Procter & Gamble is a multinational company that is based in America. The company trades in consumer goods and operates in the retailing industry. William Procter and James Gamble founded the company in 1837. Both founders originated from the United Kingdom. William dealt with the production of candles while James dealt with the production of soaps. In 1837, they merged their operations to form Procter & Gamble. In 1859, the company had eighty employees. Besides, the value of sales in the same year reached a value of one million US dollars (The Proctor & Gamble Company, 2014). Over the years, the company diversified its products and increased the number of production plants through construction and acquisitions. This increased the profit earned (The Proctor & Gamble Company, 2014). An example of a major business combination that was made by the company was the acquisition of Gillette in 2005. The operations of the company have changed significantly since its formation. Currently, the company trades on the New York Stock Exchange. Besides, it is a component of two major industry indices, these are, Dow Jones and S&P 500. At the end of 2013, the company had 121,000 employees across the world (The Proctor & Gamble Company, 2014).
Importance of the study
All companies are required to publish audited financial statements that show the results of their operations at the end of a financial year. Such statements do not provide detailed information on the financial standing of a company. Therefore, it is necessary to carry out a comprehensive analysis of the financial results. The analysis will provide the users with in-depth information on the financial standing of the company. The results of such analysis guide users in making decisions on their interaction with the company.
Objectives of the study
The paper seeks to carry out a financial analysis of Proctor & Gamble Company for five years, that is, between 2009 and 2013. The five common categories of ratios will be used to analyze the financial results of the company.
This section will discuss the five categories of ratios for five years.
|Gross profit margin %||50.8||52.0||50.6||49.3||49.6|
|Net margin %||16.76||15.86||14.01||12.85||13.44|
|Return on assets %||9.5||9.52||8.68||7.95||8.33|
|Return on equity %||20.39||20.59||18.32||16.72||17.51|
The income statement of the company gives information on the profitability level of the company. Various ratios are often used to analyze the profitability of a company. The ratios are calculated based on the profits reported in the income statement. The gross profit margin decreased from 50.8% in 2009 to 49.6% in 2013. The ratio shows that the ability of the company to manage the cost of inventory and pricing deteriorated. Further, it can be observed that the company has a low gross profit margin. This can be explained by the high cost of production and fluctuations in the costs of raw materials. The net profit margin declined from 16.76% in 2009 to 13.44% in 2013 (The Proctor & Gamble Company, 2014). The decrease in the net profit margin implies that the ability of the company to manage the total cost of operation declined over the period.
The return on assets declined from 9.5% in 2009 to 8.33% in 2013. The decrease implies that the efficiency of the company in generating profit from the asset available decreased. Finally, return on equity decreased from 20.39% in 2009 to 17.51% in 2013. The ratio is significant to potential and current investors because it shows the return on their investment. The decline in return on equity was caused by a reduction in net income and an increase in shareholder’s equity from $63,099 million in 2009 to $68,064 million. Based on the analysis above, it can be concluded that the overall profitability of the company decreased (Collier, 2009). The decline in profitability was caused by the reduction in net income from $13,244 million in 2009 to $11,312 million in 2013. Further, the company faced challenges in managing the cost of production. The change in consumer spending behavior due to the tough economic condition also played a role the in decline of overall profitability. The graph presented below shows the trend of the profitability ratios.
|Working capital ratio||0.71||0.77||0.81||0.88||0.8|
The liquidity ratios for the company were quite low. The current ratio increased from 0.71 in 2009 to 0.80 in 2013. Similarly, quick ratio rose from 0.34 in 2009 to 0.41 in 2013. The values of the liquidity ratios in all the years are less than one. This implies that the company is facing difficulties in paying current liabilities using both current and liquid assets. The ratios indicate that the company is facing problems in paying accounts payable on time. This situation may force the company to borrow from financial institutions to support its liquidity. The low liquidity ratios can be attributed to the nature of the commodities that the company trades in (Brigham & Houston, 2009). The company needs to improve on the liquidity position by increasing the amount of current assets and reducing current liabilities. The graph presented below shows the trend of the liquidity ratios.
