JNJ's Current Ratio: 2018-2016 Trend Analysis - Essay Sample

Introduction

The current ratio and quick ratio are two liquidity ratios that demonstrate whether a business is in a position to pay off its short-term obligations using the current assets. Johnson and Johnson (JNJ) 2018, 2017, and 2016 current ratio is 1.47, 1.41, and 2.47 respectively. The trend shows that there is no significant change in the current ratio in the current year (2018) compared with 2017. However, there is a significant decline in 2018 ratio compared with 2016 having 2016 demonstrating a stronger liquidity position. The quick ration in 2018, 2017, and 2016 is 1.2, 1.1, and 2.2 respectively. There is a slight improvement in 2018 from 2017 but a significant change in 2016 compared with 2016. The two liquidity ratios demonstrate that the company has been able to settle its current obligations using the current assets. A firm liquidity position is not at stake when liquidity ratios are one above (Hoye, Smith, Nicholson, & Stewart, 2018). The liquidity position is stronger in 2016 than in 2017 and 2018 while there is no significant improvement in 2018 from 2017.

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Leverage Ratios

Leverage ratios gauge the long-term financial strength of an entity to settle long-term obligations in the capital structure. Debt-to-total assets ratio for JNJ in 2018 was 0.61 and 0.62 for 2017. Comparing 2018 with 2017, the company reported almost the same level of the debt-to-total assets ratio with a small decline from 2017 to 2018 by 1%. In 2016, debt-to-total assets ratio is 0.5 which relatively lower compared with 2018 and 2017. The trend showcases that JNJ financed its total assets using 61% and 62% of the borrowed capital in 2018 and 2017 respectively. In 2016, borrowed capital financed half (50%) of the total assets and the rest using owners' capital.

Debt-to-equity ratio reported by JNJ in 2018, 2017, and 2016 was 1.56, 1.61, and 1 respectively. It can be noted that there is a slight decline in the debt-to-equity ratio from 2017 to 2018. The decline is due to the payment of some part of the borrowed capital while equity remained the same. On the other hand, the ratio of debt to equity increased in 2017 from 2016 due to additional borrowed finance in the year. The is also higher in 2018 compared with 2016 implying that borrowed capital as a proportion of equity capital is higher in 2018 than in 2016. JNJ took advantage of the cheap sources of capital to finance (debt) its projects in 2018 and 2017 compared with 2016. Debt is a cheaper source of capital because the interest expense payable on borrowed fund is tax allowable and it reduces total finance cost and improves profitability (Brigham & Houston, 2015). On the other hand, a very high debt-to-equity ratio indicates an increased financial risk to the business.

Time interest earned ratio denotes whether the firm has enough earnings before interest and tax to take care of the total interest expense on borrowed capital. The higher the ratio, the better is the financial health of the firm is. The firm interest coverage ratio in 2018, 2017, and 2016 is 21 times, 21 times, and 25 times respectively. It implies that JNJ earnings before interest and tax are 21 times more than the total expenses in both 2018 and 2017 and 25 times more in 2016. The trend highlights that time interest earned ratio remained constant in 2018 compared with 2017 but a decline compared with 2016. Notable, the ratio shows that the company is financially stable to settle total finance expense when it falls due. The financial health of the company in respect to the time interest earned ratio is that the entity was healthier in 2016 than in both 2017 and 2018 but at the same level in 2018 and 2017.

Activity Ratios

The inventory turnover ratio is almost at the same level for the three years. The trend demonstrates that JNJ converted inventory into sales approximately nine times in each of the year or after every 40 days throughout the year. Comparing the current year with the previous years, the management performed the same in each of the three years. The management needs to work extra hard to improve inventory turnover ratio to improve sales and profitability. The trend is constant from 2016 to 2018.

