Final Analysis Johnson & Johnson commom size income statament 2016-2017 2016 201

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Final Analysis Johnson & Johnson commom size income statament 2016-2017 2016 2017 $71.94| 1.00 Cost of good sold | $21.64 10.30 $3.26| 0.05 $16.5410.23 100.00%! $76.48 30.08%| $25.11 4.53%|$16.37 22.99%| $ 1.30 | 1.00 0.33| 0.21 0.02 100.00% 32.83% 21.40% 1.70% Sales Tax income Net income - we can see that inspire of an increase in the sales, yet the company's net income has decreased this is because of increase in Cost of goods sold and income tax these were the amendments to be done and the analysis of the income statement Johnson &Johnson commom size inome statament 2016-2017 2016 2017 Cash Accounts receivable Accounts payable Reteined earning Total assests 4191 11.7 6.92 110.55 141.21 change 0.18 0.01 0.05-0.003 0.14 0.30 008 13.49 0.05 18.3 0.12 0.09 7.31 0.78 101.79o 157.3 0.65 Common size balance sheet shows that in 2016, the cash was 30% ofthe total assets while in 2017 it decreased to 12% only the company has stopped keeping more cash with them, this might be due to the cash management or the excess cash is being used for the expansion of the company to generate more profit We can never interpret through the figures given only like $11.7 or $13.49 in

Explanation / Answer

See.... I don't know exactly what kind of ratio analysis you have to do, but I can help you with some of my inputs which will help you in doing fundamental analysis of a company.

Financial ratios are the most useful way of comparing a company with its competitors. Financial ratios falls in several categories which are grouped as: Activity, Liquidity, Solvency and Profitability.

1. Acitivity ratios:

Activity ratios are used to measure how efficiently a company utilizes its assets. These ratios provide investors with an idea of the overall operational performance of a firm. These ratios are “turnover” ratios that relate an income statement line item to a balance sheet line item. These ratios measure the rate at which the company is turning over its assets or liabilities. In other words, they present how many times per year inventory is replenished or receivables are collected.

Inventory turnover is calculated by dividing cost of goods sold/turnover by average inventory. A higher turnover than the industry average means that inventory is sold at a faster rate, signaling inventory management effectiveness. Additionally, a high inventory turnover rate means less company resources are tied up in inventory. For example: if the inventory turnover ratio is 2.6x, it means that inventory was “turned over” or replenished 2.6 times during a period of one year. (This equates to inventory being turned over once every 140 days, or 365 days ÷ 2.6.) Hence, a decrease in inventory or an increase in cost of goods sold will increase the ratio, signaling improved inventory efficiency (selling the same amount of goods while holding less inventory or selling more goods while holding the same amount of inventory).

Receivables turnover: The receivables turnover ratio is calculated by dividing total turnover by average receivables. This ratio is a measure of how quickly and efficiently a company collects on its outstanding bills. Or in other words, it indicates how many times per period the company collects and turns into cash its customers’ accounts receivable. For example: The receivables turnover is 7.8x, signaling that, on average, receivables were fully collected 7.8 times during the period or once every 47 days (365 ÷ 7.8). A high turnover compared to that of peers means that cash is collected more quickly for use in the company, but be sure to analyze the turnover ratio in relation to the firm’s competitors. A very high receivables turnover ratio can also mean that a company’s credit policy is too stringent, causing the firm to miss out on sales opportunities. Alternatively, a low or declining turnover can signal that customers are struggling to pay their bills.

Payables Turnover: Payables turnover measures how quickly a company pays off the money owed to suppliers. The ratio is calculated by dividing purchases (on credit) by average payables. For example if our payables turnover of 5.8x suggests that, on average, the firm used and paid off the credit extended 5.8 times during the period or once every 63 days (365 days ÷ 5.8). The payables turnover increases as more purchases are made or as a company decreases its accounts payable. A high number compared to the industry average indicates that the firm is paying off creditors quickly, and vice versa. An unusually high ratio may suggest that a firm is not utilizing the credit extended to them, or it could be the result of the company taking advantage of early payment discounts. A low payables turnover ratio could indicate that a company is having trouble paying off its bills or that it is taking advantage of lenient supplier credit policies.

Asset Turnover: Asset turnover measures how efficiently a company uses its total assets to generate revenues. The formula to calculate this ratio is simply net revenues divided by average total assets. For example if our asset turnover ratio of 0.72x indicates that the firm generates $0.72 of revenue for every $1 of assets that the company owns. A low asset turnover ratio may mean that the firm is inefficient in its use of its assets or that it is operating in a capital-intensive environment.

2. Liquidity Ratios:

Liquidity ratios are some of the most widely used ratios, perhaps next to profitability ratios. These ratios measure a firm’s ability to meet its short-term obligations.

3. Solvency ratio:

Solvency ratios measure a company’s ability to meet its longer-term obligations.

4. Profitability Ratios:

Profitability ratios are arguably the most widely used ratios in investment analysis. These ratios measure the firm’s ability to earn an adequate return. When analyzing a company’s margins, it is always prudent to compare them against those of the industry and its close competitors.

Gross profit margin: Gross profit margin is simply gross income (revenue less cost of goods sold) divided by net revenue. The ratio reflects pricing decisions and product costs. The 50% gross margin for the company, for example shows that 50% of revenues generated by the firm are used to pay for the cost of goods sold.

For most firms, gross profit margin will suffer as competition increases. If a company has a higher gross profit margin than is typical of its industry, it likely holds a competitive advantage in quality, perception or branding, enabling the firm to charge more for its products.

ROA and ROE: Two other profitability ratios are also widely used—return on assets (ROA) and return on equity (ROE).

Return on assets is calculated as net income divided by total assets. It is a measure of how efficiently a firm utilizes its assets. A high ratio means that the company is able to efficiently generate earnings using its assets. While return on assets measures net income, which is return to equity holders, against total assets, which can be financed by debt and equity, return on equity measures net income less preferred dividends against total stockholder’s equity. This ratio measures the level of income attributed to shareholders against the investment that shareholders put into the firm. Financial leverage magnifies the impact of earnings on ROE in both good and bad years. If the firm for example, has an ROA of 5.6%, indicating that for every $1 of company assets, the firm is generating $0.056 in net income. The ROE, for example is 20% suggests that for every $1 in shareholder’s equity, the firm is generating $0.20 in net income.

Conclusion:

Ratio analysis is a form of fundamental analysis that links together the 3 financial statements of the organisation. Using financial ratios, investors can develop a feel for a company’s attractiveness based on its competitive position, financial strength and profitability.

Hope these insights will be helpful for you. Wish you all the Best!

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