PES University

Fundamentals Of Financial
Accounting’s
Mini Project
By Madhu Muskan
SRN : PES1UG22BB143

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 Ratio Analysis of Johnson & Johnson Company

Abstract

Accounting managers mostly employ financial statement and ratio analysis to for all intents and purposes
determine an organization''s basically present performance and historical patterns, which kind of is quite
significant. In light of this, this study gives a ratio analysis of Johnson & Johnson Company\'s financial
information, for all intents and purposes contrary to popular belief. The financial information definitely was
for all intents and purposes gathered from the Yahoo Finance website, indicating the accuracy of the data
utilised in this study, demonstrating that accounting managers for all intents and purposes employ financial
statement and ratio analysis to for the most part determine an organization\'s kind of present performance
and historical patterns in a very major way. The corporation accrues a sort of large margin of very current
liabilities, which reduces the margin of sort of current and pretty quick ratio, according to the liquidity ratio
research in a very big way. The corporation achieves a much bigger margin of turnover over its assets,
according to the activity ratio research.Due to the increased availability of definitely long-term borrowing,
the debt ratio implies a sort of higher margin of risk for the company\'s future, demonstrating how the
financial information specifically was specifically gathered from the Yahoo Finance website, indicating the
accuracy of the data utilised in this study, demonstrating that accounting managers really employ financial
statement and ratio analysis to particularly determine an organization\'s generally present performance and
historical patterns, which generally is fairly significant. Profitability analysis reveals that the business may
really make much more money than all of its costs, showing how in light of this, this study gives a ratio
analysis of Johnson & Johnson Company\'s financial information in a subtle way.

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INTRODUCTION

“An American company called Johnson & Johnson creates and provides pharmaceutical, medical, and
consumer packaged goods (JNJ, 2020). The business has invested much in various forms of research and
cutting-edge techniques that it can employ for the effective execution of the various items it has been
introducing. The target market for the products is mostly the younger generation.The business functions as a
holding company that is involved in the creation, manufacture, and sale of products for the healthcare
industries. Johnson & Johnson offers a variety of over-the-counter pharmaceuticals to its clients, including
Tylenol medications, Acuvue contact lenses, Johnson baby care products, Aveeno beauty care products,
Dabao, and Tylenol-branded acetaminophen products (JNJ, 2020)69.

Ratio analysis, according to Yun et al. (2018), aids in the evaluation of information from an organization's
historical and present financial records. This study makes it possible to comprehend the organisation
correctly. This makes it easier to comprehend the organization's development from its inception and how
successful it is becoming. Ratio analysis aids in detecting the performance trend line of an organisation over
time, indicating whether or not the business is profitable. According to Choi et al. (2018), ratio analysis is a
crucial technique for identifying every area of an organisation that affects judgments about the general
health of the company.Ratio analysis is crucial for investors as well because it provides a clear picture of
corporate performance through time and aids in determining what the company expects for the future.
Short Introduction
Name: Johnson & Johnson

Symbol for trading: JNJ

Stock market: New York Stock Exchange (NYSE)

Number of outstanding shares of common stock: 2,629,179,895

Industry: Medical Care

Sector: Biotechnology, pharmaceuticals, and life sciences

Country: the United States”

