What does Johnson & Johnson's (NYSE:JNJ) Balance Sheet Tell Us About Its Future?

Johnson & Johnson (NYSE:JNJ), a large-cap worth US$368b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. I will provide an overview of Johnson & Johnson’s financial liquidity and leverage to give you an idea of Johnson & Johnson’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into JNJ here.

View our latest analysis for Johnson & Johnson

How much cash does JNJ generate through its operations?

JNJ's debt levels have fallen from US$35b to US$30b over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$20b for investing into the business. On top of this, JNJ has produced cash from operations of US$22b over the same time period, leading to an operating cash to total debt ratio of 73%, 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 0.73x cash from its debt capital.

Can JNJ pay its short-term liabilities?

With current liabilities at US$31b, the company has been able to meet these commitments with a current assets level of US$46b, leading to a 1.47x current account ratio. Usually, for Pharmaceuticals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Is JNJ’s debt level acceptable?

With debt reaching 51% of equity, JNJ may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if JNJ’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For JNJ, the ratio of 54.33x 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.

Next Steps:

JNJ’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around JNJ's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how JNJ has been performing in the past. I suggest you continue to research Johnson & Johnson to get a more holistic view of the large-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for JNJ’s future growth? Take a look at our free research report of analyst consensus for JNJ’s outlook.
2. Valuation: What is JNJ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether JNJ is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.