Assignment 2

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Week 2 Model Assignment

Section 2: Financial Ratio Analysis

First and Last Name

The University of Arizona Global Campus

BUS 401: Principles of Finance

Instructor Name

Due Date

This model has many helpful tips in it to illustrate best practices in APA, tables, and writing. In keeping with UAGC’s Academic Integrity policies, be sure to construct your own assignment with originality in

writing and content. If you need help writing your assignment in your own words, reach out to the Writing Center. As always, your instructor is available to answer questions about this assignment.

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Section 2: Financial Ratio Analysis

Part 1

Over the most recent three years, PG experienced increasing profitability ratios, as shown

on Appendix C. PG’s ROA was 8.17 percent in 2018, and decreased to 3.3% in 2018. As noted

in Section 1, this is primarily due to the goodwill impairment charge, and the ratio would be

higher without that charge. In 2020, PG’s ROA was 11.02 percent, a sizeable increase over 2019,

and an increase over 2018’s ratio. PG’s ROE ratio followed the same trend: ROE was 18.14

percent in 2018, dropped to 7.83 percent in 2019, and increased to 27.73 in 2020. Finally, PG’s

ROI also followed a similar pattern. The ROI was 16.1 percent in 2018, decreased to 6.82

percent in 2019, and rebounded to 19.76 percent in 2020.

PG’s liquidity ratios have been variable over the three-year period. In 2018, PG’s current

ratio was 0.59; it decreased to 0.51 in 2019, and recovered to 0.62 in 2020. PG’s quick ratio was

0.83 in 2018, 0.75 in 2019, and 0.85 in 2020.

PG’s debt management ratios reflect the increasing debt of the company. PG’s long-term

debt to equity ratio increased from 0.40 in 2018, to 0.43 in 2019, to 0.51 in 2020. PG’s total debt

to equity ratios increased from 0.60 in 2018, to 0.64 in 2019, to 0.75 in 2020. Conversely, PG’s

interest coverage ratio actually improved in 2020 as compared to 2018. In 2018, PG’s interest

coverage ratio was 52.94, while in 2020, the interest coverage ratio was 50.66. (Note, the 2019

ratio was a low of 18.99, due to the goodwill impairment charge).

PG has mixed results with respect to the asset management ratios. Total asset turnover

increased slightly from 0.56 in 2018, to 0.58 in 2019, to 0.60 in 2020. Receivables turnover also

improved slightly over the three years; it was 14.4 in 2018, 14.05 in 2019, and 15.5 in 2020.

Consider using level headings to help organize your paper

into the required parts.

In this section, summarize the trends in your company’s ratio performance over the three most recent years. Be sure to address the following ratios included in Appendix B:

1) Profitability ratios: ROA, ROE, ROI. 2) Liquidity ratios: Quick ratio, current ratio. 3) Debt management ratios: Long-term debt

to equity, total debt to equity, interest coverage ratio.

4) Asset management ratios: Total asset turnover, receivables turnover, inventory turnover, and accounts payable turnover.

5) Per share: Book value per share.

Be sure to reference where your financial information

comes from (e.g., Appendix, Mergent).

Consider having a paragraph per topic discussed.

Be sure to mention the years you are analyzing in terms of

performance.

Remember to start your paragraphs with clear topic

sentences.

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Inventory turnover declined moderately over the same period. Inventory turnover was 7.32 in

2018, 7.13 in 2019, and 6.7 in 2020. Finally, accounts payable was 6.69 in 2018, decreased to

6.27 in 2019, and decreased slightly to 6.07 in 2020.

Part 2

PG’s financial ratios are primarily strong. First, the ROA, ROE, and ROI all increased

compared to 2019 and 2018. In addition, PG’s liquidity ratios increased in 2020. PG’s interest

coverage ratio in 2020 was higher than in 2018. PG’s asset turnover ratios were all stronger in

2020 than in prior years, with the exception of inventory turnover. On the downside, PG’s debt

ratios are higher in 2020 than in prior years, and PG’s inventory turnover is slower in 2020 than

prior years. These trends are illustrated in Table 4.

Table 4

Ratio Strengths and Weaknesses

Line Item Trend Strength or Weakness

ROA Increasing Strength

ROE Increasing Strength

ROI Increasing Strength

Current Ratio Increasing Strength

Quick Ratio Increasing Strength

Long-term debt to equity Increasing Weakness

Total debt to equity Increasing Weakness

Interest coverage Increasing Strength

Total asset turnover Increasing Strength

Consider using level headings to help organize your paper

into the required parts.

