Business Management

Financial Statement Analysis  Table of Contents Introduction 3 Company Overview 3 Horizontal Analysis of Income Statement and Balance Sheet 4 Importance and Meaning of Horizontal Analysis: 4 Horizontal Analysis of Income Statement: 5 Horizontal Analysis of Balance Sheet: 6 Ratio Analysis 9 Liquidity Analysis: 9 Potential Liquidity Issues of the Competitive Companies: 10 Recommendations: 10 Conclusion 12 References 13  Introduction The financial statement analysis helps to understand the financial situation of an organization. In this report, the financial statement of the Johnson & Johnson (J&J) will be analyzed. Firstly, a horizontal analysis of the income statement and balance sheet of the company will be conducted. Then, the liquidity of the company will be measured using current ratio, quick ratio and cash ratio. After comparing the liquidity of the company with its competitors a recommendation will be provided regarding the investment in the company which will be followed by a brief conclusion. Company Overview Johnson & Johnson (J&J) being established in 1886 has become the world’s largest healthcare company (Directors, 2018). The company is operating in the medical equipment and pharmaceuticals industry with an aim to keep people well at every age and every stage of life. The company offers products to its customers in three broad categories including consumer healthcare, medical devices and pharmaceuticals (Directors, 2018). The products category of the company includes Baby Care, Skin & Haircare, Oral Healthcare, Advanced Sterilization Products etc. As the world’s largest healthcare company, the J&J faces extreme competition from different companies. The major competitors of the company include the Pfizer, Novartis, Glaxo Smith Kline, Abbott, Roche, Bristol Myers Squibb, Procter and Gamble, Merck and Bayer. In its 132 years of operation, the company has managed to create employment for more than 134000 employees globally (Directors, 2018).  Horizontal Analysis of Income Statement and Balance Sheet Importance and Meaning of Horizontal Analysis: The horizontal analysis is considered as the process of comparing the line items of the financial statements of an organization over a number of years (Gibson, 2016). Usually, two or more years are considered while performing a horizontal analysis. The decision-makers use the horizontal analysis to understand the progress and trend of the performance of a particular company. The horizontal analysis is very important while analyzing the financial statement of an organization. The analyst can understand the nature of the company’s performance, the growth of the assets, the sources of fund used to grow the assets, the pattern of company’s investment decision, how well the company is utilizing its resources to generate return for the investors and so on (Robinson, Munter and Grant, 2015). The investors can use such information to decide on their investment strategy. Horizontal Analysis of Income Statement: JOHNSON & JOHNSON (JNJ) INCOME STATEMENT HORIZONTAL ANALYSIS Fiscal Year Ends in December. USD in Millions Years Particulars 2014 2015 2016 2017 2015 2016 2017 Revenue 74331 70074 71890 76450 -5.73% -3.28% 2.85% Cost of revenue 22746 21536 21685 25354 -5.32% -4.66% 11.47% Gross profit 51585 48538 50205 51096 -5.91% -2.68% -0.95% Operating expenses Research and development 8672 9270 9124 10962 6.90% 5.21% 26.41% Sales, General and administrative 21954 21203 19945 21420 -3.42% -9.15% -2.43% Restructuring, merger and acquisition 509 491 309 -3.54% -39.29% Other operating expenses -509 -491 -309 -3.54% -39.29% Total operating expenses 30626 30473 29069 32382 -0.50% -5.08% 5.73% Operating income 20959 18065 21136 18714 -13.81% 0.84% -10.71% Interest Expense 533 552 726 934 3.56% 36.21% 75.23% Other income (expense) 137 1683 -607 -107 1128.47% -543.07% -178.10% Income before taxes 20563 19196 19803 17673 -6.65% -3.70% -14.05% Provision for income taxes 4240 3787 3263 16373 -10.68% -23.04% 286.16% Net income from continuing operations 16323 15409 16540 1300 -5.60% 1.33% -92.04% Net income 16323 15409 16540 1300 -5.60% 1.33% -92.04% The performance of the company in year 2014 has considered as the base year. Figure SEQ Figure \* ARABIC 1 Horizontal Analysis of Income Statement; Calculations are Presented in the Appendix Source: Author The above horizontal analysis of the income statement of the J&J is showing that almost all of the items in the income statement of the company have experienced a negative trend from 2015 to 2017. The revenue of the company has experienced a negative trend in 2015 and 2016 compared to the base year 2014 representing -5.73% and -3.28% decline in revenue respectively. However, in 2017 the revenue has experienced a positive trend representing a 2.85% increase in revenue compared to the base