Financial Analysis Methods

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Financial Analysis Methods

Organizations rely on financial statements to carry out important business decisions. The statements are typically compiled into a cohesive document, which allow managers to evaluate, based on various financial analysis methods. This process involves a comparison of ratio outcomes from the financial statements. Collectively, the ratios are used to execute financial analysis of business operations, to assess profitability and viability. This portion of the project requires you to apply financial analysis methods, choose the best method to evaluate financial outcomes for your case (my case study is attached Interim Chief Financial Officer Case Study:
Trinity Mother Frances Health System: Tyler, Texas.
) and explain why this method should be used over other methods.

Submit a minimum 2-page APA report that:

  • Defines and describes various financial analysis methods, such as vertical and horizontal analysis.
  • Explains how and why each method would be used in an organization's financial review process.
  • Compares the similarities and differences among the methods.

Using the financial statements (see attached; you’re only using the financial statement information from Johnson and Johnson). My case is actually Interim Chief Financial Officer Case Study:
Trinity Mother Frances Health System: Tyler, Texas. So be sure the text references this and not Johnson and Johnson.

Examine how at least one of the methods can be used.

  • Support your position with the actual ratio outcome(s).
  • Explain WHY this method should be used over the others, based on case financial challenges.

Please respond ASAP with any questions

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CASE STUDY: Interim Chief Financial Officer Case Study: Trinity Mother Frances Health System: Tyler, Texas Warbird provides customized healthcare finance team, including an interim CFO, to help leading health system move forward with key financial initiatives The Opportunity Recognized as a leader in quality and rated as the number one hospital in the state of Texas for patient safety, Trinity Mother Frances Health System in Tyler was in need of financial leadership after the retirement of its long-time CFO. Trinity had embarked on the construction of a heart hospital and the installation of the EPIC electronic information system yet days of cash-on-hand was strained and the organization was not prepared to enter the bond market for financing. The Solution Lindsey Bradley, president and CEO of Trinity, turned to Warbird Consulting Partners. Working with Warbird, Trinity was able to engage a customized team of healthcare finance experts that included an interim chief financial officer through Warbird’s Healthcare CFO Consulting Network, as well as key financial staff through Warbird’s On-Demand Services. In addition to interim CFO Pamela Vukovich, a healthcare finance expert with more than 29 years’ professional experience, including 11 years as a chief financial officer, Warbird also provided seasoned interim professionals to serve as internal audit director, tax manager and director of physician services, as well as several financial analysts. Working onsite with the Trinity executive leadership team three-to-four days a week, Pam and the Warbird team collaborated with the hospital’s finance department to devise a detailed plan of action to put the organization on financial track. With her expertise, Pam spearheaded the development of a long-range financial plan that included a return-oninvestment analysis for the EPIC and heart hospital projects, and helped define the need for bond financing for expected capital outlays in the next three years. After the long-range plan was approved by the Trinity finance committee and executive leadership team, Pam prepared the organization for review by Fitch and Moody’s. Trinity’s current ratings were confirmed and Pam led the combined finance team in working with investment bankers to execute a successful bond issue. In addition to addressing the immediate financial challenges facing Trinity, Pam worked with CEO Lindsey Bradley to restructure the finance department and its functions for longterm improvement, including instituting a department of internal audit, and defining its responsibilities, staffing models and detailed audit programs. She also reviewed Trinity’s investment practices and policies and recommended key changes in cash management and investment allocations to Trinity’s finance committee. All of these changes were implemented and have resulted in a more robust finance function with greater returns and lower risk. Finally, Pam worked with Lindsey and Trinity COO Ray Thompson to rewrite the CFO job description and provided expert input during the selection process for a permanent CFO. Trinity selected Joyce Hester, an internal candidate, and Pam has continued to consult with Trinity as a mentor