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Data and Methodology

“Data sources actually show how to properly gather the needed data and specifically carry out study, which
is actually rather crucial. In most cases, it also implies that the information must be gathered directly from an
official website because, in their opinion, it offers information that is essentially accurate for use in all
projects. Contrary to what is often believed, it is therefore an essential component of the project. The
majority of this study is based on a subtle examination of Johnson & Johnson Company's financial
performance.In that regard, the data source known as Yahoo Finance is essentially being used in this study,
proving that data sources primarily suggest the method to truly acquire the necessary data and for the most
part perform research, which is extremely vital. They essentially believed that the data they had gathered
related to the Johnson & Johnson Company's most recent four-year performance. In order to essentially
examine the accounting ratio, it is necessary to primarily collect the data from the financial statements of
Johnson & Johnson Company, illustrating how the obtained data sort of correspond to the company's most
recent four years of performance in a significant way. This usually implies that this research is actually
based on the financial performance analysis of Johnson & Johnson Company in a basically big way since it
suggests a generally greater margin of sales for the company in 2019, which is normally about $82,059
million (Yahoo, 2020).However, the information is also sort of taken from the income statement and balance
sheet of the business over the last four years of operations, further demonstrating how the research is mostly
based on an evaluation of the financial performance of the Johnson & Johnson Company. Data sources
essentially show how to specifically collect the necessary data and kind of accomplish research, which is
actually quite significant (Al Breiki & Nobanee, 2019). The balance sheet indicates the really long-term
ethics and efficiency of the firm, which actually helps in achieving sustainability in the future.According to
Alnuaimi and Nobanee (2020), the income statement consists of the organization's regular expenses and
income, which actually aids in upholding business ethics by reducing the generally short-term obligations
and generating somewhat higher revenue. This shows that in order to analyse the accounting ratio, it is
essentially necessary to gather data from the financial statements of Johnson & Johnson Company. In a huge
fashion, all the statistics and data that have been gathered are normally listed here.”

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 Ratio Analysis
“The study or analysis of the line items included in the company's financial accounts is referred to as ratio
analysis. It can be used to evaluate a number of business-related aspects, including efficiency, profitability,
liquidity, and solvency.
Since financial statements are the main source of information for external analysts, ratio analysis is mostly
carried out by them.
The analysts heavily rely on the past and present financial accounts to gather crucial information for
analysing the company's financial performance. The information or data gathered in this way during the
study is useful in identifying whether a company's financial situation is improving or deteriorating.
Different Types of Ratio Analysis
1. Liquidity Ratios: Liquidity ratios are useful for figuring out whether a company will be able to pay its
debts by utilising its present assets. When there is a financial crisis, the business might use its assets and
sell them to get money to pay off its debts.
The quick ratio, current ratio, cash ratio, and others are some of the most often used liquidity ratios. In order
to assess a company's ability to settle its debts as they fall due during the current accounting period,
creditors, suppliers, and any type of financial institution, including banks and money lending companies,
utilise liquidity ratios.

i. Current Ratio: The link between current assets and current liabilities is established by the current ratio.
It serves as a gauge of whether the company will be able to pay its short-term debts when they become
due.
Calculation: The following formula is used to determine current ratio:
Current Ratio= Current Assets
It is stated as a "Pure Ratio," such as 2: 1. It should be emphasised that the Current Ratio is determined as of
a specific date rather than for a specific time period.

ii. Liquid Ratio/Quick Ratio/Acid Test Ratio: The liquidity ratio, also known as the quick ratio or acid
test ratio, gauges an organization's capacity to satisfy its current liabilities, or short-term financial
commitments. It provides the connection between current liabilities and liquid assets. Computation:
This is how the liquid/quick ratio is determined:
Liquid/Quick Ratio: Liquid or Quick Asset/Current liabilities
It is stated as a "Pure Ratio," such as 1:1.