year 2014. The gross profit of the company also experienced a negative trend from 2015 to 2017 representing a negative gross profit of -5.91%, -2.68% and -0.95% from 2015 to 2017 respectively. Though the other income of the company has experienced a 1128.47% increase in 2015, it has experienced a -543.07% and -178.10% decrease in 2016 and 2017 respectively. The net income of the company has experienced a negative trend also. Particularly in 2017, the net income of the company has decreased by -92.04% compared to 2014. Another noticeable trend in the company is the positive trend in the research and development expenses of the company. The research and development expenses of the company have experienced a 6.90%, 5.21% and 26.41% increase from 2015 to 1017 respectively. Horizontal Analysis of Balance Sheet: The horizontal analysis presented below is showing that the total assets of the company have experienced a positive trend representing a 1.75%, 7.69% and 19.97% increase in total assets from 2015 to 2017 respectively compared to the base year’s total assets. However, the current assets of the company have experienced a -27.35% decreased in 2017. The current liabilities of the company also experienced a positive trend from 2015 to 2017 representing a 10.61%, 4.79% and 21.73% increase in current liabilities respectively. The total liabilities of the company also experienced a significant increase from 2015 to 2017. The total liabilities have increased from 1.46% in 2015 to 58.30% in 2017. The shareholder’s equity of the company experienced a decreasing trend from 2015 to 2016 and a negative trend in 2017. The shareholder’s equity of the company has decreased by -13.75% in 2017. This results analysis indicates that the company used a substantial amount of leverage to finance its increasing assets which may increase the financial risk of the company. JOHNSON & JOHNSON (JNJ) BALANCE SHEET HORIZONTAL ANALYSIS Fiscal year ends in December. USD in Millions Years Years Particulars 2014 2015 2016 2017 2015 2016 2017 Assets Current assets Cash and cash equivalents 14523 13732 18972 17824 -5.45% 30.63% 22.73% Short-term investments 18566 24644 22935 472 32.74% 23.53% -97.46% Total cash 33089 38376 41907 18296 15.98% 26.65% -44.71% Receivables 10985 10734 11699 13490 -2.28% 6.50% 22.80% Inventories 8184 8053 8144 8765 -1.60% -0.49% 7.10% Deferred income taxes 3567 -100.00% -100.00% -100.00% Prepaid expenses 3486 3047 3282 2537 -12.59% -5.85% -27.22% Total current assets 59311 60210 65032 43088 1.52% 9.65% -27.35% Non-current assets Gross property, plant and equipment 36685 36648 37773 41466 -0.10% 2.97% 13.03% Accumulated Depreciation -20559 -20743 -21861 -24461 0.89% 6.33% 18.98% Net property, plant and equipment 16126 15905 15912 17005 -1.37% -1.33% 5.45% Goodwill 21832 21629 22805 31906 -0.93% 4.46% 46.14% Intangible assets 27222 25764 26876 53228 -5.36% -1.27% 95.53% Deferred income taxes 3396 5490 6148 7105 61.66% 81.04% 109.22% Other long-term assets 3232 4413 4435 4971 36.54% 37.22% 53.81% Total non-current assets 71808 73201 76176 114215 1.94% 6.08% 59.06% Total assets 131119 133411 141208 157303 1.75% 7.69% 19.97% Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 3638 7004 4684 3906 92.52% 28.75% 7.37% Accounts payable 7633 6668 6918 7310 -12.64% -9.37% -4.23% Taxes payable 500 750 971 1854 50.00% 94.20% 270.80% Accrued liabilities 10563 10851 11038 14514 2.73% 4.50% 37.40% Other current liabilities 2751 2474 2676 2953 -10.07% -2.73% 7.34% Total current liabilities 25085 27747 26287 30537 10.61% 4.79% 21.73% Non-current liabilities Long-term debt 15122 12857 22442 30675 -14.98% 48.41% 102.85% Deferred taxes liabilities 3154 2562 2910 8368 -18.77% -7.74% 165.31% Other long-term liabilities 18006 19095 19151 27563 6.05% 6.36% 53.08% Total non-current liabilities 36282 34514 44503 66606 -4.87% 22.66% 83.58% Total liabilities 61367 62261 70790 97143 1.46% 15.36% 58.30% Stockholders' equity Common stock 3120 3120 3120 3120 0.00% 0.00% 0.00% Retained earnings 97245 103879 110551 101793 6.82% 13.68% 4.68% Treasury stock -19891 -22684 -28352 -31554 14.04% 42.54% 58.63% Accumulated other comprehensive income -10722 -13165 -14901 -13199 22.78% 38.98% 23.10% Total stockholders' equity 69752 71150 70418 60160 2.00% 0.95% -13.75% Total liabilities and stockholders' equity 131119 133411 141208 157303 1.75% 7.69% 19.97% The financial position of the company in year 2014 has considered as the base year. Figure SEQ Figure \* ARABIC 2 Horizontal Analysis of Balance Sheet; Calculations are Presented in the Appendix Source: Author  Ratio Analysis Liquidity Analysis: 2016 2017 Formula Current Ratio 2.47 1.41 Current Ratio= Current Assets/Current Liabilities Quick Ratio 2.04 1.04 Quick Ratio= Quick Assets*/Current Liabilities Cash Ratio 0.72 0.58 Cash Ratio = Cash & Cash Equivalents/Total Current