Company Overview 3
Three Year Horizontal Analysis of Johnson & Johnson Company (JNJ) from 2013 to 2015 3
Income Statement 3
Balance Sheet Analysis 6
Financial Performance Analysis of Johnson & Johnson Company for 2014 and 2015 8
Current Ratio 8
Quick Ratio 9
Cash Ratio 10
Findings from the Analysis of Johnson & Johnson Company and Recommendation for Improvement 11
References 13
Financial Performance Analysis of Johnson & Johnson Company through Horizontal and Ratios Analysis from 2013 to 2015
Company Overview
Johnson & Johnson Company, founded in 1886, is a publicly traded organization in the Medical Equipment and Pharmaceutical industry of the United States of America. The headquarter of Johnson & Johnson is in New Brunswick, New Jersey whereas consumer products segment is headquartered in Skillman, New Jersey. Johnson & Johnson Company operates 250 subsidiaries in more than fifty seven countries where its products are marketed in over 175 countries.
Major brands of Johnson & Johnson Company include various household names of first aid supplies and medications. Among them, the names of Johnson's baby products, Tylenol medications, Acuvue contact lenses, Clean & Clear facial wash, Neutrogena beauty and skin products as well as Band-Aid Brand line of bandages are quite notable in this regard. Major global competitors of Johnson & Johnson Company include Colgate-Palmolive Company, Pfizer Incorporated, Novartis AG and Procter & Gamble
Three Year Horizontal Analysis of Johnson & Johnson Company (JNJ) from 2013 to 2015
Income Statement
A three-year horizontal analysis is performed under this section for Johnson & Johnson where a percentage change in every temporary account of income statement is noted down. The importance of this analysis is that it helps/facilitates all stakeholders, including managers and investors, to determine positive as well as negative trends in each income statement item in the following manner:
Johnson & Johnson’s investment in research and development shows a positive or increasing trend over a three-year period since 2013 which is a healthy sign that this company is making industrious efforts to improve the quality of its products. Another positivity identified from income statement is that, from 2013 to2015, Johnson & Johnson also seems to have implemented tight internal controls for controlling its business expenses concerning selling and administrative matters.
For Johnson & Johnson, operating shows increasing trend for 2013 and 2014 as the company was able to generate more sales revenue while keeping its costs and expenses to an optimal level. However, from 2014 to 2015, Johnson & Johnson was unable to generate enough revenue due to which operating income declined though the costs and expenses also declined. In other words, decline in sales revenue and gross profit of Johnson & Johnson from 2014 to 2015 was much more damaging to the company though cost of sales and operating expenses shows a negative trend in the same year.
Johnson & Johnson reduced its dependence on short-term debt in 2014, but increased its reliance on short maturity debt in 2013 and 2015. Johnson & Johnson increased long-term debt in 2013 and 2014 but retired much of this debt portion in 2015. Despite all this, interest expense showed a negative trend in 2013 but got increased in 2014 and 2015. The reason behind this is quite technical and related to interest rate risk. One can say that the debt level in the capital structure of Johnson & Johnson is kept to an optimal level despite which the company is exposed to unexpected fluctuations in the level of short-term interest rates.
Balance Sheet Analysis
In this section, the horizontal analysis of Johnson & Johnson is performed for ts balance sheet, from 2013 to 2015; just it was performed for the income statement in previous section. The importance of this yearly analysis to highlight any increase or decrease in the permanent accounts of Johnson & Johnson’s balance sheet in the following manner:
One other strength of Johnson & Johnson Company is that it is reducing investments in acquisition and maintenance of its net fixed assets (Property, Plant and Equipment – PPE) since 2013. In addition to this, Johnson & Johnson Company is retaining some portion of its net income for investing the proceeds into R&D activities and operational efficiencies. The cash balance is saved to support liquidity daily working capital operations or liquidity management practices.
As far as short-term debt is concerned, Johnson & Johnson Company reduced its interest based short-term obligations and applied for more credit from suppliers or vendors. Short-term debt decreased by twenty five percent in 2014 whereas accounts payable to vendors or suppliers increased by more than twenty one percent. Compared to this, Johnson & Johnson Company increased its reliance on short-term loans by increased short maturity debt by ninety two percent in 2015. The company also applied for more supplier’s credit in 2015 that increased only by twelve percent in total.
Financial Performance Analysis of Johnson & Johnson Company for 2014 and 2015
In this section, different liquidity ratios are analysed to measure the capacity of Johnson & Johnson Company to repay its short-term creditors. Such a financial assessment is performed over a two-year period, from 2014 to 2015, by considering the financial information and ratio for respective years in the following manner:
Current Ratio
This ratio measures the ability of to pay off creditors in the event short-term obligations are called back for immediate repayment. Analysis reveals that this ratio shows a declining trend from 2014 to 2015. Initially, Johnson & Johnson Company had $2.23 in its current assets to repay every $1 of short-term liabilities or obligations of up to one year at end of 2014. However, Johnson & Johnson Company has $2.17 ($0.06 less compared to 2014) in its vault of current assets to repay short-term creditors on time.
