Gillette Company Financial Performance Analysis - Essay Example

ANALYSIS OF GILLETTE COMPANY ANNUAL REPORTS 6th March Report of: Executive Directors of Gillette Company Status: Open Subject: Analysis of Gillette Company Annual Financial Performance Introduction/executive summary he main types of profitability ratios that may be imperative in the analysis of Gillette Company financial performance have been discussed. One of the profitability ratios concerns with measuring the return on sales. The other focus on assessing return on sales. Further, solvency ratios show the ability of Gillette to pay off its liabilities and interest obligations. The short-term solvency ratios focus on the capacity of the Gillette Company to pay off its current liabilities (Drake and Fabozzi, 2012). The long-term solvency ratios focus on the ability of the Gillette Company to pay off its long and medium debt obligations. The liquidity ratios assist in determining if a company is likely to experience problems in repaying its current liabilities. Hence, if the current ratio is higher, then the liquidity position is stronger. The Asset Management Ratios try to measure the success of Gillette Company in managing assets to generate sales (Drake and Fabozzi, 2012). 1. Calculations of profitability, liquidity, asset management and long-term solvency ratios for Gillette Company (a).profitability ratio for Gillette Company When determining the profitability ratio of the company, it is imperative to measure the return on capital and return on sales (McKinley, 1988). Measuring return on capital Return on total on total assets (ROTA) = Operating profit/ Total Assets=2003/ 4500=44.5% Return on capital employed (ROCE) = Operating profit/ (Equity + Non –current liabilities) = 2003/3750= 53.41%% The Return on Equity (ROE) = Annual returns/ Equity= 350/ 2250= 15.5% (Carlin and McMeen, 1993). Measuring return on sales Gross margin ratio = Gross profit/ Sales= 2003/ 9252= 21.6% Operating profit margin ratio= Operating profit/ Sales= 1385/ 9252= 15.0% (Fridson, Alvarez and FinancePro, 2011). The ratios are affected by both changes in the selling price of the output of a company and the changes in its costs. For instance, if the ratios fall, it may be due to higher average unit costs or lower selling prices or both. On the other hand, if they rise it may be attributable to lower average unit costs or higher sale price or both. Therefore, analysts and investors have to look behind the ratios so as to get an idea of the cause of change over time. It may also help them understand the differences between different firms operating in the same market (Fridson, Alvarez and FinancePro, 2011). (b).Liquidity ratios Current ratio= Current assets/ Current liabilities= 3300/ 1000= 3.3 Acid-test ratio = (Current assets- Inventories)/ Current liabilities= 1.2 (Wahlen, Bradshaw, Baginski and Stickney, 2010). (c) Long term solvency ratios Debt equity ratio= Total debt/ total equity= 1500/ 2500= 0.60 Interest cover ratio= Profit before interest / Interest expense =1964/ 150=13.09 Cash interest cover ratio = Cash flow from operations/ interest paid= 1125/ 150= 7.50 (Wahlen, Bradshaw, Baginski and Stickney, 2010). (d).Asset management ratios Total Assets turnover= Sales/ total Assets= 9252/4500= 2.06 (Woelfel, 1993). 2. What do the ratios tell us about the financial position of Gillette Company? The first two ratios, return on total assets and return on capital employed are the alternative ways of investigating how well Gillette company has done in generating profits from its operating assets (Fridson and Alvarez, 2011).The third ratio return on equity has a different focus from the two ratios. Return on equity is with the measurement of performance solely from the perspective of the shareholders. Therefore, it is necessary to use profit for the year since it is measured by subtracting interest. The ratios show that the Gillette Company has done well-generating profits, and the company is in a better financial position (Fridson and Alvarez, 2011). The liquidity ratios indicate that the Gillette Company does not have problems in repaying its current liabilities. Gearing ratios are crucial to both shareholders as they give information on the financial risk of the enterprise. From the lender’s viewpoint the lower the debt-equity ratio and the higher the cover ratios, the lower the risk to them that the business will fail to repay their debts or make interest payments. Therefore, from the lenders viewpoint Gillette Company will be able to repay their debts and make interest payments (Wall and Duning, 1932). From the shareholders perspective, the higher the debt-equity ratio and the lower the interest cover, the higher the volatility of the profits generated by the company. Consequently,the greater the risk of them of the business becoming bankrupt. Therefore from the viewpoint of the shareholders the Gillette Company is not going bankrupt (Wall and Duning, 1932). The asset management ratios measure how the company productively manages all its assets to generate sales. The ratio indicates that the Gillette Company is managing asset prudently (Woelfel, 1993). 