Organizations are formed to accomplish the same task, which is to earn the profit by best utilizing its resources. Organizations always want to decrease its fixed and variable cost in order to increase their revenue recognition. Organizations have to invest their funds at somewhere from where they get a high return. Here! The question arises that if organizations want to get a high return from their investment then how high the return should be? Financial department plays an important role in the overall productivity of an organization. The performance of an organization will be judge from its bottom line and the amount of cash inflow. Financial and investment analysis is the procedure by which the performance of an organization can be judge and compare with other peer companies
Financial analysis is also referred to as Financial Statement Analysis (hereafter FSA). FSA is an assessment of the profitability, viability and the stability of an organization. The usage of FSA is of manifold, as users of different sectors analyze the financial statement from different angles (Rees, B, pp. 47). The main perspective of this study is to compare the financials of two competitors. The companies which have been chose for this work are Johnson and Johnson and Abbott Laboratories. There are different ratios which have been used for the compassion, let’s now analyze the same.
The first ratio which needs to be analyzed is current ratio which analyzes the stance of a company in meeting with its short term financial obligations of promises.
According to the analysis, it is clear that the CR of J&J is in a good position as compared to AL through the selected fiscal years. Both the companies have a mean CR of more than 1 which is a clear indication that both the companies always meet with its short term financial obligations but comparatively the proportion is higher for J&J because of an average CR of 1:6 as compared to the average CR of AL of 1:40. Unlike the CR of the companies, Quick Ratio of J&J is lower than AL it means that J&J sells some of their inventories to meet with its short term financial promises. Inventory Turnover which is another important measure of efficiency which shows how much revenue the company is generating from its inventories. The ratio is again with J&J with an average turnover of 11.77% as compared to the turnover of AL which is around 9.57%. Inventory turnover opens the door of another important measure called average collection period which analyzes the quickness of a company in get the credits from creditors. The collection period of J&J is far better than that of AL. Average collection period of J&J is 57.30 days while period of collection for AL is 71.62. It means that J&J is quicker in collecting cash payments from the creditors as compared to AL. Asset turnover ratio is basically an efficiency ratio which analyze the efficiency of the assets of the company in generating economic profit for the company. From the analysis, it can be said that the trend of the total asset turnover for both of these companies is somewhat similar but on average J&J is just superior than AL because the average turnover of J&J is 70% while it is around 63% for AL. it mean J&J is able to generate 70% of its revenue from its assets while AL is only generating 63% of the revenue.
Assets are also been used to utilize the debt of the company. Debt to Asset is a ratio called Asset Utilization ratio analyzed the effectiveness of the assets in utilizing the debt of the company. The average utilization of J&J is better than that of AL because the average utilization of J&J is better than AL. Time interest earned is another important measure to analyze the stance of money earned though interest income. This is a very important measure which analyzes the interest income earned by the company. Time Interest earned of J&J is far better than that of AL because the ratio of the company is around 78.6% while it is around 9.65% for AL. It means that J&J is Able to generate 78 percent of the income through interest while AL is only generating 9% of interest income. The next ratio which has been selected for the analysis is Net Profit Margin, which shows how much the company has earned from its revenue. From the analytical figures it is found that the profitability stance of JNJ is far better than that of AL. Average NPM of JNJ is around 20% while average NPM of AL is around 14% which shows that the companies are able to generate 20$ and 14$ from 100$ of sales respectively. Return on Asset (ROA) is the measure which analyzes the effectiveness of the operational assets of the companies. From the analysis, it is determined that ROA of J&J is 14% while ROA of AL is 8.81% which means that the assets of J&J is better than that of AL in terms of generating revenues.
Other ratios like Return on Equity (ROE) and Price to Earning (P/E) are also in the favor of JNJ because the average ROE and P/E is greater than that of AL. DuPont Analysis of JNJ average is 26.14% while average DuPont of AL is 21.25% showing that JNJ is better than AL in almost all the sectors.