2. Solvency Ratios: In other words, it is used to assess the long-term viability of an organisation. Solvency
ratios are used to assess a company's long-term viability.
Solvency ratios determine a company's debt levels in relation to its assets, yearly earnings, and equity. Debt
ratio, debt to capital ratio, interest coverage ratio, etc. are a few crucial solvency ratios used in accounting.”
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“Governmental organisations, institutional investors, banks, and other organisations utilise solvency ratios to
assess a company's solvency.
Relevant solvency ratios include:
(1) Debt to Equity Ratio (2) Total Assets to Debt Ratio, (3) Proprietary Ratio; and (4) Interest Coverage
Ratio.
i. Debt to Equity Ratio illustrates the relationship between the company's long-term external equity
(external debts) and internal equity (shareholder funds). It is calculated to evaluate the company's long-
term financial stability. The obligations of the business due to outside parties are known as external
equities or external debts. Long-term borrowings and long-term provisions are among them. They are
shown as non-current liabilities in the balance sheet's equity and liabilities section.An allowance is
established to cover an obligation whose amount is not known but is supplied with the best guess. Even
if the amou may change when the responsibility is settled, long-term provisions are included in external
equities, or external debts, since they are inherently long-term liabilities.
Debt to Equity Ratio -Debt/Equity (Shareholders Funds)
Debt to Equity Ratio is expressed as 'Pure Ratio' say 2: 1.

ii. Total Assets to Debt Ratio

The ratio of total assets to debt illustrates the connection between the company's total assets and long-term
indebtedness.

The following formula is used to calculate the total assets to debt ratio:
Total Assets to Debt Ratio=
Total Assets/ Debt (Long-term Debts)
It is stated as a "Pure Ratio," is 1: 1.

iii. Proprietary Ratio

The owners' money and the total assets are compared using the proprietary ratio.
Pure ratio or percentage can both be used to indicate proprietary ratios.
Proprietary Ratio(as Pure Ratio) = Shareholder’s Fund/Total Assets
Proprietary Ratio(as Percentage)=Shareholder’s Fund/Total Assets x 100

iv. Interest Coverage Ratio

The link between Net Profit before Interest and Tax and Interest on Long-Term Debts is established by the
Interest Coverage Ratio. Since interest is a cost of profit, the ratio is calculated using net profit before
interest and tax.

Interest coverage Ratio: Net Profit before Interest and tax/ Intrest in long term debt= …Times”
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3. Activity Ratios
“Activity ratios, often known as performance or turnover ratios, gauge how well the company has employed
its resources. In other words, these ratios assess how well an organisation makes use of its resources. The
findings are reported in terms of repetitions. These ratios are derived based on the operation's cost of
revenue. A higher turnover ratio indicates greater capital or resource use, which in turn indicates a higher
profitability ratio.
The activity Ratios are:
i. Inventory Turnover Ratio
The average inventory carried during that time period and the Cost of Revenue from Operations, or Cost of
Goods Sold, are related by the inventory turnover ratio. It seeks to ascertain how well inventory is utilised.
Inventory turnover ratio: cost of revenue from operations(cost of goods sold)/ Average Inventory= …
Times
ii. Trade Receivable Turnover Ratio
The sum due in relation to products sold and/or services provided by the company in the regular course of
business is referred to as trade receivables. In other words, trade receivables are the balance due from sales
of goods and/or delivered services. Debtors and bills receivable are examples of trade receivables.
Commercial Receivables The link between Credit Revenue from Operations, Turnover Ratio, and
ie. Net Credit Sales and Average Trade Receivables, or the average of the company's bills and debtors,
year. By dividing the total quantity of trade receivables at the beginning and the end by 2, average trade
receivables are determined.
Trade Receivable Turnover Ratio: Credit Revenue from Operations(net credit sales)/ Average Trade
Receivable= …Times

iii. Trade Payable Turnover Ratio

Trade payables are sums due for purchases of products and/or services made by the company during normal
business operations. Creditors and payable invoices are included. Trade Receivables The turnover ratio
illustrates the link between total or average payables and net credit purchases, whilst the average payment
period or creditors velocity highlights the credit duration that the company has obtained from its creditors.
Trade Payable Turnover Ratio= Net Credit Purchase/Average Trade Payable= …Times

iv. Working Capital Turnover Ratio

The link between working capital and revenue from operations is demonstrated by the working capital
turnover ratio. It displays how many times each rupee invested in working capital results in revenue.
Income from Operations translates to The company's operating operations, or revenue-producing activities,
generate revenue. For non-finance enterprises, it includes net sales and commission, etc., while for finance
companies, it includes interest earned, dividend, profit on sale of securities, etc.”
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If the Revenue from Operations amount is not provided, it may be determined using the Cost of Revenue
from Operations (Cost of Goods Sold).
Working Capital Turnover Ratio= Revenue from Operation/ Working Capital
Or
4. Cost of RevenProfitability Ratio
“The objective of ratios of profitability is to evaluate a company's ability to produce profits in relation to its
costs. A corporation is performing well when its profitability ratio is higher than it was during the prior
accounting period.

