Financial Analysis from Johnson & Johnson
Many companies have their stocks available to sell but the most known one by Americans is the NYSE. Thousands of companies use the NYSE to trade their stocks to the public. When these companies are in the news, either for the right or wrong reasons, their stocks rise or fall. Johnson & Johnson is also on the NYSE. Johnson & Johnson is a well known brand, that has a big line of products such as wipes, lotion, talc powder and many other primary personal needs products. During this financial analysis, there will be many information about Johnson & Johnson that the average consumer might not know about.
Johnson & Johnson is known and used worldwide, but many consumers do not know the history behind this wonderful company. According to their main website, Johnson & Johnson was founded as a family business in New Brunswick, New Jersey, in 1886. Brothers Robert, James and Edward Johnson recognized physicians’ needed to improve and simplify hygiene in their practices. The site also stated their main focus was medical products, and that is what made them a success and that is also what made the company grow faster. Any great product will not stay with the same line of product for many years, as they try to expand the brand and that is no exclusion with Johnson and Johnson. According to their site, the Johnson brothers expanded their product line over the next 40 years – to include consumer goods such as tooth floss, sanitary pads and baby powder. Johnson & Johnson was on track for international expansion, which will be covered later on. Smart marketing and great knowledge of their brand and how to expend on it, made them the successful business we know currently.
Gaining national recognition is always hard because many other companies want a piece of the market share, although some companies have more capital than others. Johnson & Johnson had a smart way to get recognition and be known nationwide, and later on, worldwide. According to the Johnson & Johnson site. In the 1940s, Johnson & Johnson broadened its product portfolio in the Medical and Pharmaceuticals areas. The company expanded into Latin America and South America, while entering the markets of several more European countries. Making that transition to the European countries proved to be beneficial as they also expended in Africa and Asia with bigger growth in Europe. When a company is gaining market share worldwide, this will provide power to incorporate many other companies, and that is the same case with Johnson & Johnson, as they added more companies to their brand; McNeil Laboratories from the United Stated and Belgian firm Janssen Pharmaceutica. Even though they were started up in New Jersey, their main area of business is considered to be in Switzerland. On Johnson & Johnson’s website, it states that they have continuously strengthened Switzerland as one of its business locations. Since 1991, a number of production and development businesses in Neuchâtel have together formed a center of excellence for the company’s medical division, with 1,000 employees working on applications in areas such as neurosurgery, sports medicine and orthopedics. Since 2003, the Johnson & Johnson portfolio in Switzerland has also included the innovative implant technology of the company DePuy. Making quality decisions financially and in the market sector has propelled Johnson & Johnson to the next level.
Johnson and Johnson has had a very steady stock rate for the past four years. They had a couple of complications in recent weeks, but since then they have steadily gained their loss on their stocks. Johnson & Johnson has put up their stocks available for purchase in December 1969, opening on $1.25. During that period it also reached a low of $0.91. The lowest the Johnson & Johnson stock has closed was $62,43 in the past five year, precisely in April 2012. The highest the stock has reached occurred in June 2017, where it closed at $132.72. In that span of five years, the growth in the stock is around 112,59%, which is a big jump for the company and investors.
Before investing in any company you will look at their financial statements. Balance sheet, Statement of Cash Flows and Income Statements. Investors will analyze every detail that the company provides before they invest their hard earned money in the company. A couple of data points is are worth looking at for each of these financial statements are:
Income Statement 2016 2015 Growth/Decline
Gross Profit 50,205,000 48,538,000 3.43%
Operating Income 20,645,000 17,556,000 17.60%
EBIT 20,529,000 19,748,000 3.95%
EBT 19,803,000 19,196,000 3.16%
Net Income 16,540,000 15,409,000 7.34%
Balance Sheet 2016 2015 Growth/Decline %
Net Receivables 11,699,000 10,734,000 8.99%
Total Assets 141,208,000 133,411,000 5.84%
Long Term Debt 22,442,000 12,857,000 74.55%
Retained Earnings 110,551,000 103,879,000 6.42%
Total Stockholder Equity 70,418,000 71,150,000 -1.03%
Cash Flows 2016 2015 Growth/Decline %
Operating Activities 18,767,000 19,569,000 -4.10%
Investing Activities -4,761,000 -7,735,000 38.44%*
Financing Activities -8,551,000 -11,136,000 23.21%*
Change in Cash & Cash Equivalents 5,240,000 -791,000 762.45%*
*it is a growth, because they have less debt in comparison to the year before
These financial aspects in the financial statement are those that could be helpful when deciding to buy a stock from a company, is this case, from Johnson & Johnson.
