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The size of Johnson & Johnson (NYSE:JNJ), a US$360.75b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to their continued success lies in its financial health. Let’s take a look at Johnson & Johnson’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into JNJ here.
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How much cash does JNJ generate through its operations?
JNJ’s debt levels have fallen from US$34.85b to US$32.08b over the last 12 months , which is made up of current and long term debt. With this debt payback, JNJ currently has US$18.14b remaining in cash and short-term investments for investing into the business. Additionally, JNJ has produced US$22.06b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 68.75%, signalling that JNJ’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JNJ’s case, it is able to generate 0.69x cash from its debt capital.
Does JNJ’s liquid assets cover its short-term commitments?
At the current liabilities level of US$27.49b liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$45.44b, leading to a 1.65x current account ratio. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is JNJ’s debt level acceptable?
With debt reaching 51.02% of equity, JNJ may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if JNJ’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For JNJ, the ratio of 31.52x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes JNJ and other large-cap investments thought to be safe.