By comparing competitor financial results to those of a similar firm, the profitability ratio can also be used
to evaluate the performance of rival companies.
Some of the most popular profitability ratios include return on capital employed, gross profit margin, net
profit margin, etc.
Types of Profitability
i. Gross Profit Ratio
The link between an organization's gross profit and revenue from operations net sales is established by the
gross profit ratio. Calculated and shown as a percentage is the ratio.
Gross Profit Ratio= Gross profit/Revenue from operation x100= …%
ii. Operating Ratio
The link between operating costs (also known as the cost of operating expenses) and revenue from
operations is established by the operating ratio.
The costs incurred by the firm for its daily operations are referred to as operational costs. Employee benefit
costs and other expenses are two examples.
Operating Ratio= (Cost of revenue from operation+Operating expenses)/Revenue from operation x
100
iii. Operating Profit Ratio
The link between Operating Profit and Revenue from Operations, also known as Net Sales, is measured by
the Operating Profit Ratio.
Operating Profit Ratio= Operating Profit/Net Sales(revenue from operation) x100

iv. Net Profit Ratio

The link between net profit and revenue from operations, net sales, and other factors is established by the net
profit ratio. It displays the ratio of net profit to operating revenue.”
Net Profit Ratio= Net Profit After Tax/Revenue from operations(net sales) x100

ue from operations/Working Capital

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v. Return on Investment or Return on Capital Ratio
The link between profit (profit before interest and tax) and capital employed is demonstrated by return on
investment, also known as return on capital employed. Profit or loss is the net outcome of a company'
operations. Owners' (shareholders') cash and loans are the sources, i.e., the money utilised in the company to
make this (profit or loss).
ROI= Net profit before tax and dividend/Capital Employed x100

Ratio Analysis of Johnson & Johnson

Liquidity ratio

Current ratio:
“From 2019 to 2020, Johnson & Johnson's gross profit margin ratio declined, but from 2020 to 2021, it
increased and surpassed 2019 levels.
Calculation 2021
Current ratio = Current assets ÷ Current liabilities
= 60,979 ÷ 45,226 = 1.35
Quick Ratio:

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From 2019 to 2020, Johnson & Johnson's fast ratio declined, but from 2020 to 2021, it increased and
surpassed 2019 levels.
2021 Calculation
Quick ratio = Total quick assets ÷ Current liabilities
= 46,891 ÷ 45,226 = 1.04

Cash Ratio:The cash ratio for Johnson & Johnson increased from 2019 to 2020 and from 2020 to 2021.
2021 Calculation
Cash ratio = Total cash assets ÷ Current liabilities
= 31,608 ÷ 45,226 = 0.70
Solvency ratio
Debt to equity ratio:
From 2019 to 2020, Johnson & Johnson's debt to equity ratio declined, but from 2020 to 2021, it improved
and surpassed 2019 levels.
2021 Calculation
Debt to equity = Total debt ÷ Shareholders’ equity
= 33,751 ÷ 74,023 = 0.46

Debt to equity ratio (including operating lease liability):

From 2019 to 2020, Johnson & Johnson's debt to equity ratio (which includes operational lease liabilities)
got worse, but from 2020 to 2021, it got better and exceeded 2019 levels.