Fixed assets turnover ratio is 76.30%, 66.90%, and 98.20% in 2018, 2017, and 2016 respectively. There is an improvement in 2018 compared with 2017 and a decline in 2017 compared with 2016. The year 2016 indicates that the company efficiently used its available resources to generate more revenue than in 2017 and 2018, which is the same case for 2018 in comparison with 2017. The higher the ratio the better the performance of the management on generating sale revenue for the firm using fixed assets. Similarly, the trend of total assets turnover illustrates a higher ratio of 53.30% in 2018 than in both 2017 and 2016 which is an improvement. The average collection period ratio showcases a slight decline in 2018 from 2017 by approximately 1% but an increase of about 9% in 2018 compared with 2016.

Profitability Ratios

The gross profit margin shows a magnificent rise in 2018 from both 2017 and 2016 66.8%. Operating margin demonstrates a constant trend with a very little change in 2018 from both 2017 and 2018, which is an indication of a similar performance in the three years. Net profit shows a tremendous increase in 2018 from 1.7% in 2017 to 18.8%. In 2016, the company net profit margin was 23% which is a better performance compared with 2017 and 2018. However, the decline from 2016 to 2017 is significant. ROA and ROE demonstrate a similar trend to the net profit margin with an increase in 2018 from 2018 and 2016 having the highest margin.

Revenue demonstrates a steady growth rate both in 2017 and 2018. Sales revenue increased by 6.34% and 6.71% in 2017 and 2018. It means that JNJ performed better in 2018 than in 2016 and 2017. Cost of sales rose by 6.34% in 2017 and declined sharply in 2018 by 64.56%. The company net income reduced immensely in 2017 by -92.14%, which later rose significantly by 1076.69% in 2018. The performance reported in 2018 is better compared with the other two years in terms of revenue, cost of sales, operating income, and net earnings.

Comparison Between JNJ and Other Companies in the Industry

Pfizer Inc and Roche Holding are the two main competitors of JNJ. JNJ liquidity is better on average compared with its competitors. Debt to total assets ratio for the three years is relatively on the same level for all the three companies. JNJ debt to equity ratio is extremely higher than that of competitors for the three years, which indicates a higher leverage ratio. Time interest ratio is higher for JNJ compared with its competitors, which demonstrates a satisfying leverage position. On profitability margin, JNJ illustrates a net profit margin of the same level with Roche in the current year Pfizer has a profit margin that is slightly higher than JNJ both in 2018 and 2017.

Warning Signals or Strong Indications of Health

Liquidity ratios indicate a health entity in the short-term. Leverage ratios signal that the firm's debt level is high which, is a sign of high financial risk. Time interest ratio showcase that JNJ financial health in the long-term is not at stake. The firm both revenue and the net earnings illustrate the firm is growing and thus an indication of health. Also, a sharp decline in the cost of sales demonstrates improved profitability and consequently its financial health.

Strengths and Weaknesses

Strengths

• Strong financial performance
• Excellent workforce
• Competent executive
• Product diversification
• Leading brand reputation internationally Weaknesses
• High gearing level adding up the risk
• Employees turnover...

References

Brigham, E. F., & Houston, J. F. (2015). Fundamentals of Financial Management, concise 8th edition. Mason, OH: South-Western, Cengage Learning. Wiley.

Financials.morningstar.com. (2019). Growth, Profitability, and Financial Ratios for Roche Holding AG Dividend Right Cert. (ROG) from Morningstar.com. [online] Available at: http://financials.morningstar.com/ratios/r.html?t=ROG&region=che&culture=en-US [Accessed 4 Sep. 2019].

Financials.morningstar.com. (2019). Income Statement for Pfizer Inc (PFE) from Morningstar.com. [online] Available at: http://financials.morningstar.com/income-statement/is.html?t=PFE&region=usa&culture=en-US [Accessed 4 Sep. 2019].

Hoye, R., Smith, A. C., Nicholson, M., & Stewart, B. (2018). Sport management: principles and applications. Routledge

Investor.jnj.com. (2019). [online] Available at: http://www.investor.jnj.com/annual-meeting-materials/2018-annual-report [Accessed 4 Sep. 2019].