Financial Analysis Methods
Organizations rely on financial statements to carry out important business decisions. The statements are typically compiled into a cohesive document, which allow managers to evaluate, based on various financial analysis methods. This process involves a comparison of ratio outcomes from the financial statements. Collectively, the ratios are used to execute financial analysis of business operations, to assess profitability and viability. This requires you to apply financial analysis methods, choose the best method to evaluate financial outcomes for your case, and explain why this method should be used over other methods.
Submit a minimum 2-page report that:
· Defines and describes various financial analysis methods, such as vertical and horizontal analysis.
· Explains how and why each method would be used in an organization's financial review process.
· Compares the similarities and differences among the methods.
· Using the financial statements for your case, examine how at least one of the methods can be used.
· Support your position with the actual ratio outcome(s).
· Explain WHY this method should be used over the others, based on case financial challenges.
Using Financial Statements
I. Total current assets and total current liabilities for JNJ
From 2017 annual report; Total current assets = 43.09B & Total Current Liabilities = 30.54B
II. Current ratio for JNJ; For 2016 & 2017 fiscal years
Current ratio of a company is a liquidity ratio which weighs the company’s ability to pay its short-term obligations. It is calculated as Total Current Assets ÷ Total Current Liabilities
JNJ 2016
Total Current Assets = 65.03B; Total Current Liabilities = 26.29B
Current ratio = 65.03/26.29 = 2.47: This current ratio indicates ability of JNJ to pay off its liabilities 2.47 times. This is a strong financial strength indicator.
JNJ 2017
Total Current Assets = 43.09B; Total Current Liabilities = 30.54B
Current ratio = 43.09/30.54 = 1.41: A current ratio of 1.41 indicates good short-term strength financially. In the short-term JNJ will be able to pay off debts comfortably
III. Review of JNJ data reports for 2016 and 2017:
· Net JNJ Cash Flows from Operating Activities
Johnson & Johnson and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Millions)
|
Cash flows from operating activities |
2016 |
2017 |
|
Net earnings |
16540M |
1300M |
|
Depreciation and Property amortization |
3754M |
5642M |
|
Compensation (Stock based) |
878M |
962M |
|
Asset written down |
283M |
795M |
|
Net gain on sale of assets |
(563M) |
(1307M) |
|
Provision for deferred tax |
(341M) |
2406M |
|
Allowances for Accounts receivable |
(11M) |
17M |
|
Increase in Accounts receivable |
(1065M) |
(633M) |
|
Increase in inventories |
(249M) |
581M |
|
Increase in accrued liabilities and accounts payable |
656M |
2725M |
|
Increase in other current and non-current assets |
18M |
(411M) |
|
Increase in other current and non-current liabilities |
(1133M) |
8979M |
|
Changes in assets/liabilities, net effects from their exchange |
(1773M) |
11241M |
|
Adjustment to reconcile net earnings to cashflows from operating activities |
2227M |
19756M |
|
Net cash flows from operating activities |
18767M |
21056M |
· Net Cash used by JNJ in Investing Activities
Johnson & Johnson and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Millions)
· Net Cash used by JNJ on Financing Activities
Johnson & Johnson and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Millions)
|
|
2016 |
2017 |
|
Net cash used by Investing activities |
(4761M) |
(14868M) |
|
Cash flows from financing activities |
|
|
|
Shareholder dividends |
(8621M) |
(8943M) |
|
Common stock repurchases |
(8979M) |
(6358M) |
|
Gains from short-term debt |
111M |
869M |
|
Retirement of short-term debt |
(2017M) |
(1330M) |
|
Gains from long term debt |
12004M |
8992M |
|
Retirement of long-term debt |
(2223M) |
(1777M) |
|
Proceeds from stock options/ Net withholding tax |
1189M |
1062M |
|
Miscellaneous uses |
(15M) |
(188M) |
|
Net Cash used by Financing Activities |