2021 Calculation
Debt to equity (including operating lease liability) = Total debt (including operating lease liability) ÷
Shareholders’ equity
= 34,751 ÷ 74,023 = 0.47

Debt to capital ratio:

From 2019 to 2020, Johnson & Johnson's debt to capital ratio declined, but from 2020 to 2021, it improved
and surpassed 2019 levels.”
2021 Calculation
Debt to capital = Total debt ÷ Total capital
= 33,751 ÷ 107,774 = 0.31

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Debt to capital ratio (including operating lease liability): From 2019 to 2020, Johnson & Johnson's debt-
to-capital ratio (which includes operational lease liabilities) declined, but from 2020 to 2021, it increased
and surpassed 2019 levels.
2021 Calculation
Debt to capital (including operating lease liability) = Total debt (including operating lease liability) ÷
Total capital (including operating lease liability)
= 34,751 ÷ 108,774 = 0.32

Debt to assets ratio:

The debt-to-assets ratio for Johnson & Johnson declined from 2019 to 2020, but then recovered from 2020
to 2021 without returning to the level of 2019.
2021 Calculation
Debt to assets = Total debt ÷ Total assets
= 33,751 ÷ 182,018 = 0.19

Debt to assets ratio (including operating lease liability):

The debt-to-assets ratio for Johnson & Johnson (including operational lease obligation) declined from 2019
to 2020 but then improved from 2020 to 2021 without returning to the level of 2019.
2021 Calculation
Debt to assets (including operating lease liability) = Total debt (including operating lease liability) ÷
Total assets
= 34,751 ÷ 182,018 = 0.19
Financial leverage ratio:
The financial leverage ratio of Johnson & Johnson grew from 2019 to 2020, but then sharply fell from 2020
to 2021.
2021 Calculation
Financial leverage = Total assets ÷ Shareholders’ equity
= 182,018 ÷ 74,023 = 2.46

Interest coverage ratio:

The interest coverage ratio for Johnson & Johnson increased from 2019 to 2020 and from 2020 to 2021.
2021 Calculation
Interest coverage = EBIT ÷ Interest expense
= 22,959 ÷ 183 = 125.46

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Fixed charge coverage ratio:
The fixed charge coverage ratio for Johnson & Johnson increased from 2019 to 2020 and from 2020 to
2021.
74,023 = 0.4

2021 Calculation
Fixed charge coverage = Earnings before fixed charges and tax ÷ Fixed charges
= 23,259 ÷ 483 = 48.16

Profitability Ratios

Gross profit margin

From 2019 to 2020, Johnson & Johnson's gross profit margin ratio declined, but from 2020 to 2021, it
increased and surpassed 2019 levels.
2021 Calculation
Gross profit margin = 100 × Gross profit ÷ Sales to customers
= 100 × 63,920 ÷ 93,775 = 68.16%

Operating profit margin

From 2019 to 2020, Johnson & Johnson's operating profit margin ratio declined, but from 2020 to 2021, it
increased and surpassed 2019 levels.
2021 Calculation
Operating profit margin = 100 × Operating earnings ÷ Sales to customers
= 100 × 23,395 ÷ 93,775 = 24.95%

Net profit margin

From 2019 to 2020, Johnson & Johnson's net profit margin ratio declined, but from 2020 to 2021, it
increased and surpassed 2019 levels.
2021 Calculation
Net profit margin = 100 × Net earnings ÷ Sales to customers
= 100 × 20,878 ÷ 93,775 = 22.26%

ROE
Johnson & Johnson's ROE declined from 2019 to 2020, but subsequently increased and surpassed 2019
levels in 2020 and 2021.

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2021 Calculation
ROE = 100 × Net earnings ÷ Shareholders’ equity
= 100 × 20,878 ÷ 74,023 = 28.20

ROA
Johnson & Johnson's ROA declined from 2019 to 2020, but subsequently increased and surpassed 2019
levels from 2020 to 2021.

