Posted: February 26th, 2023

Project Two: Comparison Analysis

Competencies

In this project, you will demonstrate your mastery of the following competencies:

Analyze financial and investment decisions that add value to the organization
Analyze financing options to maximize investor value

Scenario

You chose a business during your Module Two journal assignment. Imagine you are an analyst for that business. Your business’s board of directors wants updates on the business’s financial health. Your supervisor has asked you to write a report that includes the following:

The business’s current financial health
The available financial options for improving the business
Your recommendations about which options will support the business’s financial health

Your supervisor will present your report to the business’s board of directors. The board members have different levels of knowledge about finance. You must write the report so it is easy for all board members to understand.

Directions

Create a report for your supervisor to share with the board of directors during their presentation. Use the business you chose from the Project Two Business Options List. Use Mergent Online to find the most recent quarterly financial statements for your company. Use these statements to support your analysis during the project. Use the Project Two Financial Assumptions document for descriptions of the three financial options you will evaluate. Use the Project Two Financial Analysis Report template to complete this project.

Note: All documents and resources that are needed to complete this assignment are linked in the

What to Submit

and Supporting Materials sections.

Specifically, you must address the following rubric criteria:

Financial Analysis: For this section, you will start with calculating the financial formulas listed in Part A. Use the most recent quarterly financial statements from your chosen business and the

Project Two Financial Formulas

worksheet.

Financial Calculations: Accurately calculate financial formulas to figure out the business’s current financial health. You must calculate the following:

Working capital
Current ratio
Debt ratio
Earnings per share
Price/earnings ratio
Total asset turnover ratio
Financial leverage
Net profit margin
Return on assets
Return on equity

Working Capital Management: Explain the impact of working capital management on the business’s operations. Provide examples to support your claims.
Financing: Explain how a business finances its operations and expansion.
Short-Term Financing: Explain how potential short-term financing sources could help the business raise funds for improving its financial health. Base your response on the business’s current financial information.
Bond Investment: Discuss the risks and benefits of the business investing in a corporate bond. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis. Use the Project Two Financial Assumptions document and the Bonds section of the Net Present Value (NPV) worksheet in the Project Two Financial Formulas workbook.
Capital Equipment: Discuss the risks and benefits of the business investing in capital equipment. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis. Use the Project Two Financial Assumptions document and the Equipment section of the Net Present Value (NPV) worksheet in the Project Two Financial Formulas workbook.
Building: Discuss the risks and benefits of the business investing in a building. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis. Use the Project Two Financial Assumptions document and the Building section of the NPV worksheet in the Project Two Financial Formulas workbook.

Financial Evaluation: In this section of the report, you will determine which of the three available investments are good financing options and describe the business’s likely future financial performance.

Bond Investment: Determine if the bond investment is a good financing option for the business’s financial health. Use your financial analysis and other financial information to your support claims.
Capital Equipment: Determine if the capital equipment investment is a good financing option for the business’s financial health. Use your financial analysis and other financial information to support your claims.
Building: Determine if the building investment is a good financing option for the business’s financial health. Use your financial analysis and other financial information to support your claims.
Future Financial Considerations: Describe the business’s likely future financial performance. Base your description on the business’s current financial well-being and risk levels. Use financial information to support your claims.

What to Submit

To complete this project, you must submit the following:

Financial Analysis Report
Submit your completed

Project Two Financial Analysis Report

You must also submit the Excel files for your chosen business’s balance sheet, income statement, and cash flow statement from Mergent Online.

Workbook: Project Two Financial Formulas
Use this Excel workbook to complete your calculations for the project. You should have already completed the Ratios worksheets for your Project Two Milestone assignment.

All sources should be cited according to APA style. This includes sources listed in your Project Two Financial Formulas workbook. Consult the Shapiro Library APA Style Guide for more information on citations.

FIN 320 Project Two Financial Assumptions

When a business needs to invest, it’s important to look at financial options. This is true for simple
purchases, such as a new piece of equipment. And it is true for complex purchases, such as a new
business. Business leaders must estimate cash flows from an investment and use the net present value
(NPV) method to figure out if the investment is worthwhile.

