Tesla Ratio Project

Ratio Analysis Report - Church & Dwight Co., Inc.

This team has conducted a financial ratio analysis of the abovementioned firm primarily focusing on the 2018 fiscal year at year end 12/31/2018. Annual reports over 4 years were analyzed i n this report. We will cover several ratios to l earn about how the firm i s performing i n different aspects of the business.

Table 1. 2018 Short Term Solvency Ratios Current Ratio 0.81

Quick Ratio 0.52

Cash Ratio 0.24

The current ratio, which measures the firm’s assets to liabilities ratio, indicates that they are only able to fulfill 81% of their short term obligations. A ratio of 1 means the company’s assets is equal to their liabilities. The quick ratio of 0.52 means that comparatively to their current ratio, not much of the current assets is tied up in inventory, so the company has some flexibility to pay immediate debts. A healthy amount of cash on hand is responsible for some of the high quick ratio. The company routinely converts over 100% of net income into free cash flow, actively seeking to grow their ability to pursue acquisitions, one of their core objectives, and invest in the business.

Table 2. 2018 Financial Leverage Ratios Total Debt Ratio 0.60

Debt Equity Ratio 1.47

Equity Multiplier 2.47

Times Interest Earned Ratio 9.97

Cash Coverage Ratio 11.75

The equity multiplier shows that the company carries 2.47x the amount of assets than the amount of assets that are financed by the shareholders. As covered in the previous section, the company generates a high amount of cash from a high net income, which explains the fairly high cash coverage ratio and times interest earned ratio. The debt equity ratio of 1.47 is comparable with competitive firm, Proctor & Gamble’s ratio of 1.46 and Johnson & Johnson, with a ratio of 1.56. The total debt ratio is also nearly equal to that of Proctor & Gamble and Johnson & Johnson. This indicates that the company carries an appropriate amount of debt

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and finances their acquisitions through free cash flow conversion, rather than taking on debt or selling equity.

Table 3. 2018 Turnover Ratios Inventory Turnover 6.02

Days Sales in Inventory 60.61

Receivables Turnover 12.01

Days Sales in Receivables 30.40

Total Asset Turnover 0.68

Capital Intensity 1.46

Church & Dwight’s asset utilization efficiency is on par with industry averages. On average, the company takes 90 days to convert a finished good into cash, collecting their receivables in 30 days. The company buys and sells primarily via purchase orders, so it is not realistic to have as low a “days sales in receivables (payables)” value compared to a retail company. Their asset turnover may be elevated slightly due to an appreciable amount of outsourced manufacturing, in which the third party manufacturer owns most or all of the assets involved with manufacturing the contract products, however it is down from 0.80 in 2015 and 2016, due in large part to a $1 billion acquisition of the WATERPIK oral hygiene brand. This acquisition came with a 37% increase in goodwill and 62% increase in intangible assets over the prior year.

Table 4. 2018 Profitability Ratios Profit Margin 13.7%

Return on Assets 9.4%

Return on Equity 23.2%

The company is above industry average for FY 2018 in both ROA and ROE. . The profit margin of 13.7% falls a little bit short of the industry average for the trailing 12 months. The company cites a few reasons for a lower profit margin, namely higher commodity and transportation costs and the need to take price cuts in order to compete with larger competitive companies, which have the ability to leverage their economies of scale for lower COGS. The high ROA speaks volumes to the success of the company and its WATERPIK acquisition after taking on and keeping a higher asset balance after the acquisition.

Table 5. 2018 Market Value Ratios P/E Ratio 28.97

Market/Book Ratio 6.73

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A market price of $65.76 per share at market close on 12/31/2018 was used to calculate the above ratios. The Price/Earnings Ratio is a comfortable, but not extremely overvalued amount above the industry average, indicating that the company is performing well and attracting investors. The Market/Book Ratio is also somewhat higher than the industry average, indicating value generation for its stockholders, which is commonly distributed through dividends.

Return on Equity, Deconstructed by DuPont Analysis

Table 6. ROE = EBIT/Revenue * EBT/EBIT * Net Income/EBT * Revenue/Total Assets * Total Assets/Equity

2018 ROE EBIT Margin Interest Burden Tax Burden

Asset Turnover

Leverage (Equity

Multiplier)

23.17 0.19 0.91 0.79 0.68 2.47

Table 7. We compare the FY 2018 figures above the company’s performance over the past 4 years.