3. The Additional Information that might be in order to have better analysis of Gillette company financial statement The other information that might be in analyzing the financial statements of Gillette Company is the vertical and horizontal analysis methods. Horizontal analysis compares financial information with a number of reporting periods. On the other hand, the vertical analysis is the proportional analysis of a financial statement. I this method every line item on the financial statement of the company is listed as a percentage of another item. Usually, each line item on an income statement is stated as a percentage of gross sales. On the contrary, every line item on the balance sheet of the company is stated as a percentage of the total assets. Therefore, horizontal analysis is the review of the results of time periods that are multiple. The vertical analysis is the examination of the proportion of the accounts to each other within a single period. Therefore, a variety of key indicators of future performance of the company may be needed for proper analysis as discussed (Woelfel, 1993). 4. Significant risks and advantages/ opportunities The Gillette company will be to a number of opportunities that include; • Lower debt-equity ratio and a higher cover ratio, it will enable Gillette Company obtain loans from lenders since it will be able to make interest payments and also be able to repay their debts. • The firm will be able to bring in many shareholders because it has a low debt-equity ratio. In addition,there is a higher interest cover ratio, and the volatility of profits generated are little.It is an indication that the business will not become bankrupt (Robinson, 2012). The major risk is, if the debt-equity ratio falls in the future due to an increase in equity, the ease of Gillette Company in paying interest on debt will be decremented. The other risk is in the analysis of the financial statements of the enterprise using ratios. It would be difficult to discover a variety of key indicators of future performance. Therefore, operational information that is important will not be reviewed (Neumann and Conner, 2004). Conclusion/Recommendation Their main types of profitability ratios have been put forth. One of the profitability ratios concerns with measuring the return on sales and the other focuses on measuring return on sales. The short-term solvency ratios focus on the capacity of the Gillette Company to pay off its current liabilities. The long-term solvency ratios focus on the ability of the business to pay off its long and medium debt and interest. The liquidity ratios assist in determining if a Gillette company is likely to have problems in repaying its current liabilities. The Asset Management Ratios try to measure the success of Gillette Company in managing assets to generate sales. The Gillette Company will be to a number of opportunities and risks that would affect its financial performance. Therefore, I recommend Gillette Company to utilize an analytical method that will review operational information. Further, I will recommend Gillette Company to use the results of the computed ratios to improve its financial performance (Drake and Fabozzi, 2012). Reference List Carlin, T. P., and McMeen, A. R. (1993). Analyzing financial statements. Washington, D.C: American Bankers Association. Fridson, M. S., Alvarez, F., and FinancePro. (2011). financial statement analysis: A practitioners guide, fourth edition. Hoboken, N.J: John Wiley & Sons. Fridson, M. S., and Alvarez, F. (2011). Financial statement analysis workbook: Step-by-step exercises and tests to help you master financial statement analysis. Hoboken N.J: John Wiley and Sons Inc. McKinley, J. E. (1988). Analyzing financial statements. Washington, D.C: American Bankers Association. Neumann, B. R., & Conner, E. C. (2004). Using financial accounting: The smart guide to analyzing financial statements. Dubuque, Iowa: Kendall/Hunt Pub. Peterson Drake, P., and Fabozzi, F. J. (2012). Analysis of financial statements. Robinson, T. R. (2012). International financial statement analysis. Hoboken, N.J: John Wiley & Sons. Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western. Wall, A., and Duning, R. W. (1932). Analyzing financial statements. New York City: American Institute of Banking. Woelfel, C. J. (1993). Financial Statement Analysis: Investors Self-study Guide to Interpreting and Analyzing Financial Statements. Chicago, Ill: Probus. Read More