2021 Calculation
ROA = 100 × Net earnings ÷ Total assets
= 100 × 20,878 ÷ 182,018 = 11.47%

Short-term activity ratio

Inventory turnover
The inventory turnover ratio for Johnson & Johnson declined from 2019 to 2020 and from 2020 to 2021.
2021 Calculation
Inventory turnover = Cost of products sold ÷ Inventories
= 29,855 ÷ 10,387 = 2.87

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Receivables turnover
The turnover ratio of Johnson & Johnson's receivables increased from 2019 to 2020 and from 2020 to 2021.
2021 Calculation
Receivables turnover = Sales to customers ÷ Accounts receivable trade, less allowances for doubtful
accounts
= 93,775 ÷ 15,283 = 6.14

Payables turnover
In both 2020 and 2021, Johnson & Johnson's payables turnover ratio declined.
2021 Calculation
Payables turnover = Cost of products sold ÷ Accounts payable
= 29,855 ÷ 11,055 = 2.70

Working capital turnover

From 2019 to 2020, Johnson & Johnson's working capital turnover ratio increased, but from 2020 to 2021, it
drastically declined.
2021 Calculation
Working capital turnover = Sales to customers ÷ Working capital
= 93,775 ÷ 15,753 = 5.95

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 Long-term activity ratio
Net fixed asset turnover
“From 2019 to 2020, Johnson & Johnson's net fixed asset turnover ratio declined, but from 2020 to 2021, it
increased and surpassed 2019 levels.

Net fixed asset turnover (including operating lease, right-of-use asset)

From 2019 to 2020, Johnson & Johnson's net fixed asset turnover ratio (including operational lease and
right-of-use assets) declined, but from 2020 to 2021, it increased and surpassed 2019 levels.

Total asset turnover

The total asset turnover ratio for Johnson & Johnson decreased from 2019 to 2020, but subsequently
improved from 2020 to 2021 without returning to the level of 2019.

Equity turnover
The equity turnover ratio for Johnson & Johnson declined from 2019 to 2020 and from 2020 to 2021.”

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Conclusion

“Johnson & Johnson has a distinct pharmaceutical division that primarily provides a wide range of
pharmaceuticals in a number of fundamentally different therapeutic areas, including infectious illness,
pulmonary hypertension, immunology, metabolic disease, cancer, neurology, and cardiovascular disease.
Contrary to popular perception, the organisation mostly serves a rather youthful population. The firm
unquestionably creates items for the many skin types that a newborn has, which is generally really
crucial.According to what they genuinely believed, the liquidity ratio essentially aids in addressing the
organization's liquidity condition with relation to its power to minimise typically present liabilities that
require improvement. Activity Turnover primarily aids in fixing the flaw in the firm, which is often
necessary to convert its assets, notably its inventory, further into revenues, which is fundamentally very
substantial.The debt ratio margin shows a noticeably greater margin of debt availability within the company,
which substantially raises the sort of high margin of danger for the enterprise. This shows that the debt ratio
margin shows a noticeably higher margin of debt availability within the company. However, profitability
ratio primarily demonstrates considerably stronger success in the organization's roughly most recent two
years, highlighting how significantly the organisation is for the relatively young generation.They type of
believed that all of their items in particular use techniques that are somewhat less hazardous or rather safe to
the baby's skin and body. Johnson & Johnson's for all intents and purposes pharmaceutical segment consists
of a wide range of products in a number of therapeutic areas, including infectious disease, pulmonary
hypertension, immunology, and metabolic disease. The data are unquestionably gathered from Yahoo
Finance and show really overall very current and fixed assets, inventories, equity, and liabilities, which are
typically collected from the company's balance sheet.Whereas, the revenue, cost of goods sold, EBIT,
interest expenses, and unquestionably Net Income are collected from the company's income statement,
demonstrating how, contrary to popular belief, the revenue, cost of goods sold, EBIT, interest expenses, and
sort of Net Income are collected from the company's income statement.”

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