Financial Analysis of Procter and Gamble


Objective of paper

The current analytical report provides a detailed review of a US based company Procter and Gamble. The report encompasses findings regarding the company, its management and product profile along with a discussion on the industry and competitive forces that exist in the market. The economic challenges facing the corporate sector and its outlook that has impact on the future business of the company is also discussed.

The discussion also includes details of issues like government’s role, labor relations and litigation against the company. The analysis further extends to financial ratio analysis of the company spreading over the last five fiscal years from 2005 to 2009. Important findings from the analysis are presented to evaluate company’s financial position using the values of four categorical types of ratios. Finally, the report concludes with the estimation of the future outlook of the company based on its earnings performance and credit assessment along with recommendations for investors.

Summary of findings

The report suggests that P & G is one of the strongest companies in its own market segments with its network spreading all over the world. The company is poised to announce better results in the periods ahead as the company embarks upon more competitive strategies with new and better products. The company’s financial position including is quite strong base on the fact that it’s a market leader that is pocketing the highest revenues in the industry however the company’s liquidity and profitability needs to be focused on because its below the industry also, the profits are low in comparison to the capital invested in the company.

The return on equity ratio is even worse than ROC being only half the industry average which shows that the amount of profit which has been earned on behalf of the shareholders is very low. All other investment return ratios are also below market average. However the company’s gross profit and net profit margins exceed industry averages and indicate that the company is still profitable.

P&G has been to a great extent suffered due to the economic crisis and has seen its net revenue decrease its segments worldwide. However, it P & G recorded an increased sales and earnings in 2009 that actually exceeded its sales projecting. This unexpected increase made its share increase by 3% in the month of October 2009. At the same time, per unit volume in sales declined in all its subsidiaries due to consumers cutting back on the brand name of some of its products such a pampers and Gillette. The increase in revenues can only be explained by increased operation efficiency or by an increase in per unit selling price.

Firm and its management

Procter and Gamble is an American corporation and its products are mainly for beauty care, household care and health wealth being. The company’s headquarters is located in Cincinnati, Ohio.It operates into segments and its operations and products are mainly for beauty care, household care and health wealth being.

It manages more than 20 well known brands. Procter & Gamble products are available in North America, Latin America, Europe, the Middle East, Africa, and Asia. The P&G community adds up to more than130, 000 employees working in at least 80 countries worldwide. A. G. Lafley is the current Chairman and CEO other members of the board of directors are: W. James McNerney, Jr., Johnathan Rodgers, John F. Smith, Jr., Ralph Snyderman, Richard Dearlove, Margaret Whitman, and Brian Bowns. (jigsaw)

Competitive Forces

Procter and Gamble, due to its large operations worldwide, has different kinds of competition, mainly local competition. Their biggest competitor is Unilever followed by Clorox, L’Oreal, Kimberly- Clark and Colgate which produce similar articles to Procter and Gamble. P & G maintains its competitive edge focusing in innovation and spends twice as much Unilever in research and development to maximize profits and encourage growth. This explains why P & G has the bigger market share in revenue amongst its completion.

Economic climate and outlook

The present poor global economic conditions are posing greater challenges and uncertainties for companies and P & G is not an exception. The major reasons for this include shrinking demand for its products because of the available cheaper substitutes that have flooded the global market in particular and overall poor sentiments amongst customers leading to delays in buying in decisions as consumers tend to save more rather than spend. Consumers have less money to spend and especially North American consumers have been and will be spending less because it has become increasingly difficult to obtain credit.

For P&G which offers consumer products it has been difficult task to keep sales high in a time when consumers have less money to spend. The depression has resulted in a decrease in disposable income as well as forcing people out of the work place. Many others have lost money or net worth in the stock market and all these factors contribute to less spending on consumer products, aside from necessities. However even though the outlook is rather negative P&G CEO Bob McDonald has already announced that P&G is intending to grow in 2010. Plans to expand product lines of Pampers, Ariel, Dash and Gillette have already been revealed along with a campaign to reformulate Pantene Hair Care.

