors are confident that the company shall perform well in the future. Inventory turnover shows the number of times stock was replenished in the company. A high inventory turnover is a sign of the efficiency of the company is selling its products (Gibson, 2009). The current ratio shows the number of dollars available to repay each dollar of current liabilities. A current ratio of over +1 is desirable, and it shows the company’s ability to repay its debts on time. The time’s interest earned ratio shows the number of times the net profit can be used to cover interest expenses in the future (Gibson, 2009). A higher times interest earned ratio is better for the company. The above ratios for Johnson and Johnson Company are summarized in the table below:

Ratio Formula 2013 2012 2011
Profit Margin Net profit × 100
Sales
19.4% 15.6% 14.9%
Debt to asset ratio Total liabilities
Total Assets
0.442 0.466 0.498
Price-earnings ratio Market price per share
Earnings per share
18.72 19.64 18.48
Inventory turnover Cost of sales
Average stock
2.9 3.14 3.49
Current ratio Current assets
Current liabilities
2.20 1.90 2.38
Times interest earned Earnings before interest and taxes
Interest expense
31.10 24.89 20.65

The financial ratios for Johnson and Johnson Company show a generally positive trend. The profit margin increased over the three years. The debt to asset ratio decreased over the three years, which is an improvement in the company’s gearing position. The price-earnings ratio of Johnson and Johnson Company increased from 2011 to 2012 but later declined in the year 2013 (Stock Analysis on Net, 2014). The rate of stock turnover decreased over the years but seems to revolve around 3 or 4 times. The current ratio decreased in the year 2012 but increased again in the year 2013, but the ratio was above the threshold over the years. Times interest earned ratio has been increasing consistently over the three years.

From the analysis, it is evident that Johnson and Johnson Company is in no financial difficulties. The company shows a consistent profitability record, which is likely to raise confidence among the investors about the future profitability potential of the company. Therefore, the company is likely to be operational over the next five years.

Major steps to financial success

If I were the manager of Johnson and Johnson Company, maintaining or improving this profitability record would be my goal. First, I would invest in research and development to ensure that the company enjoys more patent rights.

This would further improve the reputation of the company, thus increasing the sales potential as well as the market price of the shares of the company. Cost leadership would also be my strategy to ensure that the cost of sales is minimized and the gross profit margin increased. Secondly, I would embark on a global strategy by opening more branches and subsidiary companies in countries where the company has no presence. That would be possible because it is easy to obtain external funding as the company’s gearing ratio is low. The strategy would further increase sales, hence profits.

Conclusion

The preparation of financial statements is not sufficient in itself to make decisions. Ratio analysis thus becomes inevitable. Different ratios can be classified as liquidity, profitability, gearing, activity, and investor ratios. The financial ratios are compared from one year to another to identify a trend that makes stakeholders make sound decisions regarding their future engagements with the company. A positive trend is an indicator that the company is likely to be operational soon.

References

Cornett, M. M., Adair, T. A., & Nofsinger, J. R. (2011). Finance: applications & theory. New York: McGraw-Hill/Irwin.

Gibson, C. H. (2009). Financial reporting & analysis: using financial accounting information. Mason: South-Western Cengage Learning.

Stock Analysis on Net. (2014). Johnson & Johnson (JNJ): Common Stock Valuation Ratios (Price Multiples). Web.

Appendices

Johnson and Johnson income statements for the three years ended 31st December 2011, 2012 and 2013

(Dollars and shares are in millions except per share amounts)

2013 2012 2011
Sales to customers 71312 67224 65030
Cost of products sold 22342 21658 20360
Gross profit 48970 45566 44670
Selling, marketing, and administrative expenses 21830 20869 20969
Research and development expense 8183 7665 7548
In-process research and development 580 1163
Interest income (74) (64) (91)
Interest expense, net of portion capitalized 482 532 571
Other (income) expense, net 2498 1626 2743
Restructuring 569
Earnings before the provision of taxes on income 15471 13775 12361
Provision of taxes on income 1640 3261 2689
Net earnings 13831 10514 9672
Add: net loss attributable to non-controlling interest 339
Net earnings attributable to Johnson and Johnson 13831 10853 9672
Net earnings per share attributed to Johnson and Johnson
Basic 4.92 3.94 3.54
Diluted 4.81 3.86 3.49
Average shares outstanding
Basic 2809.2 2753.3 2736.0
Diluted 2877.0 2812.6 2775.3

Johnson and Johnson’s Balance sheets as of 31st December 2011, 2013 and 2013

(Amounts in millions of dollars)

2013 2012 2011
Assets
Current assets
Cash and cash equivalents 20927 14911 24542
Marketable securities 8279 6178 7719
Accounts receivable trade, fewer allowances for doubtful accounts 11713 11309 10581
Inventories 7878 7495 6285
Deferred taxes on income 3607 3139 2556
Prepaid expenses and other receivables 4003 3084 2633
Total current assets 56407 46116 54316
Property plant and equipment 16710 16097 14739
Intangible assets, net 27947 28752 18138
Goodwill 22798 22424 16138
Deferred taxes on income 3872 4541 6540
Other assets 4949 3417 3773
Total assets 132683 121347 113644
Liabilities and shareholders’ equity
Current liabilities
Loans and notes payable 4852 4676 6658
Accounts payable 6266 5831 5725
Accrued liabilities 7685 7299 4608
Accrued rebates, returns, and promotions 3308 2969 2637
Accrued compensation and employee-related obligations 2794 2423 2329
Accrued taxes on income 770 1064 854
Total current liabilities 25675 24262 22811
Long-term debt 13328 11489 12969
Deferred taxes on income 3989 3136 1800
Employee related obligations 7784 9082 8353
Other liabilities 7854 8552 10631
Total liabilities 58630 56521 56564
Shareholders’ equity
Common stock 3120 3120 3120
Accumulated other comprehensive income (2860) (5810) (5632)
Retained earnings 89493 85992 81251
89753 83302 78739
Less: common stock held in treasury, at cost 15700 18476 21659
Total shareholders’ equity 74053 64826 57080
Total liabilities and shareholders’ equity 132683 121347 113644

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