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

Question

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

1...COGS as a% of sales increased. But Operating expenses% seems to have decreased from (30.08%-4.53%)=25.55% in 2016 to (32.83%-21.40%)=11.43% in 2017 --resulting in increased before-tax income in the latter year. Income statement for 2016 shows greater Net Income than Taxable income(any ERROR?)--may be because of after-tax income from other sources peculiar to 2016 alone---reason why retained earnings is more in that year. 2..Ideal current ratio is 2:1 meaning it is recommendable to maintain twice the amount of any immediate obligations likely to arise(ie. Within a year) in easily encashable(ie.liquid) current assets. More than 2 is said to be mis-management of excess curent assets losing interest on moneys unnecessarily locked-up . Less than 2 may mean inadequate backing of liquid assets ,in case of any emergent current necessities. Thus, here, 2013-2016 shows un-profitable funds lock-up in current assets . In 2017, the ratio has fallen below the normal of 2--may be due to decrease in cash balance (despite increase in $ accounts payable ) So, the company's liquidity is below normal. 3...Debt to Equity ratio The numerator ,ie. Debt has consistently increased from 2013 thro' 2017, maximum increase being in the year 2017. The denominator, ie. Equity has increased till 2015, after which it has decreased consistently in both 2016 & 2017. $ debt has increased in 2017 ,but Before-tax income % on sales has increased--meaning despite interest expense , the company is able to make increased % of taxable income. This particular ratio has increased more due to reduction in equity , than increase of debt,in 2017. Reduction in total equity may be due to that said in 1 above or any repurchase of stocks. 4.. Debt Ratio As a corollary to the above ratio,Yrs. 2013-2017 shows continuously more& more of debt -funding of assets ,rather than by equity or internal funds. But the point to be noted is that the company's tax income(ie. After interest expense) has increased ,despite the possible increase in interest expense. 5...Total Assets Turnover Ratio Sales generated per $ of total asset employed has been consistently, approximately 50% This needs comparison with industry peers for proper assessment. But sales has increased to a great extent in 2017 compared to the previous years. 6...Inventory turnover On an average, inventory turns over only 3 (maximum )times ina year,ie. It takes 365/3= roughly 120 days or 4 months for inventory to be converted to sales /receivables. Which means, inventory is very slow-moving ,indicating marketing- sales needs to be improved drastically. Inventory stacking- up may also be the reason for increased current assets figure ,in the current ratio. 7...DSO Normally, customer collection is considered good if it takes up a maximium of to 30 days.But here, it takes almost 60 days or nearly 2 months to collect receivables, again lock-up of working capital for regular operations--- which may be the reason for increasingly outside funding. Conclusion about ratios a..For the given level of sales, the company has increased before-tax profits. But ,as the poor inventory turnover & asset turnover figures suggest, company can improve its sales much further by initiating sales promotion & marketing drives. ie. Both current asset & total asset utilisation needs improvement, through much further increase in sales-- which will increase $ profits & retained earnings & total equity, in that order. b..Company's liquidity needs to be improved to be near normal of 2:1.This can be achieved by: 1. Speedier conversion of inventory to sales/receivables 2. Quick collection of receivables 3. Taking full advantage of vendor/supplier credit,ie. paying accounts payables as late as is allowed by the suppliers. c..Increased outside debt-funding , seems to be okay as the company is able to generate surplus after meeting the interest expenses. But a balance needs to be arrived about the optimal capital structure for the company, that balances interest expenses & the profit generated due to the new opportunities of borrowing. d. In essence, working capital management needs immediate improvement. Whether to invest in this company ? Even though ,it has profitable operations, as the asset utilisation is low at present, its profit margin is bound to be low. At the same time , return on equity may be higher , more due to decrease of equity rather than increase of debt,ie. More due to financial leverage. So, 2017 figures suggest ,the time is not suitable for investment right now , but needs to be monitored for a further couple of years-- for working capital management to improve .

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