(8551M) |
(7673M) |
· Cash and Cash Equivalents accruing to JNJ at the end of the Fiscal Years
Johnson & Johnson and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Millions)
|
|
2016 |
2017 |
|
Net Cash used by Financing Activities |
(8551M) |
(7673M) |
|
Effect of exchange rate changes on cash and cash equivalents |
(215M) |
337M |
|
Increase in cash and cash equivalents |
5240M |
(1148M) |
|
Cash and cash equivalents at the end of the Year |
18972M |
17824M |
IV. Balance sheet for JNJ for the last two years; 2016 and 2017
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At January 1, 2017 and January 3, 2016
For 2017
JOHNSON AND JOHNSON CORPORATION
CONSOLIDATED BALANCE SHEET
At December 31, 2017 and January 1, 2017
|
Assets |
|
Current Assets |
|
Cash and short-term investments 18.3B |
|
Cash 17.82B |
|
Short Term Investments 472M |
|
Total Accounts Receivable 13.49B |
|
Accounts Receivable Gross 13.78B |
|
Bad Debts (291M) |
|
Inventories 8.77B |
|
Finished Goods 5.31B |
|
Work in Progress 2.32B |
|
Raw Materials 1.14B |
|
Other Current Assets 2.54B |
|
Total Current Assets 43.09B |
|
Fixed Assets |
|
Property, Plant and Equipment |
|
Net Property, Plant & Equipment 17.01B |
|
Gross Property, Plant & Equipment 41.47B |
|
Buildings 11.24B |
|
Land & Improvements 829M |
|
Accumulated Depreciation 24.46B |
|
Long Term Investments & Funds |
|
Total Investments and Advances 751M |
|
Other Long-Term Investments 751M |
|
Intangible Assets |
|
Intangible Assets 85.13B |
|
Net Goodwill 31.91B |
|
Net other intangible assets 53.23B |
|
Other Assets 4.22B |
|
Other tangible Assets 3.69B |
|
Total Assets 157.3B |
|
|
|
Liabilities & Shareholders’ Equity |
|
Current liabilities |
|
ST Debt & Current Portion LT Debt 3.91B |
|
Short Term Debt 2.41B |
|
Current Portion of Long Term Debt 1.5B |
|
Accounts Payable 7.31B |
|
Income Tax Payable 1.85B |
|
Other Current Liabilities 17.47B |
|
Accrued Payroll 2.95B |
|
Miscellaneous current liabilities 14.51B |
|
Total Current Liabilities 30.54B |
|
Long Term liabilities |
|
Long-Term Debt 30.68B |
|
Provision for Risks & Charges 10.07B |
|
Deferred Taxes 1.26B |
|
Deferred Taxes-credit 8.37B |
|
Deferred Taxes-debit 7.11B |
|
Net Other Liabilities 17.49B |
|
Other liabilities 17.49B |
|
Deferred Income - 0 |
|
TOTAL LIABILITIES 97.14B |
|
Shareholders’ Equity |
|
Total Common Equity 60.16B |
|
Common Stock Par/Carry Value 3.12B |
|
Retained Earnings 101.79B |
|
Cumulative Translation Adjustment (7.35B) |
|
Unrealized Gain/ Securities Loss 232M |
|
Treasury Stock (31.55B) |
|
Revaluation Reserves - 0 |
|
Total shareholders' Equity 60.16B |
|
Total liabilities & shareholders’ equity 157.3B |
V. Graphical displays with indication of positive or negative financial trends for the organization and investors. (Solution in excel)
VI. Year when Johnson & Johnson appeared to be in a stronger financial position and differences between the 2 years.
The company appears to have been in a better financial position in 2016. Current assets declined from 65.03B in 2016 to 43.09B in 2017 as current liabilities increased from 26.29B to 30.54B. Also, although long-term assets increased from 76.18B in 2016 to 114.21B in 2017, long-term liabilities increased from 44.5B in 2016 to 66.6B in 2017. Moreover, accumulated depreciation increased from 21.86B in 2016 to 24.46B in 2017. Net cash used for investing activities further decreased from negative cash flows of 4.761B to 14.868B which is an indication of less investments in 2017 compared to 2016. Also, cash and cash equivalents decreased from 18.972B in 2016 to 17.824 in 2017 as net cash for financing activities reduced to 7.673B in 2017 from 8.551B in 2016.
REFERENCE
Johnson & Johnson (2017). 2016 annual report of Johnson & Johnson. Retrieved from:
https://jnj.brightspotcdn.com/88/3f/b666368546bcab9fd520594a6016/2017-0310-ar-bookmarked.pdf
Johnson & Johnson 2017. 2017 annual report of Johnson & Johnson. Retrieved from
http://www.jnj.com/document/2017-annual-report?id=00000162-2469-d298-ad7a-657fef1c0000.pdf