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5-2 Project Two Milestone: Comparison Analysis
Cole Staats
Southern New Hampshire University
FIN-320 Principles of Finance
February 5, 2023
5-2 Project Two Milestone: Comparison Analysis
Investors use organizational financial data in a variety of ways, and one of those ways is to compare the performance of the company between two comparable time periods that occurred in different years. They can determine whether the business was suitable for investment based on the information that they gathered. These investors investigate the company ratios. A ratio expresses the relationship between two quantities in a mathematical form. The ratios are important for drawing insights into the company's performance. Calculating a ratio is a relatively simple arithmetic procedure. However, interpreting the ratios can be quite difficult. The interpretation of financial ratios, rather than the calculation of the ratios themselves, is what makes them a useful tool for investors. The systematic application of ratios to financial statements to evaluate a company's weaknesses and strengths in addition to its historical performance and its current financial performance is what is meant by the term “ratio analysis” (Alqam, A., Ali, H. Y., & Hamshari, Y. M., 2021). The information required for ratio analysis is found in the financial statements. The financial ratios of a company can be seen as hints or indicators of significant relationships between the various factors that are used to assess the status of the company. This paper compares the financial performance of Johnson & Johnson for the three quarterly performances for the last two years .
Johnson & Johnson Fiscal Quarterly comparisons
There are different ratios investors investigate when consolidating investment information needed for investment in the company. Each ratio is categorized under liquidity, profitability, solvency, and earnings ratios. Comparing the ratios under each category revealed information critical for understanding the company's financial standing. Table 1 shows the ratios side by side for the two periods.
Table 1
|
Ratios comparison |
||
|
ratio |
3rd Quarter 2022 |
3rd Quarter 2021 |
|
Current Ratio |
1.43 |
1.34 |
|
Working Capital |
$ 19693000 |
$ 15328000 |
|
Debt Ratio |
0.57 |
0.61 |
|
Earnings per share |
5.51 |
5.24 |
|
Price Earnings Ratio |
1.22 |
1.40 |
|
Total Asset Turnover |
0.13 |
5.24 |
|
Financial Leverage |
0.23 |
0.13 |
|
Net Profit Margin |
0.66 |
0.15 |
|
Return on Asset |
0.02 |
0.16 |
|
Return on Equity |
0.48 |
0.02 |
Comparison analysis
The comparison analysis can help understand the financial status of the company. Each financial ratio gives information about an aspect of the company as far as financial performance is concerned (Laitinen, 2018).
The current ratio is one liquidity ratio that shows the company's ability to meet short-term financial obligations (Laitinen, 2018). From the calculation, the ratio increased by 0.1. this shows that the company has enough financial strength to meet its short-term financial obligation.
Working capital is another key ratio that enables one to access the capital for an organization to operate efficiently. It shows the number of assets that the company has. From the calculation, we can see that J&J working capital increased from the previous year by about $ 4000000.
Companies finance their operations using different channels, including debt. We can gain information about this debt by calculating the company's debt ratios (Laitinen, 2018). The debt ratio of J&J dropped by 0.04 in the two years. This shows that the company's assets increased.
The financial leverage shows the amount of support the company gets to boost its capital. The amount can increase or decrease in a year. From the calculation, the financial leverage ratio increased in 2022 from the amount in a similar period in 2021. Therefore, the calculation shows that the company's financial leverage increased in that period.
Another source of capital is shareholder equity. The shareholders who invest in the company, such as when the company makes a profit, also earn from the investment. We can see no significant changes in the earnings per share from the calculation.
Net profit margin is another important profit ratio that investors use to determine their company's profitability (Laitinen, 2018). From the calculation of the profit margin in the two periods, we can see that the company profits improved, as shown in the increase in the profitability margin from0.15 from 0.66.
The last critical ratio is the return on assets. The ratios show how well a company generates revenue from its assets. From the calculation, we can see that the ratio dropped in the 3rd quarter of 2022 compared to the amount achieved in a similar period in the previous year. This indicates that the company could have profited more from its assets.
Short-term financial sources that Johnson & Johnson can use
Companies rely on finances to run their operations. There are many sources that they can utilize to generate financial. However, in some instances, the company must have short-term financial sources. The following are some of the short-term sources that Johnson & Johnson can utilize.
Short-term loans
These are unsecured loans the company can borrow and commit to paying within a short period, usually one year. Many organizations use the source to fund the cash flow operation that demands daily use of cash. It is suitable because a company can make that are not paid immediately (Segal, 2022).
Asset-based lending (ABL)
This is a short-term financing method where a lender provides funds based on the value of a company's assets, such as inventory, machinery, or accounts receivable. The assets serve as collateral for the loan, which provides security for the lender. ABL is ideal for companies with tangible assets but weak credit history and cash flow. It provides quick capital for working capital, growth opportunities, or improving financial health (Kagan, 2020). The loan amount is based on the value of assets, typically ranging from 50% to 80%. ABL has quick approval and flexibility and can be expensive compared to other financing options.
Bank Overdraft
This financial arrangement allows a company to withdraw more funds than are available in its account. It's a short-term loan providing additional funds for unexpected expenses or supporting cash flow. The company can overdraw to a pre-agreed limit and pay interest only on what's used (Short-term sources of funds, 2022). It's flexible but can be expensive with high fees and interest rates.
References
Alqam, A., Ali, H. Y., & Hamshari, Y. M. (2021, January). The Relative Importance of Financial Ratios in Making Investment and Credit Decisions in Jordan. International Journal of Financial Research, 12 (2), 284-293. Retrieved February 4, 2023.
Johnson & Johnson. (n.d.). Our Beginning. Retrieved January 13, 2023.
Kagan, Julia. (2020, May 15). What is Asset-Based Landing? How Loans Work, Example, and Types. Investopedia. Retrieved February 4, 2023.
Laitinen, E. (2018, September 4). Financial Reporting: Long-Term Change of Financial Ratios. Scientific Research. Retrieved February 4, 2023.
Mergent Online. (n.d.). Johnson & Johnson (NYS: JNJ). February 4, 2023.
Segal, Troy. (2022, June 22). Term Loans Definition, Types, and Common Attributes. Investopedia. Retrieved February 4, 2023. .
Short-term sources of funds. (2022, May 23). What are Short-Term Sources of Funds? Accounting Tools. Retrieved February 4, 2023.