for the new CFO with regular update calls to provide counsel in the areas of bond financing, investments and more. Results Warbird’s expertise in healthcare finance management and its ability to build a customized On-Demand team to meet the hospital’s specific needs provided the following results for Trinity Mother Frances Health System: • New Chief Financial Officer • New bond financing at attractive rates • Established department of internal audit • Robust investment policies, including new asset allocations for corporate and retirement funds, and an improved cash management system • Completed reviews of ratings, which were confirmed • Restructured bond portfolio with reduced interest expense and lower risk • Process to review and standardize physician incentive compensation programs • New record keeping and investment management firm for the system’s 403(b) pension plan, which resulted in significant annual savings to participants • Long-range financial plan and model, which could be updated by Trinity staff in the future • Standardized financial analysis and capital analysis Total Assets Total liabilities Values Average of 2017 Average of 2016 Average of 2015 157,303 141,208 133,411 97,143 70,790 62,261 Total Assets and Lia 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Total Assets otal Assets and Liabilities Average of 2017 Average of 2016 Average of 2015 Total liabilities JOHNSON & JOHNSON COMP STATEMENT OF FINANCIAL P AS AT December 31, 2017 (Dollars in Millions Escepts S ASSETS CURRENT ASSETS Cash and cash equivalents Marketable securities $ $ 17,824 472 Account recievables, less allowances for doubtful debts accounts Inventories Prepaid expenses and other recievables Total Current Assets $ $ $ $ 13,490 8,765 2,537 43,088 property, plant and equipments, net Intagngible assets, net Goodwill Deferred taxes on income Other assets Total Assets $ $ $ $ $ $ 17,005 53,228 31,906 7,105 4,971 157,303 Liabilities and Shareholders' Equity Current Liabilities Loans and note payables Account payables Account liabilities Accrued rebates, returns and promotions Accrued compensation and employee obligations Accrued taxes on income Total current liabilities $ $ $ $ $ $ $ 3,906 7,310 7,304 7,210 2,953 1,854 30,537 Long-term debt Deferred taxes on income Employee related obligations Long-term taxes payable Other loabilities Total liabilities $ $ $ $ $ $ 30,675 8,368 10,074 8,472 9,017 97,143 $ - Shareholders' Equity Preferred stock-without par value (authorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) Accumulated others comprehensive income (loss) Retained earnings Total Equity 2017 $ $ $ $ 3,120 (13,199) 101,793 91,714 Less common stock held in treasury, at cost (437,318,000 shares and 4133,332,000 shares) Total Shareholders' Equity Total Liabilities and Shareholders' Equity $ $ $ 31,554 60,160 157,303 NSON & JOHNSON COMPANY TEMENT OF FINANCIAL POSITION T December 31, 2017 ars in Millions Escepts Share and Per Share Amount) percentage change 2016 2015 2016/2017 $ $ 18,972 $ 22,935 $ 13,732 24,644 -6.05% -97.94% $ $ $ $ 11,699 8,144 3,282 65,032 $ $ $ $ 10,734 8,053 3,047 60,210 15.31% 7.63% -22.70% -33.74% $ $ $ $ $ $ 15,912 26,876 22,805 6,148 4,435 141,208 $ $ $ $ $ $ 15,905 25,764 21,629 5,490 4,413 133,411 6.87% 98.05% 39.91% 15.57% 12.09% 11.40% Total Current Assets $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $2017 2016 2015 Total Assets $ $ $ $ $ $ $ 4,684 6,918 5,635 5,403 2,676 971 26,287 $ $ $ $ $ $ $ 7,004 6,668 5,411 5,440 2,474 750 27,747 -16.61% 5.67% 29.62% 33.44% 10.35% 90.94% 16.17% $ $ $ $ $ $ 22,442 2,910 9,615 9,536 70,790 $ $ $ $ $ $ 12,857 2,562 8,854 10,241 62,261 36.69% 187.56% 4.77% $160,000 $155,000 $150,000 $145,000 $140,000 $135,000 $130,000 $125,000 $120,000 2017 2016 -5.44% 37.23% Total current liabilities $31,000 $ $ $ $ $ 3,120 (14,901) 110,551 98,770 $30,000 $ $ $ $ 3,120 (13,165) 103,879 93,834 0.00% -11.42% -7.92% -7.14% $29,000 $28,000 $27,000 $26,000 $26,000 $ $ $ 28,352 $ 70,418 $ 141,208 $ 22,684 71,150 133,411 11.29% -14.57% 11.40% $25,000 $24,000 2017 2016 2015 Total liabilities $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $2017 2016 urrent Assets Total Current Assets 2015 al Assets Total Assets 2015 ent liabilities Total current liabilities 2015 Total liabilities Total liabilities 2015 Total Assets Total Current Assets Total current liabilities Total Equity Total liabilities Total Liabilities and Shareholders' Equity Total Shareholders' Equity Values Average of 2016 Average of 2017 141,208 157,303 65,032 43,088 26,287 30,537 98,770 91,714 70,790 97,143 141,208 157,303 70,418 60,160 J & J COMPANY'S ASS 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Total Assets Total Current Total current Assets liabilities J COMPANY'S ASSETS, LIABILITY AND EQUITY TOTALS Average of 2016 Average of 2017 Total current Total Equity liabilities Total liabilities Total Total Liabilities and Shareholders' Shareholders' Equity Equity Running Head: FINANCIAL STATEMENTS ANALYSIS