Gillette Company Financial Results - Example

Company Background The Gillete Company was founded in 1901. The company is the world leader in male grooming and it also has the global lead in alkaline batteries, manual and power toothbrushes. The manufacturing operations of the firm are scattered across 32 facilities in 14 countries. Its products are distributed through wholesalers, retailers, and agents in over 200 countries worldwide. The company has five business segments: blades and razors, Duracell, oral care, Braun, and personal care. James Kilts is the chairman, president and CEO of the company. The managerial staff of the company believes in driving continuous improvements throughout the organization. One of the keys to success of the business is offering a portfolio of differentiated products. Blades and razors are the bread and butter of the company since the firm holds a 72.5% market share in this sector. Its market share in this sector is six times higher than the nearest competitor. The Duracell brand is also a cash cow for the firm. To improve functional excellence the firm has invested over the last two years $120 million. Gilletes largest customer is the retail giant Walt-Mart. Walt-Mart accounted for 13% of the total sales of the company in 2013. The total workforce of Gillete is composed of 29,400 employees. Of those 29,400 employees 70% of them are from outside the United States. The firm faces fierce competition in all business segments. Its biggest competitor in the blades and razor sector is Energizer Holdings which owns the Schick brand. In 2003 the firm spend $203 million in research and development. The raw materials used to manufacture its products are purchased from a wide array of suppliers. The majority of the facilities of the company are owned, but the firm does use leasing as a strategy for expansion into foreign markets. Financial Overview In fiscal year 2003 the Gillete Company generated revenues of $9,252 million. The sales of the company increased by 9.45% in comparison with the previous year. The gross profit of the company was $5,444 million, while its net income was $1,385 million. The net income of Gillete in 2003 increased by 12.20%. Gilletes two biggest cost factors in 2003 were cost of goods sold and selling, general, and administrative expenses at $3,708 million and $3,541 million respectively. The total assets of the company amount to $9,955 million. In 2003 the organization had an increment in total assets of 0.9%. Gilletes total equity equals $2,224 million. The firm in 2003 experienced a small reduction in total equity of $36 million. In terms of debt the company has total liabilities of $7,731 million. The cash position of the firm at the end of fiscal year 2003 was $681 million. Even though the company has a lot of cash on hand, the firm experienced a reduction in cash in comparison with 2002 of $120 million. The cash the company handled can be divided into three segments: operating, investing, and financing. Gillete obtained $2,640 million from operating activities, -$518 million from investing activities, and -$2,250 million from financing activities. Ratio Analysis The gross margin calculates the broad profitability of a company. Gillete in 2003 had a gross margin of 59.92%. A companys net margin shows the absolute profitability of a firm. Gillete had a net margin in fiscal year 2003 of 14.96%. Based on this net margin we can conclude that the profitability of the organization is good. The business had an earnings per share (EPS) of $1.35 in 2003. The EPS metric tends to have an effect on the market price per share (Garrison, Noreen, 2003). Gillete paid dividends per share in 2003 of $0.65. The dividend payout ratio of the company was 48% which implies that the company believes in giving back earnings to its shareholders. Measuring the liquidity of a company is very important. A ratio that calculates the ability of a company to pay off its short term debt is the current ratio. The current ratio can be calculated dividing current assets by current liabilities. In 2003 Gillete had a current ratio of 1.0. Its current ratio is acceptable because it complies with general rule of a ratio of 1.0 or above been good. A more stringent measure of the solvency of a company is the quick ratio. The quick ratio is calculated similarly to the current ratio with the difference being that inventory is subtracted from the numerator of the formula. The quick ratio of Gillete in 2003 was 0.70. Working capital measures the ability of a company to repay current liabilities using only current assets. The working capital of Gillete in 2003 was -$8 million. For other companies with lower volume of business a negative working capital of $8 million would be bad, but in Gilletes case this figure is insignificant. The debt ratio shows how leveraged the company is. A company that is too highly leveraged can face liquidity problems. The debt ratio of Gillete is 0.78. Since the firms debt ratio is below 1.0 it implies that the company is not too highly leveraged. Times interest earned measures the companys ability to make interest payments. The times interest earned of Gillete in 2003 was 37.09, thus based on this result the company should not have any problems making interest payments. Return on assets (ROA) measures how effective assets have been employed by management. In 2003 Gillete had a return on assets of 13.91%. Return on equity (ROE) measures the extent to which financial leverage is working for or against common stockholders (Garrison, et al., 2003). The return on equity of the organization in 2003 was 62.27%. Gilletes return on equity in 2003 was outstanding. Inventory turnover measures how many times a companys inventory has been sold during the year. The organization had an inventory turnover in 2003 of 3.39. Average sales period measures the average number of days to sell the inventory of a company one time. The companys average sale period in 2003 was 107.67 days. The debt to equity ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by stockholders (Garrison, et al., 2003). Gilletes debt to equity ratio was 3.30. This ratio implies that the firm has used debt more than equity as a medium for its expansion. Appendix A shows a table with a summary of the 15 ratios calculated. Risks and Opportunities The Gillete Company has a wide variety of products which helps the company lower its overall risk because the firm is not dependent on a single business segment to generate sales. Despite the fact that the company has a diversified product portfolio, the firm does face a variety of business risks that can affect the operations of the company. The overall well being of the global economy affects the business. Whenever there is a contraction in the economy people tend to purchased less consumer goods which would negatively impact the Gillete Company. Another risk that the firm has to consider is legal risk. Currently the firm does not have any pending litigation that would affect the financial position of the firm. Some of the legal matters that could affect the company include antitrust and trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, and taxes. The competition are a source of risk for the company. They could come up with an innovative product in one of the firms business segments that might make Gilletes product offering obsolete. Another risk the company faces is labor relation conflicts. The company operates in a lot of foreign countries where the customs and norms are different. Political instability is a potential risk of any company that operates outside the United States. In regards to opportunities Gillete could improve its market share in some of its business segments by releasing a new innovative product that outperforms the competition. A second opportunity for the company is to achieve further penetration of the India and China marketplace. These two countries hold over 37% of the global population. A third opportunity for the company is to take advantage of the booming e-commerce marketplace. The company should get the help of an online marketing expert to create a new website independent of the corporate site to directly sell the firms products. Conclusion The Gillete Company in 2003 achieved a lot of positive financial results. The sales of the company were very good as the firm experienced a sales growth of 9.45%. The profitability of the firm was solid evidenced by the fact that the company obtained a net margin of 14.96%. The ROA and ROE results of the firm demonstrate good asset management. The current ratio shows that the company is in a good position to pay off its short term debt, while the debt ratio demonstrates that the company is not too highly leveraged and can pay its overall debt. Gillete had good solvency and liquidity. Overall the financial results of 2003 were very good, thus I would recommend an investor purchase Gillete common stocks. Appendix A: Table ratio analysis Gillete Company (2003) Financial Ratio Year 2003 Gross margin 59.92% Net margin 14.96% EPS $1.35 Dividends per share $0.65 Dividend payout ratio 48.00% Current ratio 1 Quick ratio 0.7 Working capital -$8 million Debt ratio 0.78 Times interest earned 37.09 Return on assets 13.91% Return on equity 62.27% Inventory turnover 3.39 Average sale period 107.67 days Debt to equity 3.3 References Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Read More