Term Project

Group: Cheng Wing Sum, Li Ka Ho, Wong Wing Yan, Yung Ka Lok

Financial Statement Analysis

of

The Procter & Gamble Company

(P&G)

Summary

Company Description:

The Procter & Gamble Company is a global leader focused on providing branded consumer packaged goods of superior quality and value to the world's consumers. The business has been built since 1837 when William Procter and James Gamble first founded the business, and the Company was incorporated in Ohio in 1905. The market of products from P&G has been spread to more than 180 countries through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons and high-frequency stores. P&G further expand her presence in other channels, including department stores, perfumeries, pharmacies, salons and e-commerce. There are on-the-ground operations in approximately 75 countries.

The market environment of P&G is highly competitive with global, regional and local competitors and it often holds a leadership or significant market share position and is well positioned in the industry segments and markets.

The company organizational structure is comprised of Global Business Units (GBUs), Global Operations, Global Business Services (GBS) and Corporate Functions (CF). The GBUs are aggregated into five reportable segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby Care and Family Care. The GBUs are responsible for developing overall brand strategy, new product upgrades and innovations and marketing plans. GBS provides technology, processes and standard data tools, and is responsible for providing world-class solutions at a low cost and with minimal capital investment. CF provides Company-level strategy and portfolio analysis, corporate accounting, treasury, external relations, governance, human resources and legal, as well as other centralized functional support.

Strength:

P&G is well positioned in the industry segments and markets and often holds a leadership or significant market share position. It has clear long-term financial attempt, and prioritize resources on her biggest, most profitable businesses as well as innovations and developing markets that offer the greatest opportunity for growth. P&G has also taken measures to cut down cost and be a more cost-focused company.

Nowadays, P&G has been a global market leader in the beauty category, blaze and razor market, feminine category, fabric care and family care categories.

Risk factors:

P&G is a consumer products company and rely heavily on continued demand for her brands and products. A material change in consumer demand for our products could have a significant impact on our business. It must develop and sell products that appeal to consumers and retail trade customers. This requires innovation with respect to both products and operations, positive reputations of brands and maintenance of trademark protection. P&G must also be able to obtain patents and trademarks, and respond to technological advances and patents granted to competition.

There are high levels of competitive activity in the market. Therefore, effective sales, advertising and marketing programs are crucial to the business performance. P&G need to manage factors like pricing, promotional incentives, trade terms and product initiatives, as well as maintain mutually beneficial relationships with customers.

Changes in commodity prices, raw materials, labor costs, foreign exchange and interest rates leads to fluctuation of cost. P&G has to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions, as well as consistent productivity improvements in changing global or political environment. Implementation of cost improvement plans such as outsourcing projects and those related to general overhead and workforce optimization, together with identifying, developing and retaining key employees, are critical to maintain a stable business.

Ratio Analysis

Profitability Tests

1. Profit Margin

Actual Calculations:

	2012	2011	2010	2009	2008
Profit Margin (%)	12.85373	14.28918	16.13418	17.00135	14.46056

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Profit Margin (%)	16.14453	14.87314	21.65067	19.81679	20.31311

Profit margin is an indicator of profitability. JNJ has a higher net income earned by every dollar of net sales revenue when compared with P&G in these 5 years. This means the profitability of P&G is lower compare with JNJ. Also, a decreasing profitability of P&G is found from the data.

2. Earnings per Share

As shown in Consolidated Statements of Earnings

	2012	2011	2010	2009	2008
EPS($)	3.82	4.12	4.32	4.49	3.86

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
EPS($)	3.94	3.54	4.85	4.45	4.62

EPS shows that efficiency of earning from each share. The EPS of P&G starts decreasing from 2009 to 2012. It may because there was a change in global market or environment and some economic factors rather than the poor performance of the company. The values of P&G are generally smaller than JNJ, but this cannot be compared directly as the price of each share in different companies are different.