Financial Option 1: Purchase a $10 Million Building

Rationale for investment: The business is considering environmental, social, and corporate governance
(ESG) factors as part of its investment in a new building for its headquarters. The building itself will be a
Leadership in Energy and Environmental Design (LEED)-certified building. However, the new site
currently has a large, inactive gas station that sold both gasoline and diesel fuel. The new site also has a
large repair facility that was used for deliveries and tractor-trailer trucks for more than 50 years. Some
restoration was performed on the site, but the previous owner ran out of funds before they could bring
the site up to LEED standards. Four large fuel tanks remain on the site, and they will also need to be
addressed per LEED standards.

Assumptions to consider:

• $10 million cash purchase

• Building generates additional net profits after tax of $1.25 million per year

• 20 year expected useful life of building

• Salvage value: $1.5 million

• Discount rate is 10%

Financial Option 2: Lease of $25 Million in Equipment

Rationale for investment: The business’s current equipment is efficient, but it uses a lot of electricity.
The production line also creates significant waste material, including waste plastics. The business is
looking into leasing newer, more environmentally friendly equipment that will still allow it to be at least
as efficient in production as it is now.

Assumptions to consider:

• Annual cash flows generated with equipment: $4 million

• Discount rate is 12%

• 15-year useful life

• No salvage value

Financial Option 3: $30 Million Investment in Bonds

Rationale for investment: The business is offering these bonds for sale contracts with another business
in China to assemble computer parts. The Chinese business has used child labor in the past, but it claims
it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify
whether these claims are true.

Assumptions to consider:

• 10-year bond

• 8% coupon

• Priced at a discount: $95

• Discount rate is 9%

5-2 Project Two Milestone: Comparison Analysis

Cole Staats

Southern New Hampshire University

FIN-320 Principles of Finance

February 5, 2023

5-2 Project Two Milestone: Comparison Analysis

Investors use organizational financial data in a variety of ways, and one of those ways is to compare the performance of the company between two comparable time periods that occurred in different years. They can determine whether the business was suitable for investment based on the information that they gathered. These investors investigate the company

ratio

s. A ratio expresses the relationship between two quantities in a mathematical form. The ratios are important for drawing insights into the company’s performance. Calculating a ratio is a relatively simple arithmetic procedure. However, interpreting the ratios can be quite difficult. The interpretation of financial ratios, rather than the calculation of the ratios themselves, is what makes them a useful tool for investors. The systematic application of ratios to financial statements to evaluate a company’s weaknesses and strengths in addition to its historical performance and its current financial performance is what is meant by the term “ratio analysis” (Alqam, A., Ali, H. Y., & Hamshari, Y. M., 2021). The information required for ratio analysis is found in the financial statements. The financial ratios of a company can be seen as hints or indicators of significant relationships between the various factors that are used to assess the status of the company. This paper compares the financial performance of Johnson & Johnson for the three quarterly performances for the last two years
.

Johnson & Johnson Fiscal Quarterly comparisons

There are different ratios investors investigate when consolidating investment information needed for investment in the company. Each ratio is categorized under liquidity, profitability, solvency, and earnings ratios. Comparing the ratios under each category revealed information critical for understanding the company’s financial standing. Table 1 shows the ratios side by side for the two periods.

Table 1

5.24

0.13

0.02

Ratios comparison
ratio	3rd Quarter 2022	3rd Quarter 2021
Current Ratio	1.43	1.34
Working Capital	$ 19693000	$ 15328000
Debt Ratio	0.57	0.61
Earnings per share	5.51		5.24
Price Earnings Ratio	1.22	1.40
Total Asset Turnover		0.13
Financial Leverage	0.23
Net Profit Margin	0.66	0.15
Return on Asset		0.02	0.16
Return on Equity	0.48

Comparison analysis

The comparison analysis can help understand the financial status of the company. Each financial ratio gives information about an aspect of the company as far as financial performance is concerned (Laitinen, 2018).

