Financial Statements
Johnson & Johnson provides a standardized financial reporting framework ranked by quarter and year. The selected periodization can calculate working capital – the assessment scale differs in this case. In both cases, the calculation uses the difference between current assets and liabilities, primarily showing the company’s liquidity to management, investors, and other stakeholders. The annual report can be used in vertical analysis to evaluate more liquid assets, such as cash and equivalents. It is better to analyze quarterly reports horizontally, as it is possible to better identify dynamics compared to previous periods.
Working Capital’s Role
Working capital is primarily used to pay off current liabilities, but companies can allocate assets differently when they have available cash, which is typically evident on the cash flow statement. Johnson & Johnson typically pays dividends and grows the business through investments in property, plant, and equipment, which have consistently grown slightly year over year (Johnson and Johnson, 2022b). It was in 2022, based on the results of annual reporting, that the company did not have sufficient free assets for this indicator, while in 2021, for example, it increased payments on long-term and short-term liabilities, which was reflected in the capital structure – the total number of assets increased more than debt obligations (Johnson and Johnson, 2022b).
Working Capital Interpretation
It is not uncommon for companies to allocate net working capital to new projects, one of which is a division of the new Kenvue brand (Johnson and Johnson, 2023). To offset the costs of this step, J&J issued public shares, which equalized cash flow indicators in the horizontal analysis of quarterly reports. Consequently, maintaining financial health with the help of assets is realized either by directing them to improve liquidity or the enterprise’s competitiveness.
For the calculation, the following formulas were used for the four periods taken: comparison of quarterly reports for the third quarter of 2023 and 2022 and annual reports for 2022 and 2021:
Working Capital (10 – Q 2023) = Current Assets – Current Liabilities = $53,703 – $44,370 = $9,333
Working Capital (10 – Q 2022) = Current Assets – Current Liabilities = $65,236 – $45,543 = $19,693
Working Capital (10 – K 2022) = Current Assets – Current Liabilities = $55,294 – $55,802 = -$508
Working Capital (10 – K 2021) = Current Assets – Current Liabilities = $60,979 – $45,226 = $15,753
Working Capital Management Trend
As can be seen from these calculations, in 2022, the company remained in the red at the end of the year, which may signal potential risks to liquidity and financial health. However, by the third quarter of 2023, J&J will return to comfortable levels, mainly due to the repayment of short-term debt at the end of 2022 (Johnson & Johnson, 2023; Johnson and Johnson, 2022b). By the end of 2023, loans and notes payable were significantly reduced compared to the beginning of the year, which is also observed in accounts payable, which leaves the company with significant capital to improve the current financial position or implement projects despite the negative dynamics at the end of last year (Johnson and Johnson, 2023).
By the end of the year, cash inflows are distributed over the corresponding loan payments or dividends, which reduces the working capital indicator – therefore, the primary goals and objectives are realized during the middle of the period.
In addition to the already indicated implementations of free capital in the form of increased competitiveness and liquidity, it can also be used long-term to improve solvency indicators. Reducing the debt burden over a long period frees up funds at a distance, which can protect the company from the impact of global crises, which have become a leading trend in the world economy for several reasons (World Bank, 2019). As a result, responsible management of net working capital provides many opportunities to strengthen the company’s resilience – concerning current market conditions or long-term determinants.
References
Johnson and Johnson. (2022a). 10-Q Third Quarter Report. Web.
Johnson and Johnson. (2022b). 10-K Annual Report. Web.
Johnson and Johnson. (2023). 10-Q Third Quarter Report. Web.
World Bank. (2019). Global financial development report 2019/2020: Bank regulation and supervision a decade after the global financial crisis. The World Bank. Web.