3. Return on Equity (ROE)

Actual Calculations:

	2012	2011	2010	2009	2008
ROE(%)	16.29253	18.22775	20.4532	20.26653	17.72425

The ratio calculates the earning from each equity. The ratio decreases from 2010 to 2012. The ratio is more reliable than EPS when comparing performance of different company.

4. Return on Assets (ROA)

Actual Calculations:

	2012	2011	2010	2009	2008
ROA(%)	8.13345	8.526678	9.936648	9.96492	8.385883

The ratio indicates how the company effectively turn asset into earning. The ratio of P&G starts decreasing from 2009, which may be affected by the drop of sales efficiency. (See DuPont analysis)

5. Quality of income

Actual Calculations:

	2012	2011	2010	2009	2008
Quality of Income	1.235032	1.121556	1.261935	1.110375	1.309648

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Quality of Income	1.418594	1.478288	1.228814	1.35097	1.156228

The number measures the portion of income that was generated in cash. By comparing the above results, we can see that the quality of income of JNJ in 2009, 2011 and 2012 is larger than P&G, which means that P&G may generally has a lower ability to finance its operating and the cash needs from the inflows of operating cash, and cash may not be effectively collected due to bad debt.

6. Fixed Asset Turnover Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Fixed Asset Turnover Ratio	4.016319	4.073266	4.078851	3.941399	4.156446

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Fixed Asset Turnover Ratio	4.360099	4.44012	4.20217	4.250584	4.465639

The fixed asset turnover ratio measures a company’s ability to generate sales given an investment in fixed assets. JNJ has made good use of their investment of fixed assets when comparing her PP&E with that of P&G. This may reflect a poorer and less effective management of P&G.

Liquidity Tests (P&G)

7. Current Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Current Ratio	0.879672	0.804968	0.773495	0.708877	0.791879

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Current Ratio	1.90075	2.381132	2.050407	1.819567	1.648619

The current ratios of P&G are below 1.0 in all 5 years, which means it is unable to pay off her current debt. This is not a good signal in finance health. However, the ratio keeps on increasing showing that the company is improving the situation. Compared with JNJ, it has a higher current ratio which is good to finance health. But high current ratio larger than 2.0 may mean JNJ use their resources inefficiently.

8. Quick Ratio (Acid Test)

Actual Calculations:

	2012	2011	2010	2009	2008
Quick Ratio	0.423054	0.332759	0.340623	0.350442	0.332773

The quick ratio shows a steady level of P&G liquidity. It is a more reliable ratio than current ratio as it consider quick asset and exclude inventory which may not be converted to cash. The low ratio shows the company is not in well position. Still, the ratio is increasing which means the company is more stable in 2012 than earlier years.

9. Receivable Turnover Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Receivable Turnover Ratio	13.5591	14.22205	14.13266	12.54727	12.47244

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Receivable Turnover Ratio	6.141983	6.389585	6.342636	6.392667	6.653134

It is obviously that P&G has a higher receivable turnover ratio than JNJ. It suggests that P&G is more effective in its credit-granting and also the collection activities like collecting debts. P&G uses her assets more effectively.

10. Inventory Turnover Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Inventory Turnover Ratio	6.012908	5.92429	5.717581	5.086036	5.342304

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Inventory Turnover Ratio	3.143396	3.491383	3.559765	3.605747	3.64318

P&G has a higher inventory turnover ratio, which means the inventory of the company moves more quickly through the production processes to customers. This will help to reduce the other cost like storage or obsolescence. Besides, the inventory turnover ratio keeps increasing, meaning P&G sells and replaces its inventory in a better way as time goes by.

