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Finance Project Essay

1205 words - 5 pages

The following report analyses Johnson and Johnson from a third party perspective. The report will commence with an overview of operations followed by an evaluation of the company; its financial performance, capital structure, and dividend policy. Additionally we aim to provide advice to potential investors based on relevant financing theories to whether or not it is a good company to invest in.
Overview of Johnson and Johnson
As an American multinational, Johnson & Johnson (J&J) is a manufacturer dealing with pharmaceuticals, medical devices and consumer packaged goods. These products have since become household names and have been trusted by consumers at a global level. Having ...view middle of the document...

Financing usually occurs through equity (issue of shares), debt and a mixture of hybrid securities. The debt to equity ratio gives an indication of capital structure, from which certain information for investment decision making can be obtained.
Johnson and Johnson’s debt to equity ratio reveals a number of notable inferences (see appendix).
• Over the last two years the company has had a debt/equity ratio of 18%.
• Compared to recessionary times this has decreased slightly by 1% from 2008 and reached its highest level in 2011 of 23%.
• This implies that the company is lowly geared.
• A lowly geared company is a positive indication for risk averse investors as this means that J&J has a low amount of debt and their exposure to risk in terms of interest rate increases is less likely.
Analysing the structure of an organisation has certain revelations, however it would be more prudent to analyse it in conjunction to the industry by examining its competitors to acquire an indication of the risk the Johnson and Johnson are in:
• Johnson and Johnson’s main competitors Novartis and Pfizer have a debt to equity ratio of 15% and 40% respectively in 2013.
• Once more there is a similar trend in the rise in debt financing from recessionary times(see appendix).
• Compared to their rivals J&J are placed in between, suggesting that the company is in line with the industry trend.
• This ratio cannot be examine on its own and should be examined in conjunction with ratios that indicate its ability to pay its debts.

Ability to service is Debts
Indicators show that Johnson and Johnson is utilizing its assets and managing its liabilities efficiently. Based on the current ratio and quick ratio, they also appear to be able to meet their short term liabilities with their short term assets. An ideal quick ratio is between 1.2:1 and 1.5:1. Johnson and Johnson’s 2013 ratio is 2.20:1, this has been steadily increasing since 2006 and may imply that less cash should be reserved. The optimum acid test ratio is 1:1 and Johnson and Johnson’s is 1.59:1 this demonstrates that they are managing their working capital well.
Novartis have a quick ratio and current ratio of 0.73 and 1.16, this is much lower than the ideals and relatively lower than Johnson and Johnson’s. The quick ratio indicates that the firm may not be able to pay its debts with its most liquid assets and need to better manage their working capital. Given that they have a similar debt to equity ratio of J&J, it would indicate that J&J are...

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