The current ratio is one liquidity ratio that shows the company’s ability to meet short-term financial obligations (Laitinen, 2018). From the calculation, the ratio increased by 0.1. this shows that the company has enough financial strength to meet its short-term financial obligation.

Working capital is another key ratio that enables one to access the capital for an organization to operate efficiently. It shows the number of assets that the company has. From the calculation, we can see that J&J working capital increased from the previous year by about $ 4000000.

Companies finance their operations using different channels, including debt. We can gain information about this debt by calculating the company’s debt ratios (Laitinen, 2018). The debt ratio of J&J dropped by 0.04 in the two years. This shows that the company’s assets increased.

The financial leverage shows the amount of support the company gets to boost its capital. The amount can increase or decrease in a year. From the calculation, the financial leverage ratio increased in 2022 from the amount in a similar period in 2021. Therefore, the calculation shows that the company’s financial leverage increased in that period.

Another source of capital is shareholder equity. The shareholders who invest in the company, such as when the company makes a profit, also earn from the investment. We can see no significant changes in the earnings per share from the calculation.

Net profit margin is another important profit ratio that investors use to determine their company’s profitability (Laitinen, 2018). From the calculation of the profit margin in the two periods, we can see that the company profits improved, as shown in the increase in the profitability margin from0.15 from 0.66.

The last critical ratio is the return on assets. The ratios show how well a company generates revenue from its assets. From the calculation, we can see that the ratio dropped in the 3rd quarter of 2022 compared to the amount achieved in a similar period in the previous year. This indicates that the company could have profited more from its assets.

Short-term financial sources that Johnson & Johnson can use

Companies rely on finances to run their operations. There are many sources that they can utilize to generate financial. However, in some instances, the company must have short-term financial sources. The following are some of the short-term sources that Johnson & Johnson can utilize.

Short-term loans

These are unsecured loans the company can borrow and commit to paying within a short period, usually one year. Many organizations use the source to fund the cash flow operation that demands daily use of cash. It is suitable because a company can make that are not paid immediately (Segal, 2022).

Asset-based lending (ABL)

This is a short-term financing method where a lender provides funds based on the value of a company’s assets, such as inventory, machinery, or accounts receivable. The assets serve as collateral for the loan, which provides security for the lender. ABL is ideal for companies with tangible assets but weak credit history and cash flow. It provides quick capital for working capital, growth opportunities, or improving financial health (Kagan, 2020). The loan amount is based on the value of assets, typically ranging from 50% to 80%. ABL has quick approval and flexibility and can be expensive compared to other financing options.

Bank Overdraft

This financial arrangement allows a company to withdraw more funds than are available in its account. It’s a short-term loan providing additional funds for unexpected expenses or supporting cash flow. The company can overdraw to a pre-agreed limit and pay interest only on what’s used (Short-term sources of funds, 2022). It’s flexible but can be expensive with high fees and interest rates.

References

Alqam, A., Ali, H. Y., & Hamshari, Y. M. (2021, January).
The Relative Importance of Financial Ratios in Making Investment and Credit Decisions in Jordan. International Journal of Financial Research, 12 (2), 284-293. Retrieved February 4, 2023.

https://www.researchgate.net/publication/348504551_The_Relative_Importance_of_Financial_Ratios_in_Making_Investment_and_Credit_Decisions_in_Jordan

Johnson & Johnson. (n.d.).
Our Beginning. Retrieved January 13, 2023.

https://ourstory.jnj.com/our-beginning

Kagan, Julia. (2020, May 15).
What is Asset-Based Landing? How Loans Work, Example, and Types. Investopedia. Retrieved February 4, 2023.

https://www.investopedia.com/terms/a/assetbasedlending.asp

Laitinen, E. (2018, September 4).
Financial Reporting: Long-Term Change of Financial Ratios. Scientific Research. Retrieved February 4, 2023.

https://www.scirp.org/journal/paperinformation.aspx?paperid=87112

Mergent Online. (n.d.).
Johnson & Johnson (NYS: JNJ). February 4, 2023.