Solvency Tests (P&G)

11. Debt-to-Equity Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Debt-to-Equity Ratio	1.065183	1.034588	1.086167	1.136848	1.072006

For Johnson & Johnson (JNJ)

	2012	2011	2010	2009	2008
Debt-to-Equity Ratio	0.871888	0.99096	0.818837	0.87163	0.997412

Based on the Debt-to-Equity Ratio, for each dollar of stockholders’ equity, P&G has greater worth of liabilities than that of JNJ. A high ratio suggests that the P&G relies heavily on funds provided by creditors which will increase the risk of the business.

12. Times Interest Earned Ratio

Actual Calculations:

	2012	2011	2010	2009	2008
Times Interest Earned Ratio	16.62549	18.27798	15.90592	11.28498	10.95978

The Times Interest Earned Ratio compares the income generated by P&G to its interest obligation for the same period. A pretty high ratio in previous years represents a margin protection for the creditors. But a high ratio may also means an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects.

Common size income statement

(Amounts in millions)

Significant changes	2012	2011	2010	2009	2008
Net sales	83,680	81,104	77,567	76,694	79,257
Cost of goods sold	50.7%	49.1%	47.8%	50.4%	49.5%
Selling, general and administrative expenses	31.6%	31.7%	32.0%	29.5%	30.0%
Operating income	15.9%	19.1%	20.3%	20.0%	20.2%

	2012	2011	2010	2009
Significant changes	Absolute % change	Relative % change	Absolute % change	Relative % change	Absolute % change	Relative % change	Absolute % change	Relative % change
Net sales	3.18%		4.56%		1.14%		-3.23%
Cost of goods sold	6,35%	3.08%	7.60%	2.91%	-4.26%	-5.34%	-1.45%	1.84%
Selling, general and administrative expenses	2.61%	-0.553%	3.86%	-0.669%	9.56%	8.33%	-5.75%	-2.62%
Operating income	-14.2%	-16.9%	-1.51%	-5.80%	2.33%	1.18%	-3.79%	-0.571%

When focusing on the absolute percentage changes, there is a steady increase in net sales but the operating incomes is continuously decreasing except in 2010. The dropping of operating income is vigorous in 2012 for more than 14%, it may due to the continuously increasing expense in the cost of goods sold and Selling, General and Administrative (SG&A) part, which is increased by more than 6% and 2.6% respectively when compared to 2011. The increase of net sales is not able to compensate the increases of operating expenses on cost of goods sold and SG&A, the consequence is that the net operating income decreases by more than 14% despite the fact that there is a slightly increase of 3% on net sales. We can see that the cost of goods sold and SG&A expenses have high percentage of occupation on its net sales (about 50% and 30% respectively). In order to reduce the expense, P&G has a series of restructuring activities including a plan for a net reduction in non-manufacturing overhead personnel by the end of fiscal 2013. In addition, the plan includes integration of newly acquired companies, optimization of the supply chain and other manufacturing processes. Those activities may help to lower the expense on the operating expense and thus improve the performance on operating income.

When focusing on relative percentage changes, both the ratio of SG&A Expense and the cost of goods sold are slightly improved from 2011 to 2012. The improvement in SG&A expense on relative percentage changes does not have a big effect on its operating performance since there it is not able to cover the big increase on SG&A expense in 2010, which has increased for 8% in relative percentage changes. P&G still need to put effort on reducing the SG&A expense by improving its administration efficiency and thus to improve its operating income.