Financial statements can say a lot about a company, but regular consumers won’t look further into the company for more information. Being in the news has a lot of effect on the company for the moment, but as years go by, investors tend to look at the financial ratios of the company. Financial ratios tend to be very versatile and useful because they are a critical quantitative analysis tool. Financial ratios are divided in four basic types: profitability, asset utilization, liquidity and debt utilization ratios. The four ratio types are also divided in ratios. In profitability ratios, there are three ratios; profit margin, return on assets, return on equity. For asset utilization ratios it includes, average collection period, receivable, inventory, fixed asset and total asset turnover. Liquidity ratio is divided in current and quick ratio. Debt utilization ratios include, debt to total assets, times interest earned and fixed charge coverage. Each of them have their own formula and obviously give out specific information that can be useful for investors. The financial ratios and all the aspects of it will be evaluated for the Johnson & Johnson company, how it increased or declined in comparison to the previous year and also how the results can effect in the decision-making process of buying stocks in the company.
The following is a table for the ratios for Johnson & Johnson company between 2014 and 2016, which is the only information available and the most current one.
Financial Ratios 2016 2015 2014
Profit Margin 16,540,000/71,890,000= 23.01% 15,409,000/70,074,000= 21.99% 16,323,000/74,331,000= 21.96
Return on Assets 16,540,000/141,208,000= 11.71% 15,409,000/133,441,000= 11.55% 16,323,000/130,358,000= 12.52%
Return on Equity 16,540,000/70,418,000= 23.49%
15,409,000/71,150,000= 21.66%
16,323,000/69,752,000= 23.40%
Average Collection Period 365/6.14= 59.45 365/6.53= 55.90 365/6.77= 53.91
Receivable Turnover 71,890,000/11,699,000= 6.14 70,074,000/10,734,000= 6.53 74,331,000/10,985,000= 6.77
Inventory Turnover 71,890,000/8,144,000= 8.83 70,074,000/8,053,000= 8.70 74,331,000/8,184,000= 9.08
Fixed Asset Turnover 71,890,000/15,912,000= 4.51 70,074,000/15,905,000 = 4.41 74,331,000/16,126,000 = 4.61
Total Asset Turnover 71,890,000/141,208,000= 0.51 70,074,000/133,411,000= 0.53 74,331,000/130,358,000= 0.57
Current Ratio 65,032,000/26,287,000= 2.47 60,210,000/27,747,000= 2.17 55,744,000/25,031,000= 2.23
Quick Ratio (65,032,000-8,144,000)/26,287,000= 2.16 (60,210,000-8,053,000)/27,747,000= 1.88 (55,744,000-8,184,000)/25,031,000= 1.90
Debt to Total Assets 70,790,000/141,208,000= 50.13% 62,261,000/133,411,000= 46.67% 60,606,000/130,358,000= 46.49%
Times Interest Earned 20,529,000/726,000= 28.28 19,748,000/552,000= 35.78 21,096,000/533,000= 39.58
Fixed charged was removed from the table because there are not enough data provided by the company to deliver the necessary information. If you look at the information closely, most of the ratios suffered a drop in comparison to 2014, due to bad publicity, product that has received bad publicity or just simple bad investment that the company had made that forced them to lose money.
One of Johnson & Johnson’s main competitor is the PFE Company, or better known as Pfizer Inc. They have worked in the past but for a long time they have been competitor. They are also on the NYSE market, but their numbers are more surprising than you think. Their stock
price closed most recently on $36 in comparison to Johnson & Johnson’s $130+ stock. This data that is provided by Yahoo! Finance is for Pfizer Inc. from 2014-2016.
Financial Ratio 2016 2015 2014
Profit Margin 7,215,000/52,824,000= 13.66% 6,960,000/48,851,000= 14.25% 9,135,000/49,605,000= 18.42%
Return on Assets 7,215,000/171,615,000= 4.20% 6,960,000/167,381,000= 4.15% 9,135,000/167,566,000= 5.45%
Return on Equity 7,215,000/59,544,000= 12.12% 6,960,000/64,720,000= 10.75% 9,135,000/71,301,000= 12.81%
Average Collection Period 365/4.69= 77.83 365/4.51= 80.93 365/4.52= 80.75
Receivable Turnover 52,824,000/11,266,000= 4.69 48,851,000/10,838,000= 4.51 49,605,000/10,967,000= 4.52
Inventory Turnover 52,824,000/6,783,000= 7.79 48,851,000/7,513,000= 6.50 49,605,000/5,663,000= 8.76
Fixed Asset Turnover 52,824,000/13,318,000= 3.97 48,851,000/13,766,000= 3.55 49,605,000/11,762,000= 4.22
Total Asset Turnover 52,824,000/171,615,000= 0.31 48,851,000/167,381,000= 0.29 49,605,000/167,566,000= 0.30
Current Ratio 38,949,000/31,115,000= 1.25 43,804,000/29,399,000= 1.49 55,595,000/21,587,000= 2.58
Quick Ratio (38,949,000-6,783,000)/31,115,000= 1.03 (43,804,000-7,513,000)/29,399,000= 1.23 (55,595,000-5,663,000)/21,587,000= 2.31
Debt to Total Assets 112,072,000/171,615,000= 65.30% 102,662,000/167,381,000= 61.33% 96,265,000/167,566,000= 57.45%
Times Interest Earned was not available for calculation because there is no known information on the amount of interest expenses that Pfizer Inc. has to pay. The results of the financial ratios of these two companies against each other, it can be really surprising. Especially when you look at the trends available. The data comparison chart will be for the companies JNJ and PNE for year 2014 to 2016.