Be sure to introduce and/or explain your tables, if you

include them. Because your weekly assignments will become a part of your Final Project, continue to number your tables based on your previous assignment. So, if there are three tables in your previous assignment, the first

table in this paper should be Table 4.

If you need help formatting your table according to APA guidelines, check out this resource:

Tables, Images, and Appendices.

Ensure that your table lists each ratio as either

a strength or a weakness in the most current year,

based on its trend and your interpretation.

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Receivables turnover Increasing Strength

Inventory Turnover Decreasing Weakness

Accounts Payable Turnover Decreasing Strength

Overall, PG’s ratio performance is strong. The increasing ROA, ROE, ROI, liquidity

ratios, and most asset turnover ratios are all signs of a healthy business. Although PG has

increased its debt ratios, its interest coverage ratio has actually increased, indicating PG has more

than enough income to cover the additional debt payments.

Part 3

This section will review PG’s ratio performance compared to the industry, as shown in

Appendix D. In general, PG’s ratios are stronger than the industry in some areas, and weaker

than the industry in others. In term of ROA, PG’s ROA of 11.02% is above the industry average

of 9.09 percent. PG’s ROE of 27.73% is below the industry average of 30.69%. However, PG’s

gross margin of 50.32% is higher than the industry average of 44.79%. PG’s net profit margin of

18.36% is also higher than the industry average of 10.86%. In terms of liquidity, PG’s current

and quick ratios are both slightly below the industry averages.

In terms of debt management, PG has a lower long-term debt to equity ratio of 0.51,

compared to the industry average of 9.77. The industry average is impacted by Colgate-

Palmolive’s ratio of 62.68; without Colgate the average is 0.95, and PG is still lower than the

adjusted average. PG’s total debt to equity ratio of 0.75 is lower than the industry average of

10.46. Without Colgate-Palmolive’s ratio of 67.07, the average ratio is 1.03, and PG’s ratio is

still lower than the adjusted average. PG’s interest coverage ratio of 50.66 is higher than the

If you need help creating a table in Microsoft Word, review this guide: Format a Table.

Determine the overall financial strength (i.e., strong, weak) of the

company based on the ratios identified as either strengths or weaknesses.

Compare your chosen company’s ratio performance to the industry

competitor ratios in the most recent year based on Appendix D.

Be sure to round your numerals to the hundredths place.

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average for the industry of 21.98, and is the highest of the group. PG has stronger ratio

performance in terms of debt management than the industry. Finally, PG’s total asset turnover of

0.60 is below the industry average of 0.87, which is a weakness. PG’s inventory turnover of 6.70

is above the industry average of 4.77, so this is a strength.

Table 5

Ratios Compared to Industry

Ratio PG Compared to Industry

Average

Strength or Weakness

ROA Above Strength

ROE Below Weakness

Gross margin % Above Strength

Net margin % Above Strength

Quick Ratio Below Weakness

Current Ratio Below Weakness

Long-term debt to equity Below Strength

Total debt to equity Below Strength

Interest coverage Above Strength

Total asset turnover Below Weakness

Inventory Turnover Above Strength

Continue to number tables based on continuing the list from Section 1. So, if there are three tables in your previous assignment, the first table in this paper should be Table 4, second table is Table 5, and so on.

Create a table that lists each ratio as either higher (above) or lower (below) than the average ratio for the

competitors in the industry.

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Part 4

Overall, PG’s financial strength is above average when compared to the industry in terms

of financial ratios. PG has better ratios than the industry in 7 out of 11 ratios. However, the most

critical ratios are the margin ratios and debt management ratios. PG’s success at earning above

average gross and net margins demonstrates the financial strength of the business, while PG’s

strong debt management ratios compared to the industry provide reassurance that the company

can manage its debt payments. Overall, PG’s ratios compared to the industry illustrate solid

financial performance and represent above average performance.

In Part 4, categorize the company’s overall financial performance as either better than average, average, or worse than average compared to the industry based on the ratios.

Interpret which ratios are the most important and explain your reasoning.

Justify your conclusion based on the table you created, your interpretation of which ratios are the most important and the company’s overall ratio performance compared to the industry competitors.

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References

Procter & Gamble Company. (2017-2019). Procter & Gamble Company (NMS:PG): As reported

annual balance sheet [Data set]. Mergent Online.

Be sure to include a references list that cites where you got your information

from.