Johnson & Johnson (J & J) operates under the drug manufacturing industry (MSN, 2009a) and is engaged in the research and development, manufacture and sale of range of products in the healthcare field. It operates in three segments, which include the Consumer segment, Pharmaceutical segment and Medical Devices and Diagnostics segment. The Consumer segment includes a range of products in the women’s healthcare fields, baby care, oral care, skin care, as well as nutritional and over-the-counter pharmaceutical products.
The Pharmaceutical segment includes products in the therapeutic areas, such as anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, oncology, pain management, urology, immunology, neurology, and virology. The public distributes the company products under this segment directly to retailer, wholesalers, and healthcare professionals for prescription use. The Medical Devices and Diagnostic segment distributes products to wholesalers, hospital, and retailers, used mainly in the professional fields by nurses, therapists, physicians, hospital, diagnostic laboratories, and clinics (Reuters.com, 2009a).
This paper seeks to conduct financial analysis of Johnson & Johnson using its financial statements for the past five years to determine whether the company is worth investing into by looking at the company’s financial performance, liquidity and solvency position, market ratios and dividends conditions for the past five years and. This will paper will also prepare a SWOT analysis and identify the company’s economic moats and potential for growth.
In addition, the paper will definitely look into the company’s characteristics for determining what makes it a good investment condition in relation to competition.
2. Analysis and Discussion
2. 1 Financial Analysis
Financial analysis requires the use of relevant financial ratios to evaluate the company’s financial statements for the past five years. Table I below will start starts the basis of analysis.
2. 1. 1 Profitability and Management Efficiency
Average return on equity (ROE) for 28.76% for the past five years of J & J indicates clear dominance about its past performance in relation to the industry average of 2. 07%. An average of about 28% return on equity from a practically point of view connotes that for every 100 US dollars that the investors make; they expect returns of about 28 dollars. Its ROE is even higher if the basis is the latest 12-month rate of 28. 12% as against the industry average of 10. 56%. These rates appear rather exceptional for a company like J & J given the present condition of the economy.
It is worth noting that return on equity is computed by dividing net profit by the total stockholders’ equity. When compared to bank deposit with an average rate of 0. 25% based on US base rate, J & J’s present ROE makes appears to make more than many times the bank rate earned under normal circumstances. It is also interesting to know whether the company management is efficient aside from profitability. To measure the former, this paper uses return on assets (ROA).
The company’s ROA of 14. 94%for the latest twelve months is still higher than industry average of 1. 07 %. Even using ROA five-year average, the rate of 15. 99% for the company is very much above the industry average of 7. 53%. ROA may indicate both profitability and efficiency measure in terms of profits in relation assets employed in business. ROE in comparison, measures how much management can give back resources invested by stockholders. Using the two ratios, it appears that J & J manifests profitable and efficient results than industry.
The clear profitability and efficiency of the company is additionally proved by the company’s net operating margin and net profit margin. The resulting operating profit margins for the last five years averaged at 25. 45% as against the industry average of 18. 84%. Operating margin is the margin after deducting cost of sales or services and operating expenses (Meigs and Meigs, 1995). The ratios mean that the management of J & J is doing well in management of its business with the presumed participation of its motivated employees in delivering value to customers.
To arrive at net profit margin, J & J’s s operating margin requires some values to be added or deducted still such as interest income, interest expense and other non-operating items. The resulting net profit margin could ether augment or reduce the net operating margin. If there is raise, it would mean that the company is having additional income from non-operating activities but if reduced, it would mean that it is incurring some costs like interest expenses in having to pay the cost of some borrowing for the company.
J & J’s net margin for the latest twelve-month period was posted at 20. 55% as against industry average of 1. 45%. If the rate is compared the operating profit margin, it could be found that net profit margin is lower thereby implying that J & J needed to spend other expenses to finance some of its borrowing. If further connotes that J & J’s is using other people’s money while improving profitability for stockholders. This could explain why the company had very high return on equity as earlier analyzed.
J & J’s profitability ratios such as return to equity, operating profit margin and net profit margin show the capacity of the company from a historical perspective and could indicate a more probable repetition or continuation in the future.
2. 1. 2 Liquidity Liquidity makes a company able to meet its currently maturing obligations. It is measured using the current ratio and the quick asset ratio. In the case of the J & J, the following information in Table II below summarizes some of the information.