Johnson and Johnson (JNJ) an American multinational pharmaceutical, medical devices and consumer package goods manufacturing company that is established in 1886. It is the world sixth largest consumer Health Company and eighth largest Pharmaceutical Company in the world. On the other hand, it is the world largest most diverse medical devices and Diagnostics Company and fifth largest Biologics Company in the world. It has operates more than 275 companies all around the 60 countries with around 128000 employees (Johnson & Johnson Services, Inc., 2015). It is providing a wide range of products used in the endoscopic surgery or interventional cardiology, baby care, skin care, oral care, world health care, women health care, diabetes care, infection prevention, diagnostics also with nutritional pharmaceutical products. This paper analyzes the financial situation and performance of JNJ through evaluates the company profitability or liquidity situation and risk or return on the basis of past year’s financial data of the company.
Ratio analysis is used by the investors to access the current situation or trend of the company. Ratio analysis is beneficial of the investors to identify the best investment options in the same industry companies. Investors prefer this technique to determine the financial situation and stability of the company. The ratio analysis is used to evaluate the financial performance of JNJ (Carlberg, 2002). Profitability aspect of the company evaluates by the calculated of profitability ratios of JNJ that is shown in the below appendix:
Profitability ratio indicates that profit margin of JNJ is higher than standards that indicates the significant growth of the company and pharmaceutical industry. High profit margin ratio (around 70%) and high profit margin ratio (approx 22%) indicates that company is growing around the world and good financial position of the company. On the other hand, return on shareholder equity ratio of JNJ represents the positive aspect of the shareholdersn (Palepu, Healy, Peek & Bernard, 2007). High profitability ratios of JNJ indicates the company lead the industry and it is growing around the world through effectively run its business or operations and expanding it business globally.
Liquidity ratio uses to evaluate the company ability to pay its current liability or obligation on time. On the basis of liquidity ratios in the appendix, it can be stated that the current ratio of JNJ is quite higher as it is 2.36 times that indicates the company has sufficient fund or able to pay its current obligations. On the other hand, this situation is beneficial for the company in terms of getting capital to fulfil its short-term capital needs for future project. At the same time, high quick or current ratio of JNJ indicates that company financial position is good and it is able to face the challenges and survive in market. High quick ratio of JNJ represents the company has more liquid. High liquid situation is bed from management’s perspectives and from creditor’s point of the view. Higher inventory turnover ratio of JNJ indicates company has high inventory that means it hold more fund in inventory (Velnampy & Niresh, 2012). It means JNJ needs to manage its current assets to effective achieve the market opportunities.
Leverage ratio indicates the relationship among debt capital and shareholder funds and indicates the firm ability to utilize its assets, capital, etc. Lower leverage ratios (shown in the below appendix) represents the firm is highly dependent on equity finance, while higher indicates the highly dependent on long-term financing and borrowing (Hitchner, 2006). The debt ratio uses to evaluate the long-term solvency position of organizations because it indicates the proportion of debt of an organization proportional to its assets.
The below appendix indicates that JNJ has 47% assets are financed by debt and its ratio is lower than standards that indicates the less effectiveness of the company to obtain more capital for its future financial needs as its will reduce its profitability. Debt to equity ratio of J&J company (0.88) is approx similar than standard that indicates investors and creditors’ claims are approximately equal on the assets of company (Gibson, 2008). On the other hand, higher ratio of times covered shows that the company taken long time to cover its money that is consequently higher risky position of investors’ point of view. Financial ratios are mostly used by investors to analyze the present situation and future sustainability of an organization in the industry and the market locally and globally. This ratio is effective of invests to measure the attractiveness of an existing investment through evaluates the company valuation.
On the basis of the below appendix, it predicts that JNJ paid sufficient dividend its shareholders that indicate its strong financial position in the industry. Moreover, J&J dividend payout ratio is much higher that is 48.42% that shows that investors earn higher return if they invest in the company stock (Brigham & Ehrhardt, 2011). Although expectation of investors is more from JNJ, but the strong current financial position of the company is better for it. But on the basis of all ratios, the current condition of JNJ is better and strong that will be considered by investors, while taking investment decision.
From the above finding, it can be concluded that the current financial position of JNJ Company is good in terms of utilization of its short-term assets and operations. In terms of profitability ratio, liquidity ratios and leverage ratios indicate that the company’s able to pay short-term debts, which is effective to obtain capital for business operations. Invest in J&J is less risk and provides the sufficient return of investors due to the higher profitability.
Brigham, E.F. & Ehrhardt, M.C. (2011). Financial Management: Theory and Practice (13th ed.). USA: Cengage Learning.
Carlberg, C. (2002). Business Analysis With Microsoft Excel (2nd ed.). USA: Que Publishing.
Gibson, C.H. (2008). Financial Reporting and Analysis (11th ed.). USA: Cengage Learning.
Hitchner, J.R. (2006). Financial valuation: applications and models (2nd ed.). USA: John Wiley and Sons.
Johnson & Johnson Services, Inc. (2015). Investor Relations. Retrieved from: https://www.investor.jnj.com/investor-relations.cfm
Johnson & Johnson Services, Inc. (2015). Our Company. Retrieved from: https://www.jnj.com/connect/about-jnj/
Palepu, K.G., Healy, P.M., Peek, E. & Bernard, V.L. (2007). Business Analysis and Valuation: Text and Cases. UK: Cengage Learning EMEA.
Velnampy, T. & Niresh, J.A. (2012). The Relationship between Capital Structure & Profitability. Global Journal of Management and Business Research, 12(13), 67-74.
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