JOHNSON & JOHNSON Case Solution
Johnson & Johnson, a holding company, was incorporated on 10thNovember 1997. The company is involved in the research, development, production and sale of health care products (Reuters, 2020). The company’s products are tailored to three main segments, including: Pharmaceutical, Consumer and Medical Devices. The products are focused towards the well-being and health of the consumers. The company has been operating 119 production facilities and 230 in different parts of the world, including: China, Brazil, the USA, India, Belgium, Japan, UK and many more, as of January 2017.
Financial Ratio Analysis
The case analysis involves the financial ratio analysis of Johnson & Johnson. The ratio analysis includes: profitability ratios, liquidity ratios, efficiency ratios, solvency ratios and other ratios, in order to measure the financial well-being, operational efficiency and its ability to pay off its liabilities. The data includes the classified balance sheet, income statement and cash flow statement for a period of two years, i.e. 2018 and 2019 (See Appendix 1). The data has been collected from the SEC (EDGAR) website and provided in appendices.
The performance ratios measure the earnings potential and efficiency of a particular company, relative to its sales, gross profits, operating expenses etc., for a period of time. (Kenton, 2020). A profitability ratio higher than the industry standard or peer ratio or from previous years’ ratios show that the company is performing well by generating more earnings than the industry or the past figures.The J&J’s profitability ratio analysis is given as below:
·Gross Profit Margin
The gross profit margin shows the percentage of gross profits left from the sales, after covering up the cost of goods sold. It is calculated by dividing the gross profit with the firm’s sales revenue over a period of time. The gross profit margin for J&J in 2018 is 66.79% and 66.42% in 2019, respectively(See Appendix 2.1). The gross profit margin has decreased by 0.37% from 2018 to 2019 because the cost of goods sold increasing over the time, which has led to a slight decline in the company’s gross profit margin.
·Net Profit Margin
The net profit margin shows the net profitability of the company, after accounting for it’s all the operating and interest and tax expenses. It is calculated by dividing the net income with the sales of the company.The net profit margin of J&J is 18.75% and 18.42% in 2018 and 2019, respectively(See Appendix 2.2). The net profit margin has decreased from 2018 to 2019 by 0.33%. It is because the expenses including: COGS and other expenses, have increased over the time.
·Return on Assets
The return on assets shows that how much of the net income is generated by each dollar of the total assets in the company. It is calculated by dividing the net income with the average total assets of the company over a particular period. The ROA of J&J is 0.1 in 2018 and 0.096 in 2018 and 2019, respectively (See Appendix 2.3). The net earnings generated by each dollar of total assets has decreased by 0.004. It is because the average total assets of the company has increased over the time relative to net income figure, which has resulted in a decline of ROA by 0.004.
·Earnings per Share
The EPS shows the earnings generated by the company for each of its outstanding shares. It is calculated by subtracting the preferred dividends from net income and dividing the whole by the total number of the company’s outstanding shares. The EPS of J&J is 5.7 in 2018 and 5.72 in 2019 (See Appendix 2.4). The EPS of the company has increased by 0.019 from 2018 to 2019. It is because the number of shares outstanding has decreased over the period, whereas, its net income has decreased.
·Quality of Income Ratio
The quality of income ratio shows the net earnings generated by the company from its operations. A quality of income ratio greater than 1 indicates high quality earnings of the company and the ratio lower than 1, indicates the low quality earnings of the company from its operations.The quality of income ratio of J&J is 1.45 in 2018 and 1.55 in 2019 (See Appendix 2.5). The ratio has increased by 0.1 over the time period. The ratio figures suggest the high quality net earnings by the company, which has improved over the time, as a result of an increase in the net cash from operating activities.
·Fixed Asset Turnover Ratio
The fixed asset turnover ratio shows the efficiency of a fir min generating sales from its fixed assets. It is calculated by dividing the sales of the company by the average fixed assets. The fixed asset turnover ratio of J&J is 0.763 in 2018 and 0.73 in 2019 (See appendix 2.6). The ratio has decreased over the time by 0.033. It is because the company’s fixed assets has increased, while the change in sale is not higher than the change in the fixed assets of the company.
·Total Asset Turnover Ratio
The total asset turnover ratio shows the efficiency of a firm in generating sales from its total assets. It is calculated by dividing the sales of the company by the average total assets. The total asset turnover ratio of J&J is 0.533 in 2018 and it is 0.52 in 2019 (See appendix 2.7).The ratio has decreased over the time by 0.013. It is so, because the company’s total assets has increased, while the change in sale is not higher than the change in total assets of the company………………..
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