FIN 320 5-1 Activity Working Capital Management - Roleshia Bickham

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Roleshia Bickham Southern New Hampshire University FIN-320 5-1 Activity: Working Capital Management Alex Merrill July 30, 2023
Analyzing a company’s financial statement will help determine the financial health of a company. There are three main types of financial statements: income statements, balance sheets, and cash flow statements. An income statement focuses on the revenues and expenses, gains, and losses of a company. A balance sheet is a summary of a company’s assets, liabilities, and shareholder equity. A cash flow statement shows the flow of cash within an accounting period. It’s how cash enters and exits a company. To determine the working capital, you will need the company’s balance sheet. The calculation for working capital is current assets minus current liabilities. To determine the current ratio, you will divide current assets by current liabilities. The company that I chose was Jonson & Johnson. Based on the 1 st quarter report for 2023 dated April 2, 2023, the amount of their current assets is $64,388,000, and the current liabilities amount is $60,373,000. The total working capital is $4,015,000 ($64,388,000 - $60,373,000). The current ratio is 1.067 ($64,388,000 / $60,373,000). “Good business management is the ability to utilize working capital management to maintain a solid balance between growth, profitability, and liquidity. Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business. The goal of working capital management is to maximize operational efficiency which helps maintain smooth operations and can help to improve the company’s earnings and profitability” (Hawley, 2022). Based on the above working capital results, Johnson & Johnson is still able to maintain stable financial health. Their current ratio is 1.067. “If their ratio was less than one, this is indicative that there may be potential future liquidity problems. Also, having a solid financial ground in terms of liquidity is having a ratio of 1.5 to 2” (Maverick, 2022b). They have fallen
short. Based on the financial state of the company and the comparison of prior quarterly statements, there is a potential for cash inflows at the end of their fiscal year. Based on Johnson & Johnson’s 2022 Annual Report, they have 60 straight years of increased dividends. They are ranked #1 on Fortune’s Most Admired Companies list for the pharmaceutical industry. Johnson & Johnson also has $14.6 billion invested in R&D, 29 brands and platforms with more than $1 billion in sales in 2022, 65% of 10-year free cash flow returned to shareholders, $17.7 billion invested in mergers and acquisitions, and a AAA credit rating (Mergent, n.d.). “Johnson & Johnson is now forecasting full-year sales of $98.80 billion to $99.80 billion, raising its 2023 adjusted earnings outlook to $10.70 to $10.80 per share” (Constantino, 2023). The total working capital based on the 2022 annual report is $(508,000.00) ($55,294,000 - $55,802,000). The 2022 current ratio is 0.9909 ($55,294,000 / $55,802,000). The quarterly findings compared to the analysis from the 2022 annual report, the company has slowly increased its working capital and is no longer in the negative. Based on the future financial outlook in addition to the quarterly working capital, the company’s financial growth looks promising.
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Reference Constantino, A. K. (2023, July 20). Johnson & Johnson beats on earnings, hikes full-year guidance as medtech sales surge. CNBC . https://www.cnbc.com/2023/07/20/johnson- johnson-jnj-q2-earnings-report-2023.html#:~:text=J%26J%20is%20now%20forecasting %20full,%2410.60%20to%20%2410.70%20per%20share . Hawley, J. (2022). The importance of working capital management. Investopedia . https://www.investopedia.com/ask/answers/100715/why-working-capital-management- important-company.asp Maverick, J. (2022b). Working capital ratio: What is considered a good ratio? Investopedia . https://www.investopedia.com/ask/answers/010915/what-proper-ratio-between-working- capital-current-assets-and-current-liabilities.asp#:~:text=Generally%2C%20a %20working%20capital%20ratio,necessarily%20considered%20to%20be%20better . Mergent. (n.d.).   Johnson & Johnson (NYS: JNJ)   [Company profile]. Retrieved July 30, 2023, from   https://www.mergentonline.com/login.php