Debt management ratios
The debt to equity ratio gives information on the ratio of debt and equity in the capital structure of the company. A high value of debt to equity ratio implies that the company is highly levered. However, extremely low ratios may indicate that the company is not aggressive in venturing into available investment opportunities. The ratio declined from 0.33 in 2009 to 0.29 in 2013. The low values of debt to equity ratios imply that the leverage level of the company is low. The overall financial leverage also reduced from 2.18 in 2009 to 2.08 in 2013. It shows that the amount of debt declined. The graph presented below shows the trend of gearing ratios.
The interest coverage ratio rose from 12.29 in 2009 to 23.25 in 2013. The increase was caused by a decline in the amount of debt. The ratio gives information on the solvency of the company, that is, how easily the company can pay interest expense using income before interest and taxes. The increase in the value of the ratio implies that the solvency position of the company improved (Collier, 2009). The graph presented below shows the trend of the interest coverage ratio.
Asset management ratios
|Days sales outstanding||29.09||25.83||25.66||26.92||27.27|
|Days in inventory||71.77||63.84||61.61||60.7||58.63|
The days in inventory ratio declined from 71.77 in 2009 to 58.63 in 2013. The decline implies that the period of time inventories stays on the shelf declined. It indicates that the rate of stock movement in the company improved over the period. It also shows that the number of times that the company replaces stock in a year increased. This shows an improvement in efficiency. The days sales outstanding declined from 29.09 in 2009 to 27.27 in 2013. The ratio gives information on the average period of time it takes the firm to collect accounts receivables. A decline in the value of the ratio implies that the company takes a shorter period to collect accounts receivables (Brigham & Houston, 2009). The payables period increased from 59.84 in 2009 to 71.82 in 2013. The increase implies that the company takes a longer period to pay its creditors. It shows a decline in efficiency. However, the increase is beneficial for liquidity and working capital management. Finally, the total asset turnover increased between 0.57 in 2009 to 0.62 in 2013. The ratio estimates the amount of sales generated from a unit of total asset. The increase implies that the efficiency level improved. The graph presented below shows the trend of the efficiency ratios.
The price/earnings ratio gives information on the price of shares in relation to earnings. The ratio rose from 16.6 in 2009 to 21.9 in 2013. The increase implies that the shareholders anticipate higher returns on their investment. The price/book ratio gives information on the price of shares in relation to the book value of the assets. The value of the ratio also increased from 2.6 in 2009 to 3.2 in 2013 (The Proctor & Gamble Company, 2014). Finally, price/sales ratio increased from 2.4 in 2009 to 2.8 in 2013. The increase in the value of the ratio implies that the market price of the share in relation to the sales improved (Clarke, 2012). An increase in the value of the ratios implies that the overall valuation of the company improved. The graph presented below shows the trend of valuation ratios during the period.
The paper carried out a financial analysis of Proctor & Gamble Company for a period of five years using ratios. The ratios show that the profitability level of the company declined over the period. The decline was caused by a number of factors such as fluctuations in the cost of production, competition, and dynamic economic conditions. There was a slight increase in the liquidity position of the company during the period. The debt management ratios show that there was a decline in the leverage level and an improvement in the solvency level of the company. Further, the asset management ratios show that there was an improvement in the operating efficiency. Finally, the valuation of the company rose during the period.
Brigham, E., & Houston, J. (2009). Fundamentals of financial management. USA: Cengage Learning.
Clarke, E. (2012). Accounting: An introduction to principles and practice. USA: Cengage Learning.
Collier, P. (2009). Accounting for managers. London: John Wiley & Sons Ltd.
The Proctor & Gamble Company. (2014). 2013 annual report. Web.