Johnson & Johnson
Johnson & Johnson (J&J) was founded in the late 1800s in New Brunswick, New Jersey, by Robert Wood Johnson I and his brothers, James Wood Johnson, and Edward Mead Johnson. When it first began, J&J produced consumer healthcare products including first-aid kits, baby powder, dental floss, etc. (Johnson & Johnson History, n. d. ). Overtime, however, J&J has grown tremendously and now operates three different business segments: consumer, medical devices and diagnostics, and pharmaceuticals. Additionally, J&J is made up of more than 250 companies located in 57 different countries around the world (“Company Structure”, n. d. ). As of 2012, J&J was ranked 42nd on the Fortune 500 (“Fortune 500 2012: Fortune 1000 Companies 1-100,” 2012), was a component of the Dow Jones Industrial Average (DJIA) (DIJA, n. d. ), and was traded on the New York Stock Exchange (NYSE) under the ticker symbol “JNJ” (NYSE Euronext, n. d. ). RATIO ANALYSIS (The following figures have been calculated using figures listed in J&J’s Form 10-K included in the 2012 Annual Report. Calculations of each ratio can be seen in the Appendix. ) The first ratio considered focuses on J&J’s “liquidity.
According to Ross, Westerfield, and Jordan, “Liquidity refers to the speed and ease with which an asset can be converted to cash” (2012, p. 23). The liquidity ratio being considered in this case, is the current ratio (current assets divided by current liabilities), which measures J&J’s short-term debt paying ability. Based on the figures in the balance sheet from 2012, the current ratio was 1. 90, meaning that the company had $1. 90 worth of current assets for every $1. 00 of current liabilities. J&J’s current ratio exceeds the industry average of 1. 62 (“Johnson & Johnson (JNJ),” n.
Johnson & Johnson Essay Example
Though a higher current ratio is typically desirable (especially for creditors), a high current ratio could also indicate an inefficient use of cash and short-term assets. The next set of ratios considered are called “long-term solvency” ratios, which, according to Ross, et. al. , “are intended to address the firm’s long-term ability to meet its obligations” (2012, p. 59). The first coverage ratio, “total debt ratio”, “takes into account all debts of all maturities to all creditors” (Ross, et. al. , 2012, p. 59). In 2012, J&J’s total debt ratio was .
Which was calculated by first, subtracting total equity from total assets and then, dividing that number by J&J’s total assets. In other words, Johnson and Johnson has $0. 47 of debt for every $1. 00 of assets. Whether this is high or low, depends on whether the capital structure matters. Regardless, this was very similar to the healthcare industry, which had a total debt ratio of 0. 45 (Profitability…, n. d. ). The second long-term solvency ratio to be discussed is “times interest earned” (or interest coverage), which measures how well J&J has its interest obligations covered (Ross, et.
Al. , 2012, p. 61). This is calculated by dividing earnings before interest expense and income taxes by the total interest expense for the year. In 2012, J&J was able to earn interest 26. 89 times as compared to the industry average of 14. 27 (“Johnson & Johnson (JNJ),” n. d. ). A higher ratio is desirable as it suggests that J&J would be better able to cover its interest obligations. If J&J had a low ratio, it would suggest that the company might be unable to cover its debt obligations with current earnings.
Nevertheless, J&J is covering its interest obligations sufficiently and could possibly even use some of the excess (over the industry average) to seek out other investment opportunities. An additional category to be considered is asset management, or turnover measures. These calculations measure how efficiently a firm uses its assets to generate sales (Ross, et. al. 2012, p. 61). The inventory turnover, for instance, measures approximately how many times J&J sells its entire inventory throughout the year. It is calculated by dividing J&J’s cost of goods sold by the amount left in ending inventory.
This resulted in an inventory turnover of 2. 89 times for J&J in 2012, which is comparable to the industry average of 2. 80 times (Profitability…, n. d. ). In other words, J&J essentially sold its entire inventory almost three times throughout 2012. A high inventory turnover is preferable as long as the company is able to keep adequate inventory on hand and keep sales numbers high enough to sustain the company. This amount can be further broken down by dividing 365 days by the inventory turnover of 2. 89, which results in the average days’ sales in inventory of 126. 30.
