Introduction
The Novartis example is unique in that the organization grew net income while total revenue fell. A similar effect was achieved thanks to the earnings from the equity interest item, which significantly increased net profit in 2021 (YahooFinance, 2023). Although net profit excluding this aspect fell in 2019-2022, these incomes allowed the company to increase working capital and free cash flow. As a result of this investment, Novartis was able to improve its liquidity, which in terms of the current ratio became above one, and, despite the declining dynamics in 2022, maintained the superiority of current assets over liabilities (YahooFinance, 2023).
The Reasons Behind Novartis’ Higher Net Income Despite Lower Total Revenue
In 2021-2022, the company realized the most significant dividends, which significantly strengthened its position in the eyes of investors. According to the cash flow statement, the money received was used for investments, which will allow Novartis to receive additional funds further with greater profits. In addition, over the next two years, cash flows in investing activities became an order of magnitude greater.
Finally, such a step made it possible to equalize the company’s capital structure. If, in 2020, total liabilities grew above the shareholder’s equity, then by 2022, debt fell below equity. Thus, Novartis could recover financially, allocate more funds for operating expenses and scale-up development, invest in critical projects in its activities, and receive additional funds in the form of interest for many years to come.
Conclusion
Not every company can receive such investments, especially on an ongoing basis. The medical business can rely on subsidies and grants from the government more often than other industries due to its critical infrastructure, which was especially evident during the global pandemic. In addition, the funds received must still be correctly distributed by management to maintain the positive effect of net profit growth, which is already reflected in the balance sheet and cash flow statement in the case of Novartis.
References
YahooFinance. (2023). Novartis AG (NVS). Web.