FIN 320 Final Project Financial Analysis Report

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Southern New Hampshire University *

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Jun 9, 2024

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FIN 320 Final Project Financial Analysis Report Shantavia Burr Southern New Hampshire University Fin 320-Principle Of Finance Yinfei Chen April 21, 2024 Financial Analysis, Financial Evaluation, and Financial Recommendations 1. Financial Analysis A. Financial Calculations: Using the latest quarter’s financial statements for your chosen business and the Financial Formulas spreadsheet, calculate the financial formulas below to assess the business’s financial health.  Working capital: o The working capital for Johnson & Johnson is $9,333,000. With a working capital of $9,333,000, it indicates that the company has significant resources available to cover its short-term obligations and to fund its day-to-day operations. This suggests a healthy financial position in the short term.  Current ratio: o The current ratio for Johnson & Johnson is 1.21, with a current ratio of 1.21 it means that the company has $1.21 in current assets for every $1 in current liabilities. A current ratio above 1 generally indicates that a company has more current assets than current liabilities, which suggests a healthy liquidity position. It implies that Johnson & Johnson has sufficient short-term assets to cover its short-term liabilities.  Debt ratio: o For Johnson & Johnson, with a debt ratio of 0.571, it means that approximately 57.1% of the company's assets are financed with debt. A lower debt ratio generally indicates greater financial stability, as it suggests that the company relies less on debt financing.  Earnings per share: o For Johnson & Johnson, with an EPS of $14,603.41, it indicates a positive sign for investors, indicating that the company is effectively managing its operations and generating value for shareholders. However, it's important to consider the trend of EPS over time to assess the company's growth potential.  Price and earnings ratio: o For Johnson & Johnson, with a P/E ratio of 6.48, it means that investors are willing to pay $6.48 for every $1 of earnings per share. 1

A low P/E ratio of 6.48 may indicate that the company's stock is undervalued relative to its earnings. Investors may view this as an opportunity to buy into the company at a lower price relative to its earnings potential.  Total asset turnover ratio: o With a total asset turnover ratio of 512.82, it means that the company generates $512.82 in sales revenue for every dollar of total assets. A high total asset turnover ratio like 512.82 indicates that Johnson & Johnson is efficiently using its assets to generate sales revenue. It suggests that the company is effectively managing its assets to drive revenue growth.  Financial leverage: o A financial leverage ratio of 2.41 indicates that Johnson & Johnson's assets are financed primarily through debt, with a proportion of debt being 2.41 times greater than equity. This level of leverage suggests that the company has a significant reliance on debt to finance its operations and investments.  Net profit margin: o A net profit margin of 0.412 for Johnson & Johnson means that the company earns a profit of $0.412 for every dollar of revenue generated. In percentage terms, this would be 41.2%. A net profit margin of 0.412 indicates a relatively healthy level of profitability. It suggests that Johnson & Johnson is effectively managing its costs and expenses relative to its revenue, resulting in a substantial portion of revenue translating into profit.  Return on assets: o A return on assets of 211.69 for Johnson & Johnson indicates that the company is generating significant profits relative to its total assets. A high ROA like 211.69 suggests that Johnson & Johnson is efficiently utilizing its assets to generate profits. It indicates that the company's management is effectively deploying its resources to generate returns for shareholders.  Return on equity: o A return on equity of 511.01 for Johnson & Johnson indicates that the company is generating significant returns for its shareholders relative to the amount of equity invested. A high ROE can enhance investor confidence in the company's ability to generate returns. It may lead to higher stock valuations and attract investment capital. B. Working Capital Management: o With a working capital management of $9,333,000, Johnson & Johnson can efficiently cover its short-term financial obligations while maintaining operational agility and flexibility. This level of working capital ensures that the company has ample liquidity to meet its day-to-day operational needs, such as purchasing raw materials, funding production processes, and managing inventory levels. Additionally, it provides a buffer against unexpected expenses or fluctuations in cash flow, enabling the company to navigate market uncertainties and capitalize on growth opportunities more effectively. By effectively managing its working capital at this level, Johnson 2