Common size balance sheets

Significant changes	2012	2011	2010	2009	2008
Total assets	132,244	138,354	128,172	134,833	143,992
Current assets
Cash	3.35%	2.00%	2.25%	3.55%	2.30%
Accounts receivable	4.59%	4.54%	4.16%	4.33%	4.70%
Inventories
Materials and supplies	1.32%	1.56%	1.32%	1.17%	1.57%
Work in process	0.518%	0.518%	0.471%	0.498%	0.531%
Finished goods	3.25%	3.26%	3.19%	3.45%	3.74%
Total Inventories	5.08%	5.33%	5.00%	5.10%	5.84%
Deferred income taxes	0.757%	0.824%	0.772%	0.897%	1.40%
Prepaid expenses and other current assets	2.79%	3.19%	2.49%	2.37%	2.79%
Total current assets	16.6%	15.9%	14.7%	16.2%	17.0%
PP&E
Buildings	5.54%	5.60%	5.36%	4.99%	4.90%
Machinery and equipment	24.2%	23.7%	22.9%	21.5%	20.9%
Land	0.665%	0.675%	0.663%	0.656%	0.617%
Total PP&E	30.4%	30.0%	28.9%	27.2%	26.5%
Accumulated depreciation	15.0%	14.6%	13.9%	12.7%	12.1%
Net PP&E	15,4%	15.4%	15.0%	14.4%	14.3%
Goodwill and other intangible assets
Goodwill	40.7%	41.6%	42.1%	41.9%	41.5%
Trademarks and other intangible assets, net	23.4%	23.6%	24.7%	24.2%	23.8%
Net goodwill and other intangible assets	64.1%	65.2%	66.8%	66.1%	65.3%
Other noncurrent assets	3.93%	3.55%	3.51%	3.22%	3.36%
Current liabilities
Accounts payable	5.99%	5.80%	5.66%	4.44%	4.71%
Accrued and other liabilities	6.27%	6.71%	6.68%	6.38%	17.71%
Debt due within one year	6.58%	7.21%	6.61%	12.1%	9.09%
Total Current liabilities	18.8%	19.7%	18.9%	22.9%	21.5%
Long term debt	15.9%	15.9%	16.7%	15.3%	16.4%
Deferred income tax	7.66%	8.00%	8.51%	7.97%	8.20%
Other noncurrent liabilities	9.14%	7.20%	7.95%	6.78%	5.66%
Total liabilities	51.6%	50.8%	52.1%	53.0%	51.7%
Shareholders’ equity
Common stock	3.03%	2.90%	3.13%	2.97%	2.78%
Additional paid-in capital	47.8%	45.1%	48.1%	45.3%	41.9%
Treasury stock	52.6%	48.6%	47.8%	41.5%	33.0%
Retained earnings	57.0%	51.1%	50.4%	42.5%	34.0%
Total shareholders’ equity	48.4%	49.2%	47.9%	47.0%	48.3%

Most of the assets, liabilities and shareholders’ equity keep on a steady percentage over years.

The major assets of P&G are Goodwill and other intangible assets (64.1%), PP&E (15.4%) and inventories (5.08%). The amount of cash and account receivable keep on a constant percentage of about 3% and 4.5% respectively. In the current year (2012), P&G has more cash and other noncurrent assets but less inventories, PP&E and goodwill. The decrease of goodwill may be due to the sold of global snacks business on May 31, 2012. As a result, the Snacks and Pet Care segment was eliminated. A slightly decrease in goodwill is acceptable Since the goodwill and intangible asset valuations are dependent on a number of significant estimations and assumptions, including macroeconomic conditions, overall category growth rates, competitive activities, cost containment and margin expansion and company business plans.

P&G purchases more equipment in the recent years and thus the accumulated depreciation also increases. The current liabilities of P&G decrease by about 1% when compared to 2011, while the long term debt remains unchanged. However, the “other noncurrent liabilities” keeps on increasing, the percentage of other noncurrent liabilities increases from 5.66% in 2008 to 9.14% in 2012.

P&G also purchases more treasury stock and has lager percentage of retained earning every year, the percentage of treasury stock and retained earnings increases from 33.0% and 34.0% in 2008 to 52.6% and 57.0% in 2012 respectively, while the common stock and additional paid-in capital only increase in small percentage ratio. There are two possible reasons for P&G keeps on repurchasing its stock. The first is that it is showing its confidence on its performance and thinks the price of stock is under-estimated. It should be a good news if P&G repurchasing the stocks due to this reason. The second one is that the company wants to create a higher value of earning per share (EPS) by repurchasing issued stocks in order to lower the total number of outstanding stocks. However, there is a continuously decreased in EPS in the recent years, if P&G wants to increase its EPS by repurchasing issued stocks, it does not have too much efforts.

