Johnson & Johnson’s Financial Statements Analysis (Essay Sample)

Johnson & Johnson’s Financial Statements Analysis Student’s Name Institutional Affiliation Course Name and Number Instructor’s Name Date of Submission Johnson & Johnson’s Financial Statements Analysis Johnson & Johnson is a multinational pharmaceutical and medical technologies company headquartered in the United States. As a publicly traded company, the firm’s stock is listed on the New York Stock Exchange (NYSE). The implication of being a publicly traded company is that the firm is required to periodically provide financial statements to support decision-making by current and potential investors. A ratio analysis is one of the tools available to investors to determine the profitability of the financial health of a company over a specific period. The following is a summary of the financial performance of Johnson & Johnson based on the comprehensive ratio analysis. One of the primary goals of any organization is to maximize profitability. According to the agency theory of management, the managers of a company are expected to serve as agents for the shareholders (Carney et al., 2020). In this case, the managers should make decisions aimed at maximizing profitability. Therefore, a ratio analysis is critical to determine if the managers of Johnson & Johnson have met the requirements of their agency relationship with the shareholders. The firm’s return on assets declined from 11.7% in 2021 to 9.71% mainly resulting from a decline in net income. Although there is no universally agreed optimal return on asset ratio, a return of above 10% is considered plausible, implying that the firm’s performance in 2021 was plausible but this performance deteriorated in the 2022 financial year (Spiceland et al., 2022). However, this drawback is overcome by the excellent return on equity standing at 28.35% and 24.24% for 2021 and 2022 respectively. Notably, although there was a decline in the return on equity ratios, both years recorded a return of above 10% which is considered excellent. Overall, it is notable that there was a marginal decline in the firm’s profitability metrics from 2021 to 2022, but the performance remains positive. Liquidity is an important aspect of a company’s prospect of sustaining profitability in the long term. Specifically, liquidity ensures that a firm has the resources required to meet all short-term financial obligations (Carney et al., 2020). Based on the financial ratios, it is notable that the firm’s liquidity deteriorated between 2021 and 2022. For example, the current ratio declined from 1.35 in 2021 to 0.99 in 2022. Since the optimal current is 1, the ratios imply that the firm’s current assets in 2022 would not be sufficient to cover the current liabilities (Spiceland et al., 2022). Similarly, the liquidity as measured by the quick ratio worsened from 1.12 to 0.77, a situation underlined by a negative net working capital in 2022. To sustain long-term profitability, the firm needs to ensure that the current assets are at least sufficient to offset the current liabilities. Activity analysis ratios seek to show a company’s operating efficiency by summarizing the use of the firm’s assets to generate sales. A good performance as measured by the ratios is likely to translate to improved profitability. In the case of Johnson & Johnson, it is notable that the firm’s performance is below optimal. For example, the asset’s turnover of 0.53 and 0.51 for the 2021 and 2022 financial years respectively imply that the firm is relatively in using the assets to generate revenue (Spiceland et al., 2022). In terms of capital structure, the goal is to strike an optimal balance between equity and debt financing. Ideally, debt generated tax savings since interest on debt is ...