Gillette Company's Performance Over the Years and in the Industry - Essay Example

Gillette Company Case Study Gillette Company Case Study Introduction Gillette has been in operation since 1901 in the manufacture of personal care product. To determine the company’s financial health and earning power in 2003 both qualitative and quantitative information from its annual report are used. Financial ratios are essential in this analysis as they indicate the firm’s financial position. Liquidity Ratios: Short Term Solvency This ratio measure is the firms ability to meet its short-term obligations; they indicate the company’s efficiency in utilizing its current assets and current liabilities (Gibson 2012, p. 243). Current Ratio- this is a ratio of current assets to current liabilities showing the number of times current liabilities are included with the current assets. A higher ratio is preferred. =Current Assets/Current Liabilities =3650/3658 =1 (0.998) A current ratio of 2.00 is recommended since it shows the firms ease in meeting its short-term obligations. This shows that Gillette falls short of this level and hence inefficient use of its current assets and current liabilities. Quick ratio-Inventories are the least liquid of assets and face significant risks like they may be damaged or lost among others. They are hence reduced in calculating quick ratio. A higher quick ratio is also preferred. = (current asset-inventories) /Current Liabilities =2556/3658 =0.70 A minimum quick ratio of 1 is recommended and hence Gillette fails to meet this level. Cash Ratio- shows the percentage of current liabilities covered by cash and cash equivalents. This ratio measures the company’s ability to repay current liabilities using cash. A higher ratio is also recommended. =Cash and cash equivalents/Current Liabilities =681/3658 =0.19 A ratio of 1 and above is recommended since it indicates the ease to pay current liabilities using cash and cash equivalents, companies, however, opt to use available cash for other profit generating activities and hence the ratio is ideally less than 1. Gillette’s cash ratio is 0.19 which falls far below the recommended rate. This may show that the firm does not keep its revenues in cash, and this may hinder its ability to repay its current liabilities in the short term. These liquidity measures indicate that Gillette is not able to meet its current obligations with ease. That means that the firm has to sell some of its fixed assets in order to reduce chances of insolvency. There is therefore need for improvement by the management. Long term Solvency; Financial Leverage Ratios. This measures the firm’s ability to meet its long-term debt obligations (Gibson 2012, p. 282). Debt Ratio-this is a measure of the total assets financed by debt. A lower ratio is recommended. =total Liabilities/Total Assets =7731/9955 =0.78 The debt ratio is less than one indicating that the firm has more assets than debt. The rate is, however, higher than 0.5 which is the recommended level. This is a good indication since it implies less leverage and hence fewer financial risks but management should work on increasing the level of assets and reducing liabilities. Profitability Ratios These measures determine the firm’s ability to generate revenue as compared to its expenses. Higher profitability measures are recommended (Gibson 2012, p. 483). Profit margin=net income/sales =1385/9252 =0.15 or 15% The ratio indicates the profit made per dollar of sale. A rate of 15% is high and shows the firm’s profitability. Return on assets = net income/total assets =1385/9955 =0.14 or 14% This is a ratio indicating how well the assets are generating income. A ratio of 14% is a good indication to the firm’s management. Return on equity- this is a ratio of net income to total shareholder’s equity. It indicates the amount of profit the company makes for its owners. A high ratio is preferred by investors since they are assured of high returns on their investments. =net income/total owner’s equity =1385/2224 =0.62 or 62% Gillette’s ROE is 0.62 meaning 62% of the company’s returns in 2013 belonged to the shareholder’s. Rates above 30% are recommended and hence Gillette ROE are favorable. Asset Management Ratios Inventory turnover- this is the ratio, of the cost of goods sold to inventories, showing the number of times the company restocked its inventory. A higher ratio indicates high sales as a result of fast movement of the inventory and is hence recommended (Gibson 2012, p. 432) =cost of goods sold/inventory =3708/1094 =3.39 times The ratio shows the number of times the company sold and restocked its inventories, a ratio of 3 means that the stocks were restocked three times in a year. Day’s sales in inventory =365/inventory turnover =365/3.39 =108 days This is an indication of the number of days the stock had stayed on the shelves before it was sold. 108 days in a year is a long period to restock hence indication of a slow movement of the goods. Receivable turnover- This ratio shows the number of times the company collects payments from its credit buyers. A higher ratio is recommended. =sales/accounts receivable =9252/1251 =7.40 This means that after credit sales the company received payments 7 times in that year. Day’s sale in receivables=365/receivable turnover =365/7.40 =49 days Show the number of days taken by the customers to pay for their credit purchases. Fewer days are recommended and hence Gillette’s customers quickly pay their debts. Total asset turnover- this is a ratio of sales to total assets. It measures how well the company creates revenue from its assets. A higher ratio shows that the bussiness is converting assets to revenue with ease and is hence recommended. =sales/total assets =9252/9955 =0.93 A minimum of 1 is recommended since it indicates the firm produces 1 dollar of revenue for every dollar of assets. Gillette’s asset turnover is hence not favorable. From the financial analysis of Gillette, it is evident that the firm’s liquidity ratios do not meet the required rates and hence the management needs to put more efforts in these operations. The company’s cash ratio is 0.19 which is far below the benchmark of 1. The company’s management should hence improve on their cash and cash equivalents holding to ensure liquidity. The profitability of the firm is, however, favorable as shown by its profit margin and return on assets. The firm has a high return on equity. This attracts investors; a high ROE is an advantage to the firm’s managed and owners since they are assured of external funding. The company restocks its inventory approximately three times in a year or after every 108 days. This is not favorable since it indicates slow movement of their products. The management needs to improve on sales by advertising and creating products that meet their customers desires give the new technology. Their credit customers pay for their credit purchases after every 49 days, and this is beneficial to the firm since it avails funds for re-investing and for meeting short-term debt obligations. The company produces revenue of 93 cents for every dollar of an asset. This is an indication of management’s failure since the return on assets does not meet the required minimum of 1. The management hence needs to come up with means of increasing the firm’s revenue relative to its assets. To better analyze Gillette’s financial statements, there is a need for financial statements from other years. This enables comparison of the year to year performance in order to determine whether the firm is experiencing growth or not and what areas of operation need improvements. The Company operates in an industry with other competing firms. To determine the companys performance in the industry, there is a need for financial statements and ratios for the other companies in the industry. Gillette has the advantage of consumer loyalty due to its being the initial inventor of most of its products. With available technology, innovation has increased and hence more and improved products to its customers. Gillette operates in an oligopolistic market and different countries. This reduces its costs of operation and hence makes it among the best performing firms in this industry. The company operates internationally and is hence faced by risks such as currency exchange risks and interest rates. There are however derivative instruments that help curb these challenges. Due to competition from other firms there is the need to spend most of the available resources in research and marketing. Conclusion There is inadequate information to draw the conclusion on the firm’s performance over the years and in the industry. From the available information however it is evident that the firm’s financial health is in want since tits liquidity and solvency are not favorable. Its revenue generation also needs improvements and indicated by the ROA. The company, however, has definite strengths like high receivable turnover; investors favor it due to its high ROE, and it is also a profit-making firm. From the analysis therefore Gillette is a company with a strong future prospect, and management should work to ensure the firm meets its full potential. Reference Gibson, C. H. (2012). Financial Reporting and Analysis, 13 Ed, South-Western Cengage Learning, New York. Read More