JOHNSON & JOHNSON Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

JOHNSON & JOHNSON Case Solution

A)Liquidity Ratios

Liquidity ratios are used to determine the debtor's ability to pay off its current liabilities without raising any external capital. Liquidity ratios is also used for analyzing the company's ability to pay its liabilities, and it is also used for measuring the margin of safety by calculating metrics that include: current ratio, quick ratio & operating cash flow ratio. Current liabilities are measured by the relation of liquid assets & it is very usable for evaluating the coverage of short-term liabilities in an emergency.(HAYES, Liquidity Ratio Definition, 2020).

·Current Ratio

Current ratio measures the company's ability that how much short-term obligations it should pay or keep due within 1 year. Current ratio is a liquidity ratio, which gives an idea to investors & analysts that how the company should maximize its current assets on its balance sheet, to satisfy its current liabilities and account payables(KENTON, Current Ratio, 2020). It is calculated by dividing the current assets with the current liabilities of the firm over a period of time. The current assets for J&J in 2018 is 46033 and 45274 in 2019, respectively (See Appendix 3.1). The gross profit margin has decreased by -21.51% from 2018 to 2019. It is because the current liabilities increased over the time, which has led to a decline in the company’s current ratio.

·Receivables Turnover Ratio

Receivables turnover ratio is an accounting technique that is used to measure the company's effectiveness by collecting its receivables. Receivables turnover ratio shows how efficiently a company uses and manages the credit it extends to its clients and how quickly the short-term debtis paid. The receivables turnover ratio is also known as the accounts receivable turnover ratio(MURPHY, Receivables Turnover Ratio, 2020). Net sales for J&J in 2018 is 81581 and 82059 in 2019 (see Appendix 3.2). The Receivables turnover ratio decreased by 12% from 2018 to 2019. It is because the average account receivables is increased over the time.

·Inventory Turnover Ratio

Inventory turnover ratio shows that how many times a company has sold or replaced its inventory during a given period of time. And then the company divides the days in period by inventory turnover’s formula in order to calculate the days ithas taken to sell the inventory on hand. Inventory turnover helps the businesses to take better decisions on manufacturing, pricing, purchasing, marketing and new inventory(HARGRAVE, 2020). Cost of goods sold for J&J in 2018 is 27091 and 27556 in 2019 (see Appendix 3.3). The Inventory turnover ratio has decreased by 9.55% from 2018 to 2019. It is because the average inventory has increased over the time.

B)Solvency Ratios

Solvency ratio is a key metric that is used to find the enterprise ability to meet its long-term debt. Solvency ratio shows whether a company’s cash flow is enough to meet its long-term debt and it is a measure of its financial health. Main solvency ratios are the equity ratio, debt-to-assets ratio, debt-to-equity ratio and interest coverage ratio.(KENTON, Solvency Ratio, 2020).

·Debt to Equity Ratio

Debt-to-equity (D/E) ratio is calculated by dividing the company’s total liabilities to its shareholder equity. Debt to equity ratio is used to find a financial leverage. The debt-to-equity ratio is a particular type of gearing ratio, which is used in corporate finance.It reflects the ability of shareholder equity to cover all of its debts at the time when the business is on downturn(HAYES, Debt-To-Equity Ratio – D/E, 2020). Total liabilities for J&J in 2018 is 93202 and 98257 in 2019 (see Appendix 4.1). The Debt-to-equity ratio has increased by 9.24% from 2018 to 2019. It is because the total liabilities has increased over the time.

C)Other Ratios

Accounts Payable Turnover Ratio

Accounts payable turnover ratio is a short-term liquidity that is used to quantify the rate of company pays. This ratio shows how many times a company pays off its accounts payable during a specific period of time.Accounts payable turnover ratio shows how efficiently a company pays to its suppliers and short-term liabilities(MURPHY, Accounts Payable Turnover Ratio Definition, 2020). Total purchases for J&J in 2018 is 26925 and 27977 in 2019 (see Appendix 5.1). The Accounts payable turnover ratio has decreased by 29.79from 2018 to 2019. It is because the total purchases have increased over the time.

·Capital Acquisition Ratio

Working capital turnover ratio shows how efficiently a company uses its working capital to support a given level of sales. Working capital turnover measures the relationship between the funds used to finance a company’s operations and the revenues a company produces(KENTON, Working Capital Turnover Definition, 2020). Net sales for J&J in 2018 is 81581 and in 2019, its 82059 (see Appendix 5.2). The Working capital turnover ratio has increased by 1.45% from 2018 to 2019. It is because the total assets have increased over the time..................

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JOHNSON & JOHNSON Harvard Case Solution & Analysis