This means that the inventory sits approximately 126 days before it is sold. Another asset management ratio is the receivables turnover, which measures how quickly the money can be collected on the credit sales of inventory (Ross, et. al. , 2012 p. 62). It is calculated by dividing sales to customers by the ending amount in accounts receivable, which, for J&J in 2012 gave a result of 5. 94 times. This means that the on average, J&J collects on all of its sales almost 6 times per year or approximately every 61. 45 days (365 days/5. 94 times). This is slightly less than the industry average of 6.
Times (“Johnson & Johnson (JNJ),” n. d. ) or 54. 80 days (365 days/6. 66 times). In other words, J&J collects cash for its credit sales slightly slower than other companies in the industry. While it is typically desirable to have a higher annual receivable turnover and a lower days’ sales in receivables, it is important to look at the company’s collection policy to be certain. For instance, if J&J’s collection period is one month (approximately 30 days), then the current receivable turnover is too low and days’ sales in receivables of 61. 45 is too high.
However, if the collection period is two months, then the current ratios are desirable, since they are collecting all of the receivables approximately every 61. 45 days, which is roughly two months. Regardless, J&J’s ratios are very similar to that of the industry and therefore, the company will probably not need to make any adjustments. A third asset management ratio is the net working capital turnover, which measures “how much ‘work’ we get out of our working capital” (Ross, et. al. , 2012, p. 63). In order to calculate this number, sales are divided by the net working capital.
Net working capital is made up of current assets less current liabilities. The net working capital is used to fund operations and purchase inventory, which are then converted into sales for the company. In essence then, the net working capital turnover shows the relationship between the money spent to fund the operations and the money earned from the operations. In 2012, J&J’s net working capital turnover was 3. 08, which is less than the industry average of 4. 16 (“Johnson & Johnson (JNJ),” n. d. ). In this case, a higher ratio is desired, because it implies that the company is earning more for its money.
Based on the 2012 financials, J&J is not using its working capital as well as other companies in its industry. The final asset management ratio is “total asset turnover,” which measures a company’s efficiency at using its assets to generate sales. It is calculated by dividing sales by total assets, which for J&J resulted in a ratio of 0. 55. This means that for every dollar of assets, J&J generated $0. 55 in sales. This is only slightly higher than the industry average of 0. 53. It is desirable, yet again, to have a higher ratio, because it suggests that the company is generating more money through its assets.
Another set of ratios that are typically used are called “profitability ratios. ” Profitability ratios, “are intended to measure how efficiently a firm uses its assets and manages its operations” (Ross, et. al. , 2012, p. 63). These ratios differ from asset management ratios, because they focus on net income rather than the amount of sales generated. The first profitability ratio considered is “return on assets,” which measures the profit per dollar of assets (Ross, et. al. , 2012, p. 64). It is calculated by dividing net income for the year by the total equity. In 2012, J&J’s return on assets was 8.
94%, which is slightly higher than the industry average of 8. 31% (“Johnson & Johnson (JNJ),” n. d. ). A higher ratio is desirable again, because it suggests that the company is more efficiently using its assets to generate profits. Another profitability ratio that is frequently used is called, “return on equity. ” The return on equity ratio is used to measure “how the stockholders fared during the year” (Ross, et. al. , 2012, p. 64). J&J’s return on equity in 2012 was 16. 74%, which is less than the industry average of 18. 28% (“Johnson & Johnson (JNJ),” n. d. ). This percentage is calculated by dividing net income by total equity.
It ultimately measures how much profit a company generates with the money shareholders have invested, therefore, a higher is percentage is better. The final category of ratios that will be considered are titled “market value measures,” which are based on information that is not in the financial statements, rather it is based on the market price per share of stock (“Johnson & Johnson (JNJ),” n. d. ). The only market value measure that will be considered is the “price-earnings ratio,” which is a valuation of a company’s current share price compared to its per-share earnings.
This ratio is calculated by dividing the per share price at the end of the year by the earnings per share. J&J’s price-earnings ratio in 2012 was 19. 35 times, which is higher than the industry average of 16. 40 times (“Johnson & Johnson (JNJ),” n. d. ). In general, J&J’s higher price-earnings ratio could suggest that investors are expecting higher earnings growth in the future as compared to other companies within the industry. Furthermore, the price-earnings ratio represents how much investors are willing to pay for each dollar of earnings. For J&J then, investors are willing to pay $19. 35 for every dollar of earnings.
