Procter and Gamble Company Background and History, Financial Ratio - Case Study Example

Procter and Gamble Analysis of Financial ment – June Company Background and History Procter and Gamble is a multi-national, manufacturingconglomerating. It produces many brands of consumer products and house hold goods. The company has its headquarters based in Cincinnati, Ohio and its chief regional head quarters are located in Singapore, Panama and Switzerland. The company is operating under the leadership of Angela F. Braly who is the company’s current chief executive officer. Procter and Gamble came into being in 1837 by William Procter and James Gamble. Procter who was an English Immigrant started making candles in Cincinnati. Gamble, who was an Irish immigrant became his brother in law. They were encouraged by their father-in-law to do a business together which they finally pursued and agreed to a joint venture after some years. Procter brought with him, his candle-making expertise while Gamble who was an experienced soap-maker offered his services. The company started off by selling candles and soap in the Ohio area. It became more of a family business when Procter’s eldest son went on to become the president of the corporation in 1890. Gamble’s eldest son, inducted the first ever laboratory in the company’s history giving it its first ever Ivory soap. As of 2010, the company is manufacturing and selling 81 different brands. They range from budget and household items for instance detergents and pampers to designer lines for instance Dolce and Gabbana and Burberry 5. As of 2009, the company garnered $79 billion in revenue. Of this $13 billion was in net earnings and this gave the company an earning margin of 14.3%. In 2008, the net revenues were 81.7 billion dollars. Procter and Gamble had also been in the news recently for their acquisition of Ambi Pur from the Sar Lee corporation for 320 million Euros. Industry Analysis and Business Outlook: Procter and Gamble provides consumer packaged goods. Its products are sold in more than 180 countries through mass merchandisers, grocery stores, drug stores, high frequency stores, neighborhood stores and membership club stores. These stores different consumer in developing marketings. P & G conducts on-ground operations in approximately 80 countries. As of June 30, 2010, the company had three Global Business Units: Beauty and Grooming, Health and Well Being and Household care. 16% of its total revenue comes from sales to Wal-Mart. The company takes pride in focusing on strategies that they believe are right for the long-term health of the Company. They plan on increasing their organic sales from 1% to 2% faster than the market growth in categories in which they compete. They are also focused on delivering earnings per share of high single digits to low double digits and generate free cash flow productivity of 90% or greater. They have an over-arching strategy which is inspired by Purpose and which rests on innovation and development. They are improving on the number of consumers they are catering to through constant innovation and expansion of their product portfolio. They have launched various premium innovations that focuses on improving consumer value through enhanced performance. They are also serving consumer who tend to be more price conscious. At the same time P&G continues to expand globally in more and more parts of the world through constant innovation and expansion of their product geographically into new markets. They have been increasing their operations in developing markets and increasing the amount of sales from these markets by focusing more on affordability accessibility and awareness of their brand. P&G has also been improving existing products by entering into new product categories. By attracting new consumers into the current brand franchises and broadening the products used by the current consumers, they find themselves able to build scale, reduce costs and profitably grow market share. In the fiscal year, 2010, they witnessed substantial progress. On the whole, the company’s organic sales grew by 3% and this was in line with the company’s expectations. Their core earnings per share grew by 6% and their adjusted free cash flow was 125% of their net earnings. They exceeded themselves and surpassed their targets. P&G has also made a lot of progress in churning out a profitable share growth. Just a year ago, their global market share had gone down by half a point but in 2010, they improved their global market share by another half a point. Their market share continues to grow and improve in 14 of the top 17 countries of the world. Other than this, they have also been successful in reaching out to 200 million additional consumers. Currently the company is serving 4.2 billion consumers and aims to reach their goal of 5 billion consumers by the year 2015. Average per capita spending on their products stands at 70% of their top countries. It improved from 60% in 2009. Their global house penetration improved by two points to 61% in the same years. As a result of the remarkable progress demonstrated by P&G, they paid around $5.5 billion in dividends and returned another $6 billion to shareholders by repurchasing the P&G stocks. The dividends and share purchases churn out a cash yield of more than 6 