Financial Statements Analysis – Johnson & Johnson Company Tena Jones Rasmussen College April 11, 2018 1 FINANCIAL STATEMENTS ANALYSIS 2 Introduction Johnson & Johnson Company is an American investment holding company whose interest mainly lies in the manufacturing, research and development, and trade in a broad assortment of products in the health sector. Its main core business revolves around production and supply of pharmaceuticals, medical devices, and consumer goods. It is practically felt in globally having subsidiaries in over 67 countries and its products finding their way into the market of over 175 countries in the world. This essay will analyze the company’s financial performance for the accounting period January 01, 2017 to December 31, 2017. We will scrutinize, analyze and compare various financial parameters to help us understand the financial performance of the company. Financial statements allow shareholders and stakeholders to determine the financial health, efficiency, and profitability of a company. I will use financial statements and statements of income contained in the 2017 annual report of Johnson & Johnson Company. Assets and Liabilities In 2017, the total current assets for Johnson & Johnson Company were $43,088 million and the total current liabilities were $30,537. The current assets decreased sharply compared to 2016 where the value was $65,032 which was attributed to the large sale of marketable securities held by the company. Current liabilities, on the other hand, increased by $ 4,250 million from the previous $26,278 million in 2016. The current assets were greater than the current liabilities which show that the company was in a good position to offset its liabilities. The current ratio for the year was 1.4 percent which was a significant drop from the previous years’ of 2.5. FINANCIAL STATEMENTS ANALYSIS 3 Cash Flow Cash flow statements show the movement of cash that is cash inflow and cash outflows of a company for a certain fiscal year. It provides information about a company's receipts and payments hence used to determine whether the company can generate positive cash flows in future periods. It is also a measure of the company's ability to pay its short-term debts when they fall due. The cash, in this case, constitute of cash at hand or bank and cash equivalents such as government securities. Cash flow from operating activities is the cash that arises from transactions that involve the determination of the company's net profit. Johnson & Johnson Company net cash flow from operating activities for 2017 was $21,056 million while that of 2016 was $18,767 million. In 2015 the company had net cash flows from operating activities worth $19,569 million. The net cash flow in 2017 was the result of $1,300 million net earnings and was a sharp decrease compared to the retained earnings at the beginning of the financial year which was $16,540 million and $15,409 in 2015. However, the current liabilities and non-current liabilities decreased with a value of $ 8,979 million as compared to the increase of $586 in 2016. This decrease in payable in 2017 despite the low earnings contributed greatly to the increase in cash inflow in the company. The company’s net cash flow used investing activities in 2017 was an outflow of $14,868 while in 2016 and 2015 were had an outflow of $4,761 and $7,735 respectively. In 2017, the company increased its acquisitions that increased cash outflow but also decreased on the purchase of investment which decreased cash outflow. In 2016 and 2015, the company’s purchased more investments and made less acquisition. The company also made more sold a FINANCIAL STATEMENTS ANALYSIS 4 large chunk of their investments in the two years compared to 2017 which increased cash inflow in 2015 and 2016 compared to 2017. The net cash inflow from financing activities for 2017 was an outflow of $7673 while that of 2016 and 2015 was an outflow of $8,551 and $11,136 respectively. Proceeds from longterm debt were high in 2016 and 2017 which valued at $8,992 and $12,004 respectively compared to 2015 which were valued at $75. The low debt proceeds reduced the inflow of cash for the latter year compared to the former two years. For the years 2017, the cash and cash equivalent balance was an overdraft of $1148 compared to the opening balance of $5,240. Trend Analysis Of J&J Company’s Balance Sheet Trend analysis on a balance sheet assists shareholders and stakeholders of a company to assess the progress of the company by comparing the company’s assets and liabilities from previous years. A balance sheet is a picture of a company's financial position, and therefore a trend analysis will reveal if the company is facing financial stress or growth. The total assets of the company increased from $141,208 to $157,303 which was an increase of 11.4 percent. The table below shows the total assets and liabilities for 2015, 2016 and 2017. From the table, we can see that the total assets of Johnson & Johnson