Role of Financial Assessment in Public Companies
Organizations with the most comprehensive representation and capitalization in the market often have economic problems. The nature of these issues may stem from various factors, especially in the current world, where the influence of external factors is growing stronger each year. As a result, it is essential to understand the role of financial assessment in public reporting materials to interpret dynamics and correctly determine future strategy.
This paper offers a financial analysis of the three most prominent representatives of the drug manufacturers market, including Eli Lilly & Company, Merck & Co., and Johnson & Johnson. The assessment examines several key financial relationships, including liquidity, efficiency, and solvency indicators, such as current and cash ratios; gross, operating, and net profit ratios; debt-to-equity and debt-to-assets; return on equity and return on assets. Such work is of interest to potential investors in assessing companies’ financial condition and involves numerous interpretations of quantitative data. The best company for key financial relationships was selected for the three years from 2020 to 2022, which turned out to be Merck & Co., and also describes the problems, their origins, and solutions for another company, Johnson & Johnson.
Comparative Financial Analysis
Eli Lilly & Company
Tables 1-3 in Appendix reflect the calculations performed in this work. The largest company by capitalization is Eli Lilly & Company; however, according to Table 1, the organization has been losing liquidity dynamics over the past three years – the current ratio approaches one, indicating the equality of existing assets and liabilities. Similarly, the most liquid asset reflected in the cash ratio is experiencing similar changes; compared with 2021 and 2022, it fell by more than half. The dynamics of efficiency ratios are jumping – the maximum among three years for all margins is observed in 2020 and noticeably decreases in 2021, which may have a delayed effect of the pandemic on pharmaceutical companies. However, a recovery is observed in 2022, albeit only in the operating profit ratio, which is higher than in 2020.
Eli Lilly’s capital structure is designed to favor debt, but the company is systematically and rapidly reducing debt, thereby increasing its equity capital. Such a decision is quite justified against the backdrop of US macroeconomic indicators, which make lending noticeably more expensive due to the high Fed funds rate and inflation (Trading Economics, 2024a, 2024b). A complete decline is also observed in return on equity due to a similar difference in the dynamics of the indicators that make up this ratio: equity is growing in the denominator, while net profit either falls or grows more slowly. Nevertheless, the company manages to increase revenue annually, and its only outstanding shortcoming is liquidity.
Merck & Co.
With similar efficiency dynamics, Merck noticeably improves its liquidity position every year – the current and cash ratios are growing. At the same time, the organization also reduces long-term liabilities by having fewer of them as a percentage of the capital structure than Eli Lilly. ROE and ROA are growing at varying rates. Although Merck has lower absolute values than the competitor described above, this is primarily because Merck & Co.’s equity is much higher. As a result, Merck has much healthier financials than Eli Lilly despite its smaller market capitalization.
Johnson & Johnson
Johnson & Johnson largely followed Merck & Co., trailing slightly in absolute terms across liquidity, efficiency, ROA, and ROE. However, 2022 turned out to be quite tricky and not very successful for the company, as all its indicators fell significantly: the current ratio dropped below 1, a severe signal to investors of potential problems within the organization. This fact is mitigated by the fact that, first, the fall proved short-lived and insignificant (>0.99), and second, the company’s cash ratio, even after the fall, remains at a reasonably high level, indicating increased liquidity of current assets. J&J’s turnover is much higher than its competitors’, which, given its volume, suggests the potential for a quick recovery. According to available data, the best company on the list is Merck & Co. The following will discuss J&J’s main problems and possible solutions.
Problems
In addition to the liquidity issue noted, J&J is also concerned about the same efficiency issue, even though revenue in 2022 increased compared to 2021. All margin ratios, from gross to net, fell in 2022; in some places, they were almost at the 2020 level. The company is steadily reducing long-term debt like its competitors, but slowly. The capital structure also determines debt-to-equity, but debt-to-equity is the smallest among competitors, as is debt-to-assets, except for Merck in 2022. Accordingly, the drop in liquidity associated with a significant increase in current liabilities and a decrease in existing assets can be explained by several factors, the main one being the development of new Johnson & Johnson projects.
The overall picture changed due to a significant decrease in marketable securities, while the company maintained inventory levels and reduced accounts receivable, a positive sign. This fact is confirmed by the dynamics of cash flow from investing activities: J&J invested noticeably less in short-term assets by the third quarter of 2023 (Yahoo Finance, 2024c). The organization was raising money to launch a new brand and related product line, Kenvue, while also developing a strategy to optimize future budgets.
In this case, the company most recently increased its equity capital by issuing shares of its Kenvue division, which improved short-term cash flow but reduced liquidity in that year (Johnson & Johnson, 2023). As a result, J&J has already implemented one of the additional financing facilities to improve liquidity in 2023, without resorting to riskier debt capital, given the significant upward movement in US key rates and inflation (Trading Economics, 2024a, 2024b). The company acts as carefully as possible within the current unstable economic system and responsibly to investors to maintain trust and reputation for future project implementation.
References
Johnson and Johnson. (2023). 10-Q Third Quarter Report.
Trading Economics. (2024a). United States Fed Funds Interest Rate.
Trading Economics. (2024b). United States Inflation Rate.
Yahoo Finance. (2024a). Eli Lilly and Company (LLY) Financials.
Yahoo Finance. (2024b). Merck & Co., Inc. (MRK) Financials.
Yahoo Finance. (2024c). Johnson & Johnson (JNJ) Financials.
Appendix
Table 1 – Eli Lilly & Company (Yahoo Finance, 2024a)
Table 2 – Merck & Company (Yahoo Finance, 2024b)
Table 3 – Johnson & Johnson (Yahoo Finance, 2024c)