Financial Analysis of Procter and Gamble Company

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Introduction

The Procter and Gamble (P&G) company is a multinational corporation dealing with home-based products for consumers. It was established by two Americans, William Procter and James Gamble in 1837, who named the company after their surnames. Its headquarters is located in Ohio, the United States. All over the world, the corporation impacts people’s lives through its popular brands, such as Gillette, Tide, and Crest. Moreover, its products, which encompass paper towels, cosmetics, hair and skincare, razor blades, and dental care items, are sold in twenty-six distinct markets, where it competes against other companies (Schill & Lentz, 2017). This paper analyzes the income statement, balance sheet, financial ratios, and cash flow of Procter and Gamble Company for the last three years with a focus on examining its economic progress.

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Income Statement Analysis

The total revenue for Procter & Gamble Company for 2018, 2019, and 2020 is 66,832.00, 67,684.00, and 70,950.00 respectively, and all the figures are in millions of US dollars. The cost of sales for 2018, 2019, and 2020 is 34,636.00, 34,247.00, and 33,613.00 respectively. Net income for the company for the years 2018, 2019, and 2020 are 9,750.00, 3,897.00, and 13,027.00 respectively, with all the figures in millions of US dollars. From the analysis of the sales figures above from 2018 to 2020, the company revenue has been increasing.

The cost of sales for the company shows a decreasing trend from 2018 to 2019. The net income for the company dropped drastically to 3,897.00 in 2019 from 9,750.00 in 2018 but later rose to 13,027.00 in 2020, which is a significant value (The Wall Street Journal, 2020). The drop in profit generation in 2019 could have been due to short-term factors, such as consumers’ preference for the products sold against those availed by competitors. An increase in sales leading to profit generation could be attributed to innovation, good management of the supply chain, and competitiveness of the company. For instance, the introduction of new products. such as Zevo and Oral B Genius increased the revenue returns.

Balance Sheet Analysis

The total asset for Procter and Gamble Company for 2018, 2019, and 2020 is 118,310.00, 115,095.00, and 120,700.00 respectively. Moreover, all liabilities of the corporation for 2018, 2019, and 2020 are 65,427.00, 67,516.00, and 73,822.00 respectively. Finally, the total shareholder’s equity for the industry for 2018, 2019, and 2020 are 52,293.00, 47,194.00, and 46,521.00 respectively. All the figures in the total asset, total liabilities, and total shareholder’s equity are in millions of United States Dollars (USD). From the figures, the total asset dropped to 115,095.00 in 2019 from 118310.00 in 2018 and later rose to 120,700 in 2020. However, the sum of liabilities showed a trend that is rising from 2018 to 2020.

There is a decreasing trend in total Shareholder’s equity from the above analysis in that it decreased from 52,293.00 in 2018 to 47,194.00 in 2019 and finally 46,521.00 in 2020 (The Wall Street Journal, 2020). There is no stability in the trend depicted by the firm’s total assets from the year’s analysis. An implication of increasing liability is that the company continued owing more, which would be settled at a later date. The decrease in total shareholder’s equity could be as a result of paying a dividend to its owners (Ameer & Abbas, 2017).

Cash Flow Analysis

The cash flow statement refers to the money getting exchanged into and out of the company; thus, the number of dollars entering into the company is termed as cash inflow while that leaving is called cash outflow. The total operating activities net cash flow in 2018, 2019, and 2020 is 14,867.00, 15,242.00, and 17,403.00 respectively. Moreover, the sum of investing activities cash flow of the organization from 2018 to 2020 is -3,511.00, -3,490.00, and 3,045.00. The financing net cash flow of the firm for 2018, 2019, and 2020 is -14,375.00, -9,994.00, and -8,367 respectively. The cash flow of the company depicts the change in cash for 2018, 2019, and 2020 as -3,000.00, 1,670.00, and 11,947.00 respectively (The Wall Street Journal, 2020). All the figures above are in millions of United States Dollars (USD).

There is an increasing trend in cash derived from operating activities from 2018 to 2020. Increasing in cash from operating activities reflects that the entity operating activities result in more cash flow to the organization for the three consecutive years. For the years, the firm cash flow from the investing activities increased. However, for the first two years, namely 2018 and 2019, there is an outflow of cash from the P&G organization. There is a decreasing trend in cash outflow from the financing activities of the company. In 2018, there was cash outflow while in 2019 and 2020 cash inflow occurred.

