Johnson & Johnson in the last 10 Years

#EMBA27

Background

As we rounded up the corporate financial analysis class for the term, we were requested to complete a capstone project which bothers on the financial analysis of Johnson & Johnson. This project was expected to summarize all our learnings during the term: the comprehension and analysis of financial statements, the use of financial ratios and trends, horizontal and vertical analysis among others.

Johnson & Johnson was founded in 1886 and became publicly listed on the New York Stock Exchange (NYSE) in 1944.  A market capitalization of $468.57B and net sales of $94B in 2021. Johnson & Johnson (J&J) operates in three key markets: Pharmaceuticals, Medical Devices, and Consumer health. It manages a staff strength of 134,500 across the world, while its headquarter is in New Brunswick, New Jersey, United State of America.

Growth Trend and Profitability Ratio

J&J has proven to be a mature company with a very stable net profit margin of about 23% over the 10 years period except in 2017. This drop in net profit margin was due to the introduced Tax Cut and Jobs Act by the United State government, which significantly shot their tax expenses up. Also, the year-on-year revenue growth was stable at about 6% except for a few years and a Compound Annual Growth Rate (CAGR) of 3.38% in 10 years. With the introduction of Stelara medication into Europe, Africa, and Asia markets, as part of market development activity, J&J improved its year-on-year revenue growth by 13.55% in 2021.

Efficiency & Capital Structure Ratio

Furthermore, J&J was able to sweat its asset by returning about 30% on its Asset Turnover ratio. The industry average is between 25% and 50%. The Inventory Turnover was equally impressive over the 10 year period. It reported about 2.96 which means that J&J is required to replenish inventory or stock approximately every 4 months. Reviewing the capital structure, Equity Multiplier showed that J&J financed its asset with a good balance of Equity and Debt. However, between 2017 and 2020, the Equity Multiplier grew about 2: denoting heavy borrowing but reverted back to the pre-2017 trend in 2021.

Market Ratio

For the market ratio, Earning Per Share (EPS) was considered. J&J also reported a stable EPS of about $6 per share except for 2017 because of the low net profit due to the Tax Cut and Job policy implementation. Another market ratio considered is the Return on Equity (ROE), and J&J maintained a stable ratio of about 19.5% through the 10 year period.

Conclusion

In conclusion, the SWOT (Strength, Weakness, Opportunity, and Threat) analysis identified the consistency in financial ratio as a key strength. Furthermore, the mature nature of the business seems to have been complacent with the growth pattern and no new ambition to push higher. To shake things up a bit, there might be an opportunity for a new acquisition that can open up new market potentials to develop and grow. However, the high legal exposure due to perceived quality control issues might be its undoing if not nipped in the bud.