https://www-mergentonline-com.ezproxy.snhu.edu/companyfinancials.php?pagetype=standardized&compnumber=4593&period=Quarters&dataarea=BS&range=5&currency=AsRep&scale=AsRep&Submit=Refresh&csrf_token_mol=90f0e5bcb8

Segal, Troy. (2022, June 22).
Term Loans Definition, Types, and Common Attributes. Investopedia. Retrieved February 4, 2023.

https://www.investopedia.com/terms/t/termloan.asp#:~:text=A%20short%2Dterm%20loan%2C%20usually,from%20a%20company’s%20cash%20flow

Short-term sources of funds. (2022, May 23).
What are Short-Term Sources of Funds? Accounting Tools. Retrieved February 4, 2023.

https://www.accountingtools.com/articles/what-are-short-term-sources-of-funds.html

RATIOS Most Recent Fiscal Qtr

ACCOUNTING & FINANCIAL RATIOS

CURRENT RATIO (Current Assets / Current Liabilities)

TOTAL ASSET TURNOVER RATIO (Total Revenue / Total Assets)

Current Assets

65236000

Total Revenue

23791000

Current Liabilities

45543000

1.4324045408

Total Assets

175124000

0.1358523104

WORKING CAPITAL (Current Assets – Current Liabilities)

FINANCIAL LEVERAGE (Total Assets / Shareholder’s Equity)

Current Assets

65236000

Total Assets

175124000000

Current Liabilities

45543000

19693000

Shareholder’s Equity

745999000000

0.2347509849

DEBT RATIO (Total Liabilities / Total Assets)

NET PROFIT MARGIN (Net Income / Total Revenue)

Total Liabilities

100525000

Net Income

14421000

Total Assets

175124000

0.574021836

Total Revenue

23791000

0.6061535875

EARNINGS PER SHARE (Net Income / Weighted Average Common Shares Outstanding)

RETURN ON ASSETS (Net Income / Total Assets)

Net Income

14421000

Net Income

14421000

Shares Outstanding

2616882

5.5107566944

Total Assets

175124000

0.0823473653

PRICE EARNINGS RATIO (Share Price (end of quarter / EPS)

RETURN ON EQUITY (Net Income – Preferred Dividends / Shareholder’s Equity)

Stock Price

36.55

NI – Pref. Div.

14412272000

EPS

1.78

20.5337078652

Shareholder’s Equity

745999000000

1.93194%

RATIOS Same Fiscal Qtr 1 Yr Ago

ACCOUNTING & FINANCIAL RATIOS

CURRENT RATIO (Current Assets / Current Liabilities)

TOTAL ASSET TURNOVER RATIO (Total Revenue / Total Assets)

Current Assets

59889

Total Revenue

23338000

Current Liabilities

44561

1.3439779179

Total Assets

179228000

0.1302140291

WORKING CAPITAL (Current Assets – Current Liabilities)

FINANCIAL LEVERAGE (Total Assets / Shareholder’s Equity)

Current Assets

59889000

Total Assets

179228000

Current Liabilities

44561000

15328000

Shareholder’s Equity

70272000

2.5504895264

DEBT RATIO (Total Liabilities / Total Assets)

NET PROFIT MARGIN (Net Income / Total Revenue)

Total Liabilities

108956

Net Income

3667000

Total Assets

179228

0.6079184056

Total Revenue

23338000

0.1571257177

EARNINGS PER SHARE (Net Income / Weighted Average Common Shares Outstanding)

RETURN ON ASSETS (Net Income / Total Assets)

Net Income

3667000

Net Income

3667000

Shares Outstanding

2616882

1.4012859579

Total Assets

179228000

0.0204599728

PRICE EARNINGS RATIO (Share Price (end of quarter / EPS)

RETURN ON EQUITY (Net Income – Preferred Dividends / Shareholder’s Equity)

Stock Price

1.67

NI – Pref. Div.

33876000

EPS

1.37

1.2189781022

Shareholder’s Equity

70272000

0.4820696721

NPV

Net Present Value (NPV) Calculator

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Optional Worksheets->

Monthly

Time Value of Money – Monthly Compounding

Rate of Return

Year 1

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