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The cash inflow from the operating activities of the entity increases, implying that more capital is derived from the operating activities of the company. However, there is a net outflow of cash from the investing activities of the organization for the first two years. An outflow implies that the entity spends cash to purchase the asset that is used for its activities. A later inflow of cash in 2020 indicates a sale of an asset, which resulted in obtaining funds after its sale. The financing activities of the firm indicate an outflow of cash from 2018 to 2020. The outflow of financing activities indicates a reduction in the total shareholder’s equity, debt, and dividend. The company is experiencing outflow since it is settling its obligations and paying its shareholders.

Ratio Analysis

Liquidity Ratio

Current ratio = Current Asset/ Current Liability

2018 = 23320/28237 = 0.83

2019 = 22473/30011 = 0.75

2020 = 27987/32976 = 0.85

The current ratio determines how efficiently an entity can meet its obligation that is incurred in a short duration during its operations. A ratio higher than 1 implies that the company is unable to cater to its current liability (Svynarenko, Zhang, & Kim, 2019). From the analysis above, the company faces challenges in covering its short-term obligations since it has more current liabilities than assets.

Quick ratio = (Current Asset – Inventiry)/ Current Asset

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2018 = (23320 – 4738) / 28237 = 0.65

2019 = (22473 – 5017) /30011 = 0.58

2020 = (27987 – 5498) / 32976 = 0.68

Quick ratio provides information on whether the firm can meet its short-term obligations using the current asset minus the inventory. The lower the quick ratio is, the riskier is the firm in meeting its obligation (Svynarenko, et al., 2019). The company’s quick ratio is less than one, which indicates its hindrance in meeting its current liability.

Profitability Ratio

Profit Margin = Cross Profit/ Sales

2018 = 33219/66832 = 0.5

2019 = 33437/67684 = 0.49

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2020 = 36314/70950 = 0.511

The gross profit margin shows the amount of gross profit derived from the sales of the company. The company generates a gross profit of an averagely of 0.5, which is relatively high and indicates good performance.

Return on Asset = NetProfit After Tax/ Total Asset

2018 = 9750/118310 = 0.08

2019 = 3897/115095 = 0.0.03

2020 = 13027/120700 = 0.11

Return on assets shows the net profit that a company generates from its sale of assets. The return on capital for the three years is less than 0.1. The ratio is considered low since it is less than 0.5, which can be expected as a good return. Hence, a low net profit from the total asset reflects the low return that a firm can derive from the sale of its assets.

Leverage Ratio

Debt Equity ratio = Total Debt/ Total Equity

2018 = 20863/52883 = 0.39

2019 = 20395/47579 = 0.43

2020 = 24189/46878 = 0.52

Debt – Equity ratio reflects how much the company confides in the financing from lenders. A high index implies that the firm runs a risk since it relies on lenders for its financing activities (Irman & Purwati, 2020). From the analysis, the organization depends highly on debt in 2020, thus running a risk due to the cost associated with paying to the lenders.

Conclusion

The ratio analysis above depicts that the company is likely to face a risk since it has more current liabilities than assets. Hence, it faces complications while paying its liability using the current asset. In addition, there is low net income generated from its assets. In 2020, the company highly depends on debt for its financing, which is a risky situation. Therefore, Procter and Gamble Company is considered to be running at risk.

References

Ameer, M. S., & Abbas, A. (2017). Determinants of dividend policy in services industry of China. International Journal of Business, Economics and Management Works, 4(11), 20-23. Web.

Irman, M., & Purwati, A. A. (2020). Analysis on the influence of current ratio, debt to equity ratio and total asset turnover toward return on assets on the automotive and component company that has been registered in Indonesia Stock Exchange within 2011-2017. International Journal of Economics Development Research (IJEDR), 1(1), 36-44. Web.

Schill, M. J., & Lentz, D. (2017). The Procter and Gamble Company: Investmentin Crest Whitestrips advanced seal. Darden Business Publishing Cases. Web.

Svynarenko, R., Zhang, Q., & Kim, H. (2019). The financial burden of cancer: Financial ratio analysis. Journal of Family and Economic Issues, 40(2), 165-179. Web.

Procter and Gamble Company Financials (2020). Web.

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