ROE EBIT Margin Interest Burden Tax Burden

Asset Turnover

Leverage (Equity

Multiplier)

2018 23.17 0.19 0.91 0.79 0.68 2.47

2017 33.52 0.20 0.90 1.07 0.63 2.71

2016 23.21 0.21 0.97 0.65 0.80 2.20

2015 20.28 0.20 0.94 0.65 0.80 2.10

Church & Dwight’s 2017 Report highlights a 7.3% drop in tax rate, down from 35% in 2016. This reduction to a lower tax rate had immediate impacts on their tax burden ratio, which also was tipped higher due to an 8.1% increase in revenue over 2016. The tax burden term is the primary reason that the calculated ROE is significantly higher for 2017 than for other years in this data set.

Table 8. We also compare the deconstructed ROE figures to 2 of Church & Dwight’s competitors, Johnson & Johnson and Proctor & Gamble, both much larger companies.

2018 ROE EBIT Margin Interest Burden Tax Burden

Asset Turnover

Leverage (Equity

Multiplier)

Johnson & Johnson 25.60 0.26 0.84 0.85 0.53 2.56

Proctor & Gamble 20.43 0.21 0.42 1.56 0.59 2.49

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The ROE for Church & Dwight falls between that of Johnson & Johnson and Proctor & Gamble, signifying that they are on par with the industry. Church & Dwight, however falls short on operating profitability compared to both competitors here, especially Johnson & Johnson, which posts an EBIT margin of 0.26. It is also worthwhile to note that Proctor & Gamble overcomes a large tax burden, nearly double the values that Johnson & Johnson and Church & Dwight have. Furthermore, we can infer that Proctor & Gamble have a larger amount of equity than Church & Dwight from having a lower ROE but a higher EBIT Margin.

Table 9. Income Statement Data for the previous 3 years of Church & Dwight.

FISCAL YEAR ENDING 12/31/2018 12/31/2017 12/31/2016 12/31/2015 Comm. Size '18

Comm. Size '17

Comm. Size '16

Comm. Size '15

Total Revenue 4,145,900 3,776,200 3,493,100 3,394,800

Cost of Revenue 2,305,100 2,046,600 1,897,600 1,883,000 55.6% 54.2% 54.3% 55.5%

Gross Profit 1,840,800 1,729,600 1,595,500 1,511,800 44.4% 45.8% 45.7% 44.5%

Total Operating Expenses 3,354,200 3,004,300 2,764,000 2,720,600 80.9% 79.6% 79.1% 80.1%

Operating Income 791,700 771,900 729,100 674,200 19.1% 20.4% 20.9% 19.9%

Other Income, Net -72,200 -79,200 -23,200 -47,700 -1.7% -2.10% -0.6% 1.4%

Earnings Before Interest and Taxes (EBIT) 791,700 771,900 729,100 674,200 19.1% 20.4% 20.9% 19.9%

Income Tax Expense 150,900 -50,700 246,900 225,000 3.6% -1.3% 7.1% 6.6%

Net Income From Continuing Operations 568,600 743,400 459,000 410,400 13.7% 19.7% 13.1% 12.1%

Figure 1. Forecasted revenue growth for the next three years of Church & Dwight

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Table 10. Revenue growth rates calculated from the slope for the line in the above graph. Revenue Growth Rates

2019 11%

2020 13%

2021 15%

Table 11. Expectations for Revenue Growth, EPS and Dividends for the next five years.

All Numbers in Thousands 2019 2020 2021

Assumptions: (% of Revenue)

Assumed Growth Rate 0.11 0.13 0.15

Total Revenue $4,621,860 $5,230,572 $6,007,848

Cost of Revenue $2,569,754 $2,908,198 $3,340,364 55.6%

Gross Profit $2,052,106 $2,052,106 $2,667,485

Total Operating Expenses $3,739,085 $4,231,532 $4,860,349 80.9%

Operating Income or Loss $882,775 $999,039 $1,147,499

Earnings Before Interest

and Taxes $882,775 $999,039 $1,147,499 19.1%

Interest Expense -$88,740 -$100,427 -$115,351 -19.2%

Income Before Tax $971,515 $1,099,466 $1,262,850

Income Tax Expense $168,236 $190,393 $218,686 3.64%

Net Income From

Continuing Ops $803,279 $909,073 $1,044,164

Net Income $803,279 $909,073 $1,044,164

EPS $3.25 $3.68 $4.23 247,100,000

shares

Cash Flow per Share -0.05 -0.25 -0.45

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Sources: Yahoo Finance Data https://finance.yahoo.com/quote/CHD/ Industry Average Data - CSI Market.com, Personal & Household Products Industry https://csimarket.com/Industry/Industry_Performance.php?ind=507 Church & Dwight Co., Inc. 2018 Annual Report http://investor.churchdwight.com/static-files/097a431e-6cc0-4a65-9c82-23983ced103a Church & Dwight Co., Inc. 2017 Annual Report http://investor.churchdwight.com/static-files/a2997a88-7d27-459a-93a8-4d09d9b5cb72

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