(Detailed calculation please refer to Appendix I)

Dupont Analysis

Sales efficiency

Sales efficiency= Sales/asset

Year	Sales efficiency
2008	0.5512
2009	0.5401
2010	0.5899
2011	0.6086
2012	0.6185

For 2008, =0.5512

For 2009, =0.5401

For 2010, =0.5899

For 2011, =0.6086

For 2012, =0.6185

From 2008 to 2009, the sales efficiency decreases and the sales decrease by 3.11%. This may due to appearance of some competitors on the same market. The average total asset has decreased by 1.14%. This may be due to the depreciation for the equipment, purchasing treasuring stock for cash and payment for cash dividends

From 2009 to 2012, the sales efficiency increased gradually. It is possible that some sales strategies had been promoted and attracted more customers to buy the goods.

ROA

ROA=x (the assets in this equation is the average asset)

For 2008, ROA= x = 8.385883%

For 2009, ROA= x = 9.96492%

For 2010, ROA= x = 9.936648%

For 2011, ROA= x = 8.526678%

For 2012, ROA= x = 8.13345%

From 2008 to 2010, the return on assets increases. It may due to several reasons. Firstly, the sale of goods increases and expenses reduces. Secondly, the asset turnover increases.

Leverage

Leverage = Assets/Equity

For 2008, = 2.062

Year	Leverage
2008	2.062
2009	2.094
2010	2.107
2011	2.059
2012	2.049

For 2009, = 2.094

For 2010, = 2.107

For 2011, = 2.059

For 2012, = 2.049

From 2008 to 2010, P&G has a small increase on debt. It may due to the long and short term borrowing for some new product inventions. From 2011 to 2012, the demand of debt has decreased by 0.01, which may because of the payment of debt after collecting cash from account payable.

Interest efficiency

Interest efficiency= NI/NOPAT

For 2008, = 1.021

For 2009, = 0.967

For 2010, = 0.975

For 2011, = 1.038

For 2012, = 0.997

The interest efficiency keeps decreasing from 2008 to 2010, it is expected that P&G had less debt at this period. From 2010 to 2012, the interest expense increases again, which may due to the financial crisis that more money is needed to maintain the operation of the company.

ROE

ROE= xxx

For 2008, xxx = 17.72425

For 2009,xxx = 20.26653

For 2010,xxx = 20.4532

For 2011,xxx = 18.22775

For 2012,xxx = 16.29253

Year	2008	2009	2010	2011	2012
ROE	17.72425	20.26653	20.4532	18.22775	16.29253

The ROE increases for about 2.3% from 2008 to 2010, while the ROA of these three years are nearly the same. On the other hand, the leverage calculated from 2008 to 2010 increases gradually, this shows that ROE is more sensitive to the change of leverage.

Recommendation:

After analyzing a series of ratio and considering various factors, our group recommends not to invest on P&G. This decision is based on ratio analysis of the company’s performance in recent 5 years. Most ratios reflect that the company is not in a stable, healthy financial condition.

The profit margin shows that the profitability of P&G keeps on decreasing. The EPS and ROE are also decreasing over 2008 to 2012. The current ratio further suggests the company is not able to pay off current liabilities. The quality of cash is not in good condition, which means there may be a situation of not enough cash in running the business when money is needed in emergency. The debt-to-equity ratio also reflects the company mainly relies on funds by creditors, which is not a healthy condition for a business. The fixed asset turnover ratio also shows a not satisfactory level of company management. All these factors show a risky financial situation for P&G to be invested. As competitors like JNJ keeps growing in its business, we do not think there will be a great improvement in short period of time. Therefore we conclude that it is not profitable to invest on P&G.