Is a company that rates financial securities, including bonds. S&P assigns the financial securities one of the following ratings: “AAA”, “AA”, “A”, “BBB”, “BBB-“, “BBB+”, “BB”, “B”, “CCC”, “CC”, “C”, and “D”. “AAA” is the highest rating and “D” is the lowest; “Investment Grade” bonds include those with ratings of “AAA” to “BBB”, while those below “BBB” are classified as “Speculative Grade” or junk bonds. The ratings are concerned only with the possibility of default. According to S&P Rating Services, J&J has foreign and local long-term bonds, as well as foreign and local short-term bonds.
The term “local” refers to bonds held in the U. S. Based on S&Ps ratings, both J&J’s long-term foreign and long-term local bonds are AAA, meaning that there is an extremely strong capacity for J&J to meet its financial commitments (Standard & Poor’s, n. d. ). S&P also assesses the potential direction of a long-term credit rating in the short-term. S&P projected that J&J’s long term credit rating would remain “stable” in the short-term, meaning that is not likely the rating will change. On the other hand, both J&J’s short-term foreign and short-term local bonds are rated A.
The “A” rating suggests that there is still a strong capacity for J&J to meet its financial commitments, but there is some susceptibility to adverse economic conditions and changes in circumstances (Standard & Poor’s, n. d. ). Nevertheless, all of the bonds issued by J&J are considered “Investment Grade”. In addition to bonds, J&J also issues common stock on which it has reported increasing dividends for 50 consecutive years (Gorsky, 2013). This year continued that trend as J&J reported an annual dividend of $2. 59 per share, an increase from last year’s annual dividend of $2. 40 per share.
The final quarter dividend of $0. 61 per share was declared on October 17, 2013, but will not be paid until December 10, 2013 (Johnson & Johnson – Investor Relations, 2013). Finally, it should be noted that J&J had a 38. 98% increase in price per share of common stock. Last year at this time (specifically on November 25, 2012), the price for a share of J&J’s stock was $68. 81. Since then, the share price has increased dramatically, as it is now $95. 63. In other words, investors are willing to pay more per share of stock, likely because they are expecting higher earnings in the future. CONCLUSION
One important factor that has not been discussed due to its non-financial nature, is the many current product defects and recalls that the company has experienced. Some such recalls have included products such as Tylenol, contact lenses, artificial hips, infant motrin, etc. Though it would seem that the recalls would affect the financial status of the company, after evaluating J&J’s financial ratios, bonds, and stocks, it seems the company is still financially sound. This is likely due to the impact J&J has worldwide. According to Business Insider, J&J touches more than one billion people per day (2012).
In other words, J&J has so many products and such a large share of the market that many consumers use the products, because they may not have much other choice. Despite the recalls, we believe that J&J would be a good company to invest in for three reasons. First, J&J has many strong brands in each of its three segments (consumer, medical devices and diagnostics, and pharmaceuticals). These brands will likely remain profitable in the future, since many people will continue to rely on medical products. Second, J&J has nearly all healthy ratios and provides a hefty dividend, which has continued to increase for the past 50 years.
Finally, there is a great potential for growth in the healthcare industry as medical problems are not likely to cease anytime soon. With that in mind, we believe that investing in J&J would likely be a wise decision. APPENDIX Johnson & Johnson Ratio Calculations J & J Industry Current Ratio Current Assets $46,116 1. 90 1. 62 Current Liabilities $24,262 Total Debt Ratio Total Assets – Total Equity $56,521 0. 47 0. 45 Total Assets $121,347 Times Interest Earned EBIT $14,307 26. 89 14. 27 Interest $532 Inventory Turnover Cost of Goods Sold $21,658 2. 89 2. 80 Inventory $7,495
Receivable Turnover Sales $67,224 5. 94 6. 66 Accounts Receivable $11,309 Net Working Capital Turnover Sales $67,224 3. 08 4. 16 Net Working Capital $21,854 Total Assets Turnover Sales $67,224 0. 55 0. 53 Total Assets $121,347 Return on Assets Net Income $10,853 8. 94% 8. 31% Total Assets $121,347 Return on Equity Net Income $10,853 16. 74% 18. 28% Total Equity $64,826 Price-Earnings Ratio Price Per Share $76. 25 19. 35 16. 40 Earnings Per Share $3. 94 Percent Change Stock Price Price Today – Price Last Year 26. 82 38. 98% (11/25/12 to 11/25/13) Price Last Year 68. 81