Johnson & Johnson: The Financial Ratios

The MSN financial ratios are inaccessible. As a result, alternative websites have been used to assess the financial ratios. The paper uses financial ratios from the Morning Star and compares them with those from the MarketWatch. The two sources give almost similar results on the ratios under consideration.

Financial condition ratio

The current ratio

The current ratio is a value obtained from dividing the current assets by the current liabilities (Brigham & Ehrhardt, 2013). Johnson & Johnson (JNJ) had a current ratio of 2.38 in 2011, 1.9 in 2012, and 2.2 in 2013 (Morning Star, 2014). In 2013, GlaxoSmithKline had a current ratio of 1.11 (MarketWatch, 2014). Both firms have current assets that are adequate to cover their short-term liabilities. GlaxoSmithKline keeps an efficient level of current assets. Johnson & Johnson has more current assets than it requires in the short-term period. There is no problem when excess current assets are held in financial assets that generate interest.

Shareholders should be concerned only when excess current assets are held as cash and other assets that do not generate income (Brigham & Ehrhardt, 2013). It means the firm will report a lower return on assets than it would have been if the firm invested more cash in interest generating assets. Excess current assets may also mean that the firm plans to offer credit to reach more customers, especially to large customers. Increased liquidity may allow Johnson & Johnson to capture more opportunities that may emerge in the external environment than GlaxoSmithKline.

Johnson & Johnson may maintain a higher current ratio to build the confidence of suppliers and financial asset investors. The firm could be keeping a higher current ratio to reduce interest expense on overdrafts. GlaxoSmithKline operates in the UK and Johnson & Johnson in the U.S. The cost of capital may be higher in the US than in the UK. The firm may decide to keep more current assets if there is increased uncertainty on cash flow. Brigham & Ehrhardt (2013) discuss that a firm may also have a higher current ratio because of keeping more inventory than other firms. Keeping more inventories is inefficient and poses the threat of keeping obsolete products.

Efficiency ratio

Receivables turnover

The receivables turnover indicates the number of times that customers clear the accounts receivable in a year. Accounts receivable records the goods that have been sold on credit. Johnson & Johnson had accounts receivable turnover that is equal to 6.39 in 2011, 6.14 in 2012, and 6.2 in 2013 (Morning Star, 2014). According to MarketWatch (2014), Johnson & Johnson had accounts receivable turnover of 6.2 in 2013. GlaxoSmithKline had accounts receivable turnover equal to 5.13 (MarketWatch, 2014). A higher turnover shows that Johnson & Johnson receives payment for goods sold on credit more often than GlaxoSmithKline.

Receiving payment often can help the firm to keep less cash. The difference in accounts receivable is small between the two firms. It may show that their operations are almost similar or that both firms follow similar practices in making sales.

Analyzing the two firms’ financial performance based on the two ratios, Johnson & Johnson appears to have a better financial performance than GlaxoSmithKline. Industry ratios that capture the two ratios are not available on all the websites. As a result, only the two firms have been compared. A higher current ratio shows that Johnson & Johnson invests more in current assets than fixed assets, which is also supported by a higher accounts receivable turnover.

References

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: theory and practice (14th ed.). Mason, OH: South-Western Cengage Learning.

MarketWatch. (2014). GlaxoSmithKline (GSK.L) – LSE. Web.

MarketWtach. (2014). Johnson & Johnson NYSE: JNJ. Web.

Morning Star. (2014). Johnson & Johnson JNJ. Web.

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