Johnson & Johnson (JNJ)

Conclusion

Johnson & Johnson develops, manufactures and sells healthcare products through two segments, Innovative Medicine (prescription drugs) and MedTech (surgical, orthopedic, vision and cardiovascular devices). On 2026-11-09 the share price is 282.11 USD, giving a market capitalisation of 679.1 billion USD.

The verdict is that the shares are overvalued. The price-to-earnings ratio is 42.2 against a ten-year median of 23.9, a premium of 76.5%, and enterprise value to EBITDA is 22.9 against a median of 15.6, a premium of 46.6%. The discounted cash flow gives 131.74 USD per share, and the fair value band runs from 128.22 to 192.32 USD with a midpoint of 160.27 USD, a margin of safety of -43.2% at the current price. The fair value from historical multiples is 188.80 USD. The reverse DCF implies 12.9% annual growth, against revenue growth of 2.7% and free cash flow per share growth of 1.4% over five years.

The strongest supports are the Altman Z-score of 5.53, interest coverage of 23.5 and a return on invested capital of 14.1% against a weighted cost of capital of 8.6%. The weakest numbers are a current ratio of 1.02, which is on watch, a net margin of 16.2% against a median of 20.6%, and an estimate for next year's earnings that has been cut by 9.5% over 90 days.

Financial health

Financial strength is green, held up by the Altman Z-score, net debt to EBITDA and interest coverage, with the current ratio the only neutral signal. The current ratio is 1.02 and the quick ratio 0.65 as of 2026-09-30. Net debt to EBITDA is 0.89 on a trailing basis and debt to equity 0.55. Interest coverage is 23.5 on a trailing basis. The Altman Z-score is 5.53, in the safe zone; the model was built for manufacturers, and this company makes drugs and medical devices, so it applies reasonably well. Insolvency risk is low, about 0.2% by the estimate of the Ohlson model over one to two years, using statements dated 2025-12-31.

Earnings quality

Earnings quality is yellow: the share count reduction and the earnings surprise record are favourable, but the Piotroski score is only 4 out of 9 and the free cash flow conversion over five years is weaker than the trailing figure. Trailing free cash flow conversion is 1.28, while the five-year average is 0.82. The accrual ratio is 0.012, and stock-based compensation is 1.4% of revenue, leaving free cash flow after compensation of 19.2 billion USD. The share count fell at a compound rate of 1.9% over five years, which means buybacks. The company beat estimates in seven of the last eight quarters, with an average surprise of 2.4%. Estimates are being cut: the current year fell 4.8% over 90 days and the next year 9.5%, with five downward revisions in the last 30 days. The Beneish M-score is not available.

Profitability

Profitability is green. The gross margin is 68.8% against a median of 68.2%, and the operating margin is 25.7% against a median of 25.8%, both stable. The net margin is 16.2% against a median of 20.6%, the weakest of the three. Return on invested capital is 14.1% against a weighted cost of capital of 8.6%, and the given difference is 5.6 percentage points, so the business creates value. The five-year median return on invested capital is 20.9%, so returns have fallen from that level. Return on equity is 19.7%. The DuPont split, as of 2025-12-31, shows a net margin of 28.5%, an asset turnover of 0.47 and an equity multiplier of 2.44, so leverage contributes meaningfully to the return on equity.

Growth

Growth is green, supported by earnings per share growth and consistent revenue, but held back by modest top-line expansion. Revenue compounds at 5.6% over three years, 2.7% over five and 3.0% over ten. Earnings per share compound at 17.9% over three years, 14.9% over five and 7.3% over ten, so profit growth has outpaced sales. Revenue grew in 9 of the 10 comparable years. Free cash flow per share compounds at 7.9% over three years, 1.4% over five and 3.7% over ten. The next-year earnings estimate implies growth of 4.5%, which is below the recent three-year earnings pace.

Valuation

Valuation is red. Every multiple trades above its ten-year median: the price-to-earnings ratio is 42.2 against 23.9 (a premium of 76.5%), the price-to-free-cash-flow ratio 33.0 against 21.7 (52.1%), price to sales 6.8 against 4.8 (42.0%), and price to book 8.3 against 6.0 (39.6%). The free cash flow yield is 3.0%. The discounted cash flow gives 131.74 USD per share, using a discount rate of 8.87%, 3.0% growth for the first stage and 2.5% in perpetuity. The terminal value makes up 55.0% of that figure. The reverse DCF implies 12.9% growth, against 2.7% revenue growth and 1.4% free cash flow per share growth over five years. The fair value is an order-of-magnitude estimate built on fixed assumptions, including a 5% equity risk premium and capped growth, and is not a price target. The dividend yield is 1.9%, with a forward yield of 1.9%, and the dividend absorbs 61.8% of free cash flow.

Risks

A current ratio of 1.02 leaves little room for short-term obligations; a drop below 1 would weaken the liquidity cushion. The net margin of 16.2% against a median of 20.6% suggests that rising costs or pricing pressure could erode returns further. Falling estimates, with next year's earnings cut by 9.5% over 90 days, could push the market to reprice growth lower. The valuation premium is the largest risk: if growth stays near the five-year pace, the implied 12.9% growth is hard to reach, and the price stays far above the fair value band. The discounted cash flow depends heavily on the terminal value, which makes up 55.0% of it. Not available: the Beneish M-score and the debt maturity schedule. This analysis also excludes revenue by segment, so it cannot show which of the two businesses drives growth or margin changes.