percent as of today. The quarterly dividend was increased by 9.5% in April. P&G has been paying its dividends out for the last 120 years and in the last 54 years the dividend has been growing at an annual compound rate of around 9.5%. Future Outlook Procter and Gamble brought down its profit forecast for the year 2011 . this is in its response to the economic conditions and its attempt at trimming down on prices. Its earnings rose for the year but fell short of the expected market. On the whole the company earned $2.87 billion in the third quarter. Analysts on average have expected 97 cents per share. Its sales rose by 5% to 20.23 billion dollars. (Reuters, 2011) Financial Ratios: For the Year 2010 A) Short term Liquidity Ratios Liquidity ratios provide insight into the ability of the company to meet it’s short term debts. Two types of liquidity ratios are used. 1) Current Ratio Current Ratio = Current Assets/ Current Liabilites (All amount in USD $ in millions) Total Current Assets = 14,782 Total Current Liabilities = 24, 282 Current Ratio = 0.77 Industry average = - The company’s ratio declined from 2008 to 2009 (0.79 to 0.71) and then improved from 2009 to 2010 but did not reach the 2008 mark in 2010. 2. Quick Ratio Quick Ratio = Cash + Short term marketable Investments + Receivables /Current Liabilities Financial Data (USD $ in millions) Cash and cash equivalents = 2879 Investment securities = - Accounts Receivable = 5335 Total Quick Assets = 2879 +5335 = 8214 Total Current Liabilities = 24, 282 Quick ratio = 8214/24, 282 = 0.34 3. Cash Ratios Cash Ratio = Cash + Marketable Securities / Current Liabilities Financial Data (USD $ in millions) Cash and cash equivalents = 2879 Investment securities = - Total Cash Assets = 2879 Total Current Liabilities = 24, 282 Cash Ratio = 2879/24, 282 = 0.12 B) Operating Efficiency 1) Inventory Turn Over Inventory Turn Over = Revenue / Inventory Financial Data (USD $ in millions) Net Sales = 79, 938 Inventories = 6,384 Inventory Turn Over = 79, 938/ 6,384 = 12.36 2) Receivables Turn Over Receivables Turn Over = Revenue / Receivables Financial Data (USD $ in millions) Net Sales = 79, 938 Receivables = 5335 Receivables Turn Over = 79, 938/5335 = 14.30 3) Payables Turn Over Payables Turn Over = Net Sales/ Payables Financial Data (USD $ in millions) Net Sales = 79, 938 Payables = 7251 Receivables Turn Over = 79, 938/7251 = 10.89 4) Working Capital Turn Over Working Capital Turn Over = Net Sales/ Working Capital Financial Data (USD $ in millions) Net Sales = 79, 938 Working Capital = 4,468 Working Capital Turn Over = 79, 938/4468 = 17.67 5) Average Inventory Processing Period Average Inventory Processing Period = Number of days in the period / Inventory turn over in the period Inventory turn over = 12.36 Number of days in the period = 370 Average Inventory Processing period = 370/12.36 = 30 6) Average Receivable Collection Period Average Receivable Collection Period = Number of days in the period / Receivable turn over in the period Receivable turn over = 14.80 Days = 370 Average Receivable Collection Period = 370/14.8 = 25 7) Operating Cycle Operating Cycle = Average Receivable Collection Period + Average Inventory Processing Period Average Receivable Collection Period = 25 Average Inventory Processing Period = 30 Operating Cycle = 55 8) Average Payables Payment Period Average Payables Payment Period = Number of days in the period / Payable turnover ratio Payable turn over ratio = 10.89 Days = 370 Average Payables Payment Period = 370/ 10.89 = 34 9) Cash Conversion Cycle Cash Conversion Cycle = Average Receivable Collection Period + Average Inventory Processing Period - Average Payables Payment Period Average Receivable Collection Period = 25 Average Inventory Processing Period = 30 Average Payable Payment Period = 34 Cash Conversion Cycle = 25 + 30 -34 = 21 C) Capital Structure 1) Debt to equity ratio = Total Debt / Total Equity Financial Data (USD $ in millions) Debt Due in One Year = 8472 Long term Debt = 21, 360 Total Debt = 8472 + 21360 = 29832 Total stock holder’s equity = 61, 115 Debt to Equity Ratio = 0.49 2) Debt to Capital Ratio = Total Debt/ Total Capital Financial Data (USD $ in millions) Debt Due in One Year = 8472 Long term Debt = 21, 360 Total Debt = 8472 + 21360 = 29832 Total Capital = 90, 947 Debt to Capital Ratio = 0.33 3) Interest Coverage = EBIT / Interest Payments Financial Data (USD $ in millions) Net earnings = 12, 736 Add: Interest expense = 946 Add : Income Tax = 4101 EBIT = 17,783 Interest Coverage = 18.80 D) Profitability Ratios 1) Gross Profit Margin = Sales – Cost of Goods Sold / Sales Financial Data (USD $ in millions) Gross Profit = 41, 109 Net sales = 78, 938 Gross Profit Margin = 51. 96% 2) ROE = Net Income / Share-holder’s equity Financial Data (USD $ in millions) Net earnings = 12, 736 Total equity = 61, 115 ROE = 20.84 3) ROA = Net income / Total Assets Financial Data (USD $ in millions) Net earnings = 12, 736 Total Assets 128, 172 ROA = 9.94 (Research Analysis) Bibliography Research Analysis. (n.d.). Retrieved May 24, 2011, from Stock-Analysis on Net: http://www.stock-analysis-on.net/NYSE/Company/Procter-Gamble-Co#Ratios Reuters. (2011, April 28). P & G lowers top end forecast. Retrieved April 24, 2011, from Yahoo News: http://news.yahoo.com/s/nm/20110428/bs_nm/us_procter_1 Read More