JOHNSON AND JOHNSON COMPANY STUDY

Johnson and Johnson Company study



Johnson and Johnson Company study

Capital Structure

2011

2010

2009

2008

2007

Debt Ratio

16.30%

15.36%

13.96%

11.78%

9.34%

Debt to Equity Ratio

29.65%

28.74%

27.88%

22.02%

16.77%

Equity Multiplier

1.82

1.87

2.00

1.87

1.79

Debt Ratio

Debt ratio is calculated by dividing the total debt by total assets. The debt ratio of Johnson and Johnson is shown in the graph adjacent to the paragraph. As we can observe from the chart, during the last 5 years, debt of Johnson & Johnson has increased from 9.34% to 16.3% of the total assets which is an increase of 74% from year 2007 to 2011. The graph shows a rising trend in the ratio. During the last fiscal year 2010-11, it has increased to 16.3% from 15.36% which is a growth of 6%. It may be interpreted as management decision to increase profit by leverage on Debt financing.

Debt to Equity Ratio

Debt to Equity ratio is calculated by dividing the total debt by shareholders equity. The debt to equity ratio of Johnson & Johnson for last 5 years are shown in the graph. During the year 2007-11, the ratio has increased from 16.77% to 29.65% which is an increase of 77%. The graph of debt to equity ratio is also showing an upward trend in the figure. During the last fiscal year 2010-11, the ratio has increased from 28.74% to 29.65% which is a growth of 3%. The company is relying more on debt financing to finance its assets; the impact of this policy is also affecting the ratio of debt to equity as equity amount has proportionally decreased relative to total liabilities.

Equity Multiplier

Equity Multiplier is calculated by dividing the shareholders equity from the total assets of the company. The equity multiplier of Johnson & Johnson is illustrated in the graph. Unlike the previous two ratios, this graph is showing a bell shape which means that initially it showed some upward trend followed by downward trend. In year 2007, the multiplier was 1.79 and after touching the highest figure of 2.00 in 2009, it came back to 1.82 in 2011, almost equal to 2007 level. During 2007-2009, it showed a growth of 4% and 6 % respectively followed by negative growth of 7% and 4% in subsequent years. The net change during the last year was minute 1%. Degree of Financial Leverage

The degree of financial leverage shows how much returns of the company can be magnified by using fixed financial cost. It is calculated by dividing %change in EBIT from %change in EPS. The DFL during the last four years is shown in the graph. We can observe a familiar upward trend in the figure. The management is utilizing more debt financing to increase its net income. Keeping in view stressed economic conditions, world over sales revenue has contracted which posed challenges to the companies. At this time, using the debt capacity available to the company, the management tried to ensure the growth of the company revenue. We can see in the chart above, the company had a negative growth in Net income during year 2008 and ...