Company have been increasing over the years. The total liabilities to have been increasing from 2015 to 2017 Table 1: Assets and Liabilities of J & J Company for 2015 - 2017 Average of 2017 Average of 2016 Average of 2015 Total Assets 157,303 141,208 133,411 Total liabilities 97,143 70,790 62,261 FINANCIAL STATEMENTS ANALYSIS 5 Graph 1: Total Assets and Liabilities of Johnson & Johnson Company for the years 2015 - 2017 Total Assets and Liabilities 180,000 160,000 140,000 120,000 100,000 Average of 2017 80,000 Average of 2016 60,000 Average of 2015 40,000 20,000 Total Assets Total liabilities The graph presents a better view of the growth in total assets as wells as total liabilities of the company. From the graph, we can see that the rate at which the assets increased in these three years was slower compared to that of liabilities. However, both the graph and the tables show that the company is in a healthy financial position. Table 2: Assets and Liabilities of J & J Company for 2016 & 2017 Total Assets Total Current Assets Total current liabilities Total Equity Total liabilities Total Liabilities and Shareholders' Equity Total Shareholders' Equity Average of 2016 Average of 2017 141,208 157,303 65,032 43,088 26,287 30,537 98,770 91,714 70,790 97,143 141,208 157,303 70,418 60,160 FINANCIAL STATEMENTS ANALYSIS 6 Graph 2: J & J Company's Assets, Liability and Equity Totals for the Years 2016 & 2017 J & J COMPANY'S ASSETS, LIABILITY AND EQUITY TOTALS 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - Average of 2016 Average of 2017 We can see from the graph above that the total equity of the company reduced during the year 2017 compared to 2016 but all the other totals increased comparing the same period. FINANCIAL STATEMENTS ANALYSIS References Fridson, M & Alvarez, F. (2011) Financial Statement Analysis: A Practitioner's Guide. 4th ED. Wiley Finance. Johnson & Johnson Company. (2018). Annual Report 2017. Accessed on April 11, 2018. https://www.jnj.com/about-jnj/annual-reports 7 Running Head: FINANCIAL STATEMENTS ANALYSIS Financial Statements Analysis – Johnson & Johnson Company Tena Jones Rasmussen College April 11, 2018 1 FINANCIAL STATEMENTS ANALYSIS 2 Introduction Johnson & Johnson Company is an American investment holding company whose interest mainly lies in the manufacturing, research and development, and trade in a broad assortment of products in the health sector. Its main core business revolves around production and supply of pharmaceuticals, medical devices, and consumer goods. It is practically felt in globally having subsidiaries in over 67 countries and its products finding their way into the market of over 175 countries in the world. This essay will analyze the company’s financial performance for the accounting period January 01, 2017 to December 31, 2017. We will scrutinize, analyze and compare various financial parameters to help us understand the financial performance of the company. Financial statements allow shareholders and stakeholders to determine the financial health, efficiency, and profitability of a company. I will use financial statements and statements of income contained in the 2017 annual report of Johnson & Johnson Company. Assets and Liabilities In 2017, the total current assets for Johnson & Johnson Company were $43,088 million and the total current liabilities were $30,537. The current assets decreased sharply compared to 2016 where the value was $65,032 which was attributed to the large sale of marketable securities held by the company. Current liabilities, on the other hand, increased by $ 4,250 million from the previous $26,278 million in 2016. The current assets were greater than the current liabilities which show that the company was in a good position to offset its liabilities. The current ratio for the year was 1.4 percent which was a significant drop from the previous years’ of 2.5. FINANCIAL STATEMENTS ANALYSIS 3 Cash Flow Cash flow statements show the movement of cash that is cash inflow and cash outflows of a company for a certain fiscal year. It provides information about a company's receipts and payments hence used to determine whether the company can generate positive cash flows in future periods. It is also a measure of the company's ability to pay its short-term debts when they fall due. The cash, in this case, constitute of cash at hand or bank and cash equivalents such as government securities. Cash flow from operating activities is the cash that arises from transactions that involve the determination of the company's net profit. Johnson & Johnson Company net cash flow from operating activities for 2017 was $21,056 million while that of 2016 was $18,767 million. In 2015 the company had net cash flows from operating activities worth $19,569 million. The net cash flow in 2017 was the result of $1,300 million net earnings and was a sharp decrease compared to the retained earnings at the beginning of the financial year which was $16,540 million and $15,409 in 2015. However, the