& Johnson can sustain its operational excellence, support ongoing investments in research and development, and maintain its position as a leader in the healthcare industry. An example of this is with sufficient working capital, Johnson & Johnson can optimize its inventory levels to ensure that it has the right number of raw materials, work-in-progress, and finished goods on hand. This allows the company to meet customer demand efficiently without overstocking or understocking, reducing carrying costs and minimizing the risk of obsolete inventory. C. Financing: Businesses typically finance their operations and expansion through a combination of internal and external sources of capital. Internally, they utilize retained earnings, generated from profits reinvested into the company, to fund day-to-day activities and strategic investments. Effective management of working capital, including optimizing cash flow from receivables, inventory, and payables, also contributes to internal funding. Externally, businesses may seek external financing options such as debt financing, through loans or bonds, to access additional capital for expansion projects, acquisitions, or capital expenditures. Equity financing, including issuing shares to investors or seeking venture capital funding, provides another avenue for businesses to raise capital for growth initiatives. By strategically leveraging a mix of internal and external funding sources, businesses can sustain operations, drive growth, and enhance shareholder value while managing financial risk. D. Short-Term Financing: Potential short-term financing sources with a liability amount of $44,370,000 could assist Johnson & Johnson in raising necessary funds to enhance its financial health by providing quick access to capital for immediate needs. One option is through short-term bank loans or lines of credit, allowing the company to borrow funds for short periods to bridge cash flow gaps or finance urgent expenses. Commercial paper issuance, a form of unsecured short-term debt, offers another avenue for raising funds quickly, leveraging the company's strong creditworthiness. Additionally, trade credit arrangements with suppliers could be utilized to negotiate extended payment terms, allowing Johnson & Johnson to delay cash outflows and preserve liquidity. By strategically utilizing these short-term financing sources, Johnson & Johnson can address liquidity needs, capitalize on growth opportunities, and strengthen its financial position in the short term while maintaining long-term sustainability. E. Bond Investment: o Investing in corporate bonds can offer Johnson & Johnson both benefits and risks. On the benefit side, corporate bonds typically provide a fixed income stream through regular interest payments, offering predictable cash flows that can be used to fund various operational needs or investment initiatives. Additionally, corporate bonds often have higher yields compared to government bonds, potentially providing attractive returns for the company's investment portfolio. Moreover, investing in corporate bonds can diversify Johnson & Johnson's investment holdings, reducing overall portfolio risk. However, there are also risks associated with corporate bond investments. One major risk is credit risk, where the issuer may default on its debt obligations, leading to potential losses for the investor. Johnson & Johnson must carefully assess the creditworthiness of the bond issuer to mitigate this risk, considering factors 3

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such as the issuer's financial health, credit rating, and industry dynamics. Interest rate risk is another consideration, as bond prices typically fluctuate inversely with interest rate movements. Therefore, if interest rates rise, the market value of existing bonds may decline, impacting on the company's investment returns. Ethical considerations are also crucial when investing in corporate bonds, particularly regarding the issuer's business practices, environmental impact, social responsibility, and governance standards. Johnson & Johnson must align its investment decisions with its corporate values and ethical guidelines to ensure responsible investing. Calculations such as yield to maturity (YTM), which measures the annualized return on a bond if held until maturity, and duration, which assesses a bond's sensitivity to interest rate changes, can help Johnson & Johnson evaluate the risk-return profile of potential corporate bond investments and make informed decisions that align with its financial objectives and ethical principles. An example of this is supposed Johnson & Johnson is considering investing in a corporate bond issued by a pharmaceutical company. The bond has a face value of $10,000, a coupon rate of 5%, and a maturity period of 10 years. Given the company's strong financial position and solid credit rating, Johnson & Johnson assesses the bond as having relatively low credit risk. Therefore, the company has decided to invest $100,000 in these bonds. F. Capital Equipment: o Investing in capital equipment presents both risks and benefits for Johnson & Johnson. On the benefit side, acquiring capital equipment can enhance operational efficiency, improve productivity, and reduce production costs over the long term. This can lead to increased profitability and competitiveness for the company. Additionally, owning capital equipment provides greater control and flexibility over production processes, allowing Johnson & Johnson to customize operations to meet specific needs and quality standards. Moreover, investing in capital equipment can support innovation and technological advancement, enabling the company to develop new products and services to address evolving market demands. However, there are also risks associated with capital equipment investments. One major risk is the significant upfront cost of purchasing and installing equipment, which can strain cash flow and financial resources in the short term. Johnson & Johnson must carefully assess the financial feasibility of the investment, considering factors such as the expected return on investment (ROI), payback period, and net present value (NPV) of the project. Additionally, there are ethical considerations related to capital equipment investments, including environmental impact, workplace safety, and labor practices. Johnson & Johnson must ensure that equipment suppliers adhere to ethical standards and regulatory requirements, promoting sustainability and social responsibility throughout the supply chain. By conducting thorough cost-benefit analyses and integrating ethical considerations into decision-making processes, Johnson & Johnson can effectively manage risks and realize the potential benefits of investing in capital equipment to support its long-term growth and success. G. Capital Lease: Choosing to purchase a capital lease offers both risks and benefits for Johnson & Johnson. On the positive side, a capital lease allows the company to acquire essential assets, such as manufacturing equipment or office space, without a substantial initial cash outlay. This preserves liquidity for other strategic investments and operational 4