Liabilities *Quick Assets= Total Current Assets-Inventories-Prepaid Expense Figure SEQ Figure \* ARABIC 3 Liquidity Analysis of J&J; Calculations are Presented in the Appendix Source: (Investor.jnj.com, 2018) The ratio analysis presented above is showing that the overall liquidity of the company has experienced a decreasing trend from 2016 to 2017. The current ratio of the company has decreased from 2.47 to 1.41 which indicates that the company’s ability to meet its short-term obligations using its current assets has decreased. The quick ratio of the company has decreased from 2.04 to 1.04 which also showing the weakening liquidity of the company. The cash ratio of the company also representing that the company will not be able to meet its current liabilities using its cash and cash equivalents. The cash ratio of the company is below 1 which is not a good sign for the company’s financial strengths. In 2016 and 2017, the company has invested $9124 and $10962 million in the R&D which impacted the availability of the cash and cash equivalents of the company. Potential Liquidity Issues of the Competitive Companies: The liquidity is referred to as the company’s ability to pay its short-term obligations using its current assets (Williams and Haka, 2015). The standard liquidity ratio varies from industry to industry. Though the company’s liquidity has significantly decreased in 2017 compared to 2016, the liquidity of the company is still within a reasonable range compared to the industry average. The average quick ratio of the company is above 0.80 and the quick ratio of the J&J was 1.04 in 2017. However, the company might face some difficulties in meeting its current liabilities using its cash and cash equivalents. But the company has enough current assets to meet its short-term financial needs. The liquidity of the J&J’s major competitors is also within a close range to the J&J’s liquidity. For example, the current ratio and quick ratio of Pfizer was 1.35 and 1.03 in 2017, of Novartis was 1.21 and 0.88, for GSK was 0.60 and 0.36. As noticeable, the financial health of the J&J is satisfactory compared to its competitors and industry average. Recommendations: The above analysis has revealed that the J&J is maintained its financial strengths at a satisfactory level compared to its competitors. According to the horizontal analysis of the balance sheet of the company, it is noticeable that the company’s total assets are experiencing a positive trend which is one of the major strengths of the company. The horizontal analysis of the income statement of the company is showing that the R&D expenditure of the company is also increasing. As the long-term survival of the pharmaceuticals industry largely depends on the R&D, it is a good sign for the company that its R&D resources are increasing. The financial health of the company is also very strong compared to its competitors and industry average. However, the company depends on a high level of leverage to finance its assets which a major weakness of the company. The stockholders’ equity of the company also experienced a negative trend which is also a weakness of the company. The company also doesn’t have enough cash & cash equivalents to meet its total current liabilities. Considering the strengths and weaknesses of the company, it can be suggested that individuals who are looking for a long-term investment opportunity, the J&J will be a suitable investment option for them. In case of short-term investors, this company might not be a good investment option as the current net income is experiencing a negative trend and it will take time to reflect the benefits of R&D and merger and acquisition initiated by the company in its financial statements.  Conclusion The above report analyzed the financial statements of the J&J. Though the horizontal analysis of the income statement showed a negative trend in most of the line item, the company is doing great in maximizing the wealth of the company. The ratio analysis also revealed a strong financial health of the company. Considering the strengths and weaknesses of the company, it is safe to suggest a long-term investor for investing in this company.  References Directors, B. (2018). About Johnson & Johnson. [online] Content Lab - U.S. Available at: https://www.jnj.com/about-jnj [Accessed 19 Aug. 2018]. Gibson, C. (2016). Financial statement analysis. 11th ed. Mason, Ohio: South-Western. Investor.jnj.com. (2018). SEC Filings - Johnson & Johnson. [online] Available at: http://www.investor.jnj.com/sec.cfm [Accessed 19 Aug. 2018]. Robinson, T., Munter, P. and Grant, J. (2015). Financial statement analysis. 12th ed. Upper Saddle River, N.J.: Pearson/Prentice Hall. Williams, J. and Haka, S. (2015). Financial accounting. 11th ed. Running Head: FINANCIAL STATEMENT ANALYSIS 1 FINANCIAL STATEMENT ANALYSIS 10