current liabilities and non-current liabilities decreased with a value of $ 8,979 million as compared to the increase of $586 in 2016. This decrease in payable in 2017 despite the low earnings contributed greatly to the increase in cash inflow in the company. The company’s net cash flow used investing activities in 2017 was an outflow of $14,868 while in 2016 and 2015 were had an outflow of $4,761 and $7,735 respectively. In 2017, the company increased its acquisitions that increased cash outflow but also decreased on the purchase of investment which decreased cash outflow. In 2016 and 2015, the company’s purchased more investments and made less acquisition. The company also made more sold a FINANCIAL STATEMENTS ANALYSIS 4 large chunk of their investments in the two years compared to 2017 which increased cash inflow in 2015 and 2016 compared to 2017. The net cash inflow from financing activities for 2017 was an outflow of $7673 while that of 2016 and 2015 was an outflow of $8,551 and $11,136 respectively. Proceeds from longterm debt were high in 2016 and 2017 which valued at $8,992 and $12,004 respectively compared to 2015 which were valued at $75. The low debt proceeds reduced the inflow of cash for the latter year compared to the former two years. For the years 2017, the cash and cash equivalent balance was an overdraft of $1148 compared to the opening balance of $5,240. Trend Analysis Of J&J Company’s Balance Sheet Trend analysis on a balance sheet assists shareholders and stakeholders of a company to assess the progress of the company by comparing the company’s assets and liabilities from previous years. A balance sheet is a picture of a company's financial position, and therefore a trend analysis will reveal if the company is facing financial stress or growth. The total assets of the company increased from $141,208 to $157,303 which was an increase of 11.4 percent. The table below shows the total assets and liabilities for 2015, 2016 and 2017. From the table, we can see that the total assets of Johnson & Johnson Company have been increasing over the years. The total liabilities to have been increasing from 2015 to 2017 Table 1: Assets and Liabilities of J & J Company for 2015 - 2017 Average of 2017 Average of 2016 Average of 2015 Total Assets 157,303 141,208 133,411 Total liabilities 97,143 70,790 62,261 FINANCIAL STATEMENTS ANALYSIS 5 Graph 1: Total Assets and Liabilities of Johnson & Johnson Company for the years 2015 - 2017 Total Assets and Liabilities 180,000 160,000 140,000 120,000 100,000 Average of 2017 80,000 Average of 2016 60,000 Average of 2015 40,000 20,000 Total Assets Total liabilities The graph presents a better view of the growth in total assets as wells as total liabilities of the company. From the graph, we can see that the rate at which the assets increased in these three years was slower compared to that of liabilities. However, both the graph and the tables show that the company is in a healthy financial position. Table 2: Assets and Liabilities of J & J Company for 2016 & 2017 Total Assets Total Current Assets Total current liabilities Total Equity Total liabilities Total Liabilities and Shareholders' Equity Total Shareholders' Equity Average of 2016 Average of 2017 141,208 157,303 65,032 43,088 26,287 30,537 98,770 91,714 70,790 97,143 141,208 157,303 70,418 60,160 FINANCIAL STATEMENTS ANALYSIS 6 Graph 2: J & J Company's Assets, Liability and Equity Totals for the Years 2016 & 2017 J & J COMPANY'S ASSETS, LIABILITY AND EQUITY TOTALS 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - Average of 2016 Average of 2017 We can see from the graph above that the total equity of the company reduced during the year 2017 compared to 2016 but all the other totals increased comparing the same period. FINANCIAL STATEMENTS ANALYSIS References Fridson, M & Alvarez, F. (2011) Financial Statement Analysis: A Practitioner's Guide. 4th ED. Wiley Finance. Johnson & Johnson Company. (2018). Annual Report 2017. Accessed on April 11, 2018. https://www.jnj.com/about-jnj/annual-reports 7
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Running Head: FINANCIAL ANALYSIS

1

Financial Analysis Methods
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FINANCIAL ANALYSIS

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Investors and company owners put their money in any company with an aim of
maximizing their wealth. There is the need for every company to prepare financial statements
that will show the performance of a business in any fiscal year. The major statements include
the income statement, the balance sheet and the cash flow statements. These shed light on the
incomes and expenses, assets and liabilities and the cash flow respectively. However, it is
essential to establish how a firm has performed from one period to the other. This paper looks
at the performance measures of the financial statements. This paper evaluates the
performance ...


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