The difference is immediately noticeable because it already seems like that Johnson & Johnson is leading in all of the important categories. J&J is leading the profit margin for all the three years, with the closest margin being in 2014. The return on assets is the same, but it appears the margins from 2016 is the closest one. Johnson & Johnson has a better return on equity in all three years and it appears after the results it wasn’t even close. The four closest ratios were the turnover ratios. The companies have great turnover ratios in comparison to each other. Although Johnson & Johnson has the better ratios by a considerably small margin, they are fairly close against each other and could be considered above average turnover ratios. Something that might catch some investors eyes will be the debt to asset ratio. What is interesting on the debt to asset ratio for Johnson & Johnson is that each year the ratio has dropped, meaning the liabilities are less in comparison to the assets that the company has, which will also intrigue investors.
Leverage Analysis 2016 2015 2014
DOL 4.00/2.59= 1.54 -6.39/-5.73= 1.12 —
DFL 20,529,000/(20,529,000-726,000)= 1.04 19,748,000/(19,748,000-552,000)= 1.03 21,096,000/(21,096,000 -533,000)= 1.03
DCL 1.54 x 1.04 = 1.60 1.12 x 1.03 = 1.15 —
Leverage analysis is also important before investing in a company. For bigger companies like Johnson & Johnson, the data is more difficult to acquire, but luckily, there is some data where this information can be attained for leverage. The data being presented are: Degree of Operating Leverage, Degree of Financial Leverage and Degree of Combined Leverage.
For the Degree of Operating Leverage, the formula that was used was percent change in EBIT divided by the percent change in sales. There will be a calculation for Pfizer Inc. for the DOL only because it is stated that the interest expenses are not available in the income statement, therefore there cannot be a calculation for the DFL and the DCL, but there will be a comparison between Johnson & Johnson plus Pfizer Inc. in the Degree of Operating Leverage.
Leverage Analysis 2016 2015
DOL -6.85/8.13= -0.84 -26.76/-1.52= 17.61
Something to point out, when the Degree of Operating Leverage is a negative number, it means that the fixed cost exceeds the contribution, in other words the gross profit that the company has made during that year. The financial way to state this is that the company is operating at a lower level than the break-even point. The DOL in 2015 for Pfizer Inc. is extremely high, while both the percentage change in Earnings Before Interest & Taxes and the percentage change in sales is negative.
Financial analysis really gives anyone a deeper understanding on how the company is doing, if it is really worth investing in, or maybe at that moment is not the right time to put your hard earned money in that company. For this paper, Johnson & Johnson got a thorough analysis, and Pfizer Inc. also got a great analysis. By comparing two competitors in the medical field, investors have a better understanding which one is beneficial for them. While looking at the prices of stocks for both company, the $134 or more by Johnson & Johnson versus the $36 by Pfizer Inc., it would be a no-doubter that Pfizer Inc. would be the right investment due to the price and volume of stock that an investor can buy. The key aspect of the analysis paper that debunk that way of thinking is when the financial ratios are being compared against each other, the rate in which Johnson & Johnson has, especially in their profit margin, and all the other ratios besides Debt to Asset ratio, makes them an easy target for an investment in comparison to Pfizer. Inc.
Personally, if I was a Financial Advisor, and I had the job to decide between Pfizer Inc. and Johnson & Johnson, Johnson & Johnson would be the logical pick. Although the amount the investor has to pay to receive a stock in the company, the trends will make it easier to get a return on investment. If the investor is looking at quality return on investment, Johnson & Johnson is the right investment, especially that they were in the news for some bad publicity, their stocks drop by $3-5 in a span of two weeks, during that time would have been an amazing time to purchase their stocks. Sometimes investors just want to earn some quick cash, then it would be better to spend their money on Pfizer Inc., but if I am a Financial Advisor in this situation, Johnson & Johnson is the right choice.
References
JNJ Income Statement | Johnson & Johnson Stock. (2017, October 06). Retrieved October 07, 2017, from https://finance.yahoo.com/quote/JNJ/financials?p=JNJ
PFE Income Statement | Pfizer, Inc. Stock. (2017, October 05). Retrieved October 07, 2017, from https://finance.yahoo.com/quote/PFE/financials?p=PFE