FINANCIAL ANALYSIS OF JNJ Dhanvantari Jalagam New England College
FINANCIAL ANALYSIS OF JNJ
Introduction
Johnson & Johnson is the company that was selected.
Income statement, balance sheet and cash flow statement for the financial year 2016, 2017 and 2018 will be used to conduct financial analysis.
Financial ratios are calculated which are used to evaluate performance and financial stability of Johnson & Johnson company.
Five categories of financial ratios are used which are broken down into particular ratios in each category.
Data used from financial statement used can be retrieved from Yahoo Finance as well as form 10-K.
Revenue Analysis
Two ratios are considered, which are revenue growth and revenue per employee.
Revenue growth =(revenue this period-revenue last period)/revenue last period.
For 2016, revenue growth=(71,890,000-70,704,000/70,704,000=0.016774157, which shows that revenue grew by 1.6% in year 2016 in favor of JNJ.
Revenue growth 2017 =(76,450,000-71,890,000)/71,890,000=0.063430241, which shows that revenue grew by 6.34% in year 2017 in favor of JNJ.
Revenue growth 2018=(81,581,000-76,450,000)/76,450,000=0.067115762, which show that revenue grew by 6.71% in favor of JNJ.
Cont.…
Revenue per employee is another type ration in revenue analysis that measures productivity and higher the ratio, the better the company. Calculated by dividing revenue by average number of employees.
Revenue per employee 2016=(71,890,000/126.4)=568750.
Revenue per employee 2017=(76,450,000/134))=570522.3881.
Revenue per employee 2018=(81,581,000/135.1)=603856.4027.
From the above analysis, revenue per employee is increasing from 2016 to 2018 and this clearly demonstrates increase in the productivity among the employees in JNJ.
Profit Analysis
This is used to measure the performance of the business. For Johnson & Johnson, will analyze gross profit margin and net profit margin.
Gross profit margin =(revenues-cost of goods sold)/revenue.
Gross profit margin 2016=(71,890,000-21,789,000)/71,890,000=0.696911949.
Gross profit margin 2017=(76,450,000-24,939,000)/76,450,000=0.673786789.
Gross profit margin 2018=(81,581,000-26,986,000)/81,581,000=0.669212194.
Conclusion: gross profit margin is declining from 2016 to 2018 thus there is decrease in the profitability of the JNJ.
Cont.…
Net profit margin=net income/revenue. This is used to determine amount left for reinvestment and to shareholders in form of dividends.
Net profit margin 2016=(16,540,000/71,890,000)=0.23007372.
Net profit margin 2017= (1,300,000/76,450,000)=0.017004578.
Net profit margin 2018=(15,297,000/81,581,000)=0.187506895.
Conclusion: Net profit margin decreased significantly 2017 but has increased 2018. JNJ has positive ratio and this show has amount left for reinvestment and paying dividends to shareholders but there is need to increase this ratio.
Operational efficiency
This is used to determine how company is well using its resources. Will consider inventory turnover in this analysis.
Inventory turnover= cost of goods sold/average stock.
Inventory turnover 2016=(21,789,000/8,098,500)=2.69049824.
Inventory turnover 2017=(24,939,000/8,144,000)=3.06225442.
Inventory turnover 2018=(26,986,000/8,682,000)=3.108269984.
Conclusion: inventory turnover is increasing over from year 2016 to 2018 which shows that management is efficiently managing sales and production of the products in JNJ.
Capital efficiency & solvency ratio
This an area that used mots by investors and lenders. Will analyze two ratios, return on equity (ROE) and debt to equity ratio (D/E).
ROE=net income/ shareholder’s equity.
ROE for 2016= (16,540,000/70,418,000)=0.234883126.
ROE for 2017=(1,300,000/60,160,000)=0.021609043.
ROE for 2018=(15,297,000/59,752,000)=0.256008167.
Conclusion. Year 2017 return on the investment made by investor was minimal but for year 2016 and 2017, return generated investors in JNJ was good. From 2018 figure, it is expected in next year, higher returns will be generated.
Cont.…
D/E =debt/equity .Used to determine how leveraged is the firm.
D/E for 2016=(70,790,000/70,418,000)=1.00528274.
D/E for 2017=(97,143,000/60,160,000)=1.614744016.
D/E for 2018=(93,202,000/59,752,000)=1.559813897.
Conclusion: debt to equity ratio is higher than one that shows JNJ is finances its operation more with debt financinbg than equity financing.
Liquidity ratio
This is used to measure the ability of the firm to generate sufficient cash to cover cash expenses. Will consider two ratios, current ratio and earning before interest and expense ratio.
Current ratio=current assets/ current liabilities. Measures ability of the firm to pays its short-term obligations from cash and other current assets.
Current ratio, 2016=(65,032,000/26,287,000)=2.473922471,
Current ratio, 2017=(43,088,000/30,537,000)=1.411009595.
Current ratio, 2018=(46,033,000/31,230,000)=1.47399936.
Conclusion: Over 3 years ,current ratio is more than one hence JNJ has capacity to cover its current obligation using cash and other current assets. This means JNJ is financially stable.
Cont.…
Interest coverage ratio (ICR) measures ability to pay interest expense from cash firm generates. Given by formula=EBIT/interest expense
ICR, 2016=(21,165,000/726,000)=29.15289256.
ICR, 2017=(19,622,000/934,000)=21.00856531.
ICR, 2018=(21,407,000/1,005,000)=21.30049751,
Conclusion: The interest coverage ratio is more than 20 in all years hence the JNJ generates enough cash to pay its interest expense.
General overall conclusion. Considering 5 types of ratios, JNJ is financially stable and performing very well.
References
Johnson & Johnson. (2019). Form 10-K. Retrieved from August, 8, from https://johnsonandjohnson.gcs-web.com/static-files/690e9ae2-2874-41f2-b278-1e95d902ae4b
Statista. (2019). Johnson & Johnson's number of employees from 2004 to 2018 (in 1,000). Retrieved August, 08, 2019 from https://www.statista.com/statistics/281388/number-of-employees-at-johnson-und-johnson/
Yahoo Finance.(2018). Johson & Johson. Retrieved August, 08, 2019 from https://finance.yahoo.com/quote/JNJ/financials?p=JNJ
Yahoo Finance. (2018). Johnson & Johnson (JNJ) . Retrieved August 08, 2019 from: https://finance.yahoo.com/quote/JNJ/balance-sheet?p=JNJ