needs. Additionally, capital leases often provide fixed payments over the lease term, offering predictability and stability in budgeting. However, there are risks associated with capital leases, including the obligation to make lease payments over the lease term, which can strain cash flow and financial resources if not carefully managed. Ethical considerations are crucial when entering capital leases, including transparency in lease agreements, fair treatment of lessors, and adherence to ethical standards in negotiations. Calculations such as the net present value (NPV) of lease payments and the impact on profitability and solvency can help Johnson & Johnson assess the financial implications of the lease. For example, if Johnson & Johnson decides to lease a new research facility under a capital lease arrangement, it can access state-of-the-art facilities while preserving financial flexibility and adhering to ethical principles in lease agreements and facility usage. 2. Financial Evaluation In this section of the report, you will evaluate the three available financial options for the business and recommend which option or options are the best for the business to choose. H. Bond Investment: Considering Johnson & Johnson's financial health and its position as a stable and well- established company, investing in bonds would be a suitable option to further strengthen its financial position. With a strong credit rating and steady cash flows, Johnson & Johnson should invest in high-quality corporate bonds to diversify its investment portfolio and generate additional income. Bonds offer predictable returns and can provide a steady stream of income, which aligns well with Johnson & Johnson's long-term financial objectives. Furthermore, given the company's ethical considerations and commitment to sustainability, investing in bonds issued by socially responsible companies could reflect its values and contribute to its corporate social responsibility initiatives. Additionally, by conducting thorough financial analyses, including calculations such as yield to maturity and duration, Johnson & Johnson can assess the risk-return profile of potential bond investments and make informed decisions that support its financial health and long-term sustainability. I. Capital Equipment: Considering Johnson & Johnson's financial health and strategic objectives, investing in capital equipment could be a prudent option to enhance operational efficiency and support long-term growth. With its strong cash reserves and steady revenue streams, Johnson & Johnson has the financial capacity to make investments in state-of-the-art equipment that can improve productivity, streamline operations, and drive innovation across its diverse portfolio of healthcare products and services. By carefully assessing the financial feasibility of the investment, including calculating metrics such as return on investment and payback period, Johnson & Johnson can ensure that the benefits of the capital equipment investment outweigh the associated costs. Furthermore, ethical considerations, such as ensuring environmental sustainability and workplace safety, should be integrated into the decision-making process to align with the company's corporate values and regulatory obligations. Overall, investing in capital equipment presents an opportunity for Johnson & Johnson to maintain its competitive edge, 5

enhance operational resilience, and deliver value to shareholders and stakeholders alike. J. Capital Lease: Considering Johnson & Johnson's robust financial position and strategic priorities, opting for a capital lease purchase would be a beneficial investment option to support its operational needs while preserving liquidity and financial flexibility. Capital leases allow Johnson & Johnson to access essential assets, such as manufacturing equipment or office space, without a significant upfront cash outlay, enabling the company to allocate capital more efficiently towards other growth initiatives. Additionally, fixed lease payments over the lease term provide predictability and stability in budgeting, supporting long-term financial planning. However, careful financial analysis, including calculations such as the net present value of lease payments and the impact on profitability and solvency, is essential to assess the overall cost-effectiveness of the lease arrangement and ensure alignment with the company's financial objectives. Ethical considerations, such as transparency in lease agreements and adherence to ethical standards in negotiations, should also be integrated into the decision-making process to uphold Johnson & Johnson's corporate values and reputation. Overall, a capital lease purchase presents an opportunity for Johnson & Johnson to acquire necessary assets while managing financial risk and maintaining its commitment to sustainable growth and responsible business practices. 3. Future Financial Considerations: Based on Johnson & Johnson's latest financial indicators, including a healthy working capital of $9,333,000, a moderate debt ratio of 0.571, and robust profitability metrics such as earnings per share of $14,603.41, a price-earnings ratio of 6.48, a return on assets of 211.69, a return on equity of 511.01, and a net profit margin of 0.412, the company is likely to continue demonstrating strong financial performance in the future. The high total asset turnover ratio of 512.82 suggests efficient utilization of assets to generate revenue. However, the relatively high financial leverage ratio of 2.41 indicates a significant reliance on debt financing, which may pose some risk, especially in volatile economic conditions. Overall, Johnson & Johnson's solid financial foundation, coupled with its profitability and efficiency metrics, suggests a positive outlook for its future financial performance, provided it continues to manage its debt levels prudently and sustain its operational excellence. 6

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References (2023, December 31). Johnson & Johnson . Mergent Online. https://www-mergentonline- com.ezproxy.snhu.edu/companydetail.php?compnumber=4593 (2024, January 1). Discover J&J . Johnson & Johnson. https://www.jnj.com/discover-j-j Sheridan, S., Keown, A. J., & Martin, John D, J. D. (2018). Financial management: Principles and applications. Pearson. 7