The liquidity strength of Johnson & Johnson Company deteriorated by a slight margin as the company witnessed a major decline in prepayments (by thirteen percent approximately) from 2014 to 2015. Furthermore, though total current assets increased by eight percent but the current liabilities increased by more than ten percent in total. Major increase, of almost ninety two percent, was witnessed in short-term debt and positive trend in tax related obligations. As the globally accepted benchmark for current ratio is 2:1, it reflects that Johnson & Johnson Company continues to outperform the worldwide standard of liquidity management .
Quick Ratio
This ratio is also known as an acid-test ratio since it exercises concentration test on financial performance by disregarded the less liquid current assets in the equation. Generally, inventories and prepayments are considered less liquid assets as they can only be converted to cash or sold at reduced financial worth or Forced Sale value (FSV) .
Analysis reveals that the liquidity strength of Johnson & Johnson Company, based upon concentration test, has improved from 2014 to 2015. This is so because not only the prepaid expenses for Johnson & Johnson Company declined by more than twelve percent from 2014 to 2015, but level of ending inventories also declined by approximately two percent. This makes it apparent that, for Johnson & Johnson Company, the financial worth of remaining inventories has declined in valuation. As the worldwide standard of quick ratio is 1:1, it makes it convincing that Johnson & Johnson Company still outperforms the global benchmark of effective liquidity management practices.
Cash Ratio
For much restrictive and refined financial performance analysis of Johnson & Johnson Company to effectively manage its liquidity practices, this ratio is analysed. This ratio is more accurate indicator of liquidity performance, compared to current and quick ratios, as it gauges the capabilities of Johnson & Johnson Company to repay short-term liabilities on the basis of cash alone.
If the cash ratio from 2013 to 2015 is considered, one can easily be convinced that the ability of Johnson & Johnson Company to repay short maturity obligations by paying immediate cash has been improving. This is evident from the fact that total cash balance of Johnson & Johnson Company increased by thirteen and sixteen percent (approximately) by the end of 2014 and 2015.
In 2014, Johnson & Johnson Company had $1.32 in its cash balances (cash and marketable securities) to repay each $1 of short-term creditors. This capacity further improved in 2015, by $0.06, as the company now owns $1.38 in its cash vault to cover every dollar of liabilities of up to one year or less in the event they are called back by short-term creditors for repayment.
Findings from the Analysis of Johnson & Johnson Company and Recommendation for Improvement
After carefully analyzing the financial information of Johnson & Johnson Company through horizontal and ratio analysis, it is found that Johnson & Johnson Company is effective enough in managing its liquidity strength. From 2014 to 2015, Johnson & Johnson Company demonstrates success in providing lucrative margin of safety to investments of short-term creditors. In other words, the management of Johnson & Johnson Company is efficient enough to manage current assets in a very well manner to repay its creditors, particularly, trade suppliers or vendors.
Another strength of Johnson & Johnson Company is that its management has been able to control business costs and expenses since 2013 which is evident from income statement analysis. Investing heavily in Research and Development (R&D) since 2013 and retaining some portion of net income for investment is one of the core strengths of Johnson & Johnson Company. Additionally, Johnson & Johnson Company has been investing heavily in short-term marketable securities to keep itself highly liquid and face any financial distress beforehand.
However, the company employed more than ninety two percent of short-term debt in its capital structure. Because of this, not only the financial flexibility of Johnson & Johnson Company has gone down but also the interest rate volatility has increased dramatically. This is because short-term interest rates are more vulnerable to unexpected and unfavourable changes. At the same time, Johnson & Johnson Company retied most of its debt payable to vendors or suppliers. This company did not ask its suppliers to extend credit with relaxed terms further.
Based on this particular negative, the management can overcome this deficiency by reducing its dependence over short-term debt. Instead, the company should try to strike an optimal balance between debt and equity in its capital structure. To escape unexpected and unfavourable volatility in interest rates and minimize risk of default, it is recommended to Johnson & Johnson Company to employ more long-term debt. Similarly, to reduce obligations to lenders to make regular interest payments on time, Johnson & Johnson Company may ask for more credit from its suppliers with relaxed credit terms.
In addition to this, as Johnson & Johnson Company witnessed a decline in generation of sales revenue in 2015, the management should investigate into the supply chain and distribution as well as marketing activities of Johnson & Johnson Company. As both the sales revenue and cost of sales declined in 2015, it reflects the closure or withdrawal of any profitable business segment.
References
Brechner, R., & Bergeman, G. (2016). Contemporary Mathematics for Business & Consumers. Cengage Learning.
Porter, G. A., & Norton, C. L. (2016). Financial Accounting: The Impact on Decision Makers. Cengage Learning.