Other factors

Proctor and Gamble Pampers division which contributes to the revenues by about $ 86 billion of their total revenue per year requires edge cutting public relation skill after their product was criticized by mother globally. Mothers globally are claiming they are causing rashes to their babies. Mothers have joined the group and the number is still swelling. (Goingsocialnow) This has gotten so grave that P&G is being sued in the USA and Canada (Goingsocialnow). P&G is acting in response to the allegations energetically and one could argue in some situations its acting rebelliously. (Singh)

Evaluation of Financial Statement


The company’s net assets have decreased by 6.36% in 2009 to $134,833 as compared to $ 143,992in 2008. The company’s cash flows have also increased by 44.3% from 3313 to 4781in 2009.The Company did not show a strong position in its respective markets. It net income reduced by 1.96% to $ 15325 in 2009 in comparison to 2008. The findings of this report are that even as an industry leader Procter & Gamble continues to adapt and change in order to grow and increase its profitability no matter the market conditions. Even with the drop in sales the company has increased its net earnings through its operating and management efficiency.

Short-term liquidity

The company’s short term liquidity position has weakened as compared to the last year by 0.07. The liquidity of the company is fairly weak as it is less than 1. The company has a negative net working capital of $ (8996) that reflects current liability being less than one.

Operation efficiency

The company’s operation efficiency reflected by receivables turnover suggests that it has strengthened from $ 12.9 in 2008 to $ 13.54 in 2009 as the company is converting more of its receivables into sales. Moreover, the company seems to be less more efficient in its inventory management that has resulted in higher inventory period of 6 days in 2009 as compared to almost 4 days in 2008. However P&G is ahead of the industry and this also justifies the lower than average liquidity ratios because the company is very efficient in turning inventory and receivables into cash.

Capital Structure and long-term solvency

The debt to equity ratio is 1. 13 in 2009 as compared to 1.07 in 2008, this suggests that the company’s liabilities have increased in 2009. The equity has decreased in 2009 so have the liabilities. Times interest earned implies that the company’s operating income is not well sufficient to pay off its interest expense.


The company is operating at low gross profit margin of 24.4% in 2009 and 23.3% in 2008. The net income of the company has also increased slightly indicating net profit margin of 19.3% and 19.1% in 2009 and 2008 respectively. The asset turnover has also increase from 56.7% to 58.6%. There is an increase in both ROE and ROA that implies that the shareholders can expect higher returns on their investment. ROE is 24.2% and ROA is 11.3% in 2009.

Market measures

The P/E ratio is high that implies that the company stock has further potential of increase in value. The price trend of the company has been that of increasing value from $54 in 2005 to $185 in 2009 and it is further expected to reach $325.

Quality of financial reporting

The company provides sufficient details of its business, products and the management. The financial statements are well documented along with notes to these financial statements. The reporting by the company meets the requirement of accounting standards and US laws as indicated in the auditor’s report. (P&G)

Investment potential

For investors it is important to look at earnings per share and as a result of successful operations EPS has been increasing over the five years which this report analyses. Another important factor is the price earnings ratio which is the same as the industry average for P&G. on a five year average it is higher than the industry indication that the market expects the company to do well in the future. The company has a higher dividend cover than the market average which indicates that the company is retaining a substantial part of its profits and that this profits are more than adequate to fund the dividends which are paid out.

Outlook for performance, earnings projection

The company is expected to show higher net income in the coming periods despite of the poor economic conditions in the market. The reasons for this expectation are due to the demand for and products still growing strong especially outside the US.

Summary and conclusions

The above analysis implies that the company is overall in a very good shape and will most likely continue to grow and increase its net earnings. Furthermore the company has a great reputation and a world class array of prominent products which are popular with consumers. A competent management is looking to reinvest earnings and continue to expand product lines. In conclusion the great success of P&G in the past will most likely continue into the future since even the great financial turmoil in recent years has not been able to jeopardize business operations.

Appendix I

Amounts in millions, except per share amounts 2010 2009 2008 2007 2006 2005
Net Sales $ 78,938 $ 76,694 $ 79,257 $ 72,441 $ 64,416 $53,210
Gross Margin 41,019 38,004 39,996 37,065 32,549 26,391
Operating Income 16,021 15,374 15,979 14,485 12,551 9,666
Net Earnings from Continuing Operations 10,946 10,680 11,291 9,662 8,187 6,384
Net Earnings from Discontinued Operations 1,790 2,756 784 678 497 539
Net Earnings 12,736 13,436 12,075 10,340 8,684 6,923
Net Earnings Margin from Continuing Operations 13.9% 13.9% 14.2% 13.3% 12.7% 12.0%
Basic Net Earnings per Common Share:
Earnings from continuing operations $ 3.70 $ 3.55 $ 3.61 $ 3.01 $ 2.63 $ 2.48
Earnings from discontinued operations 0.62 0.94 0.25 0.21 0.16 0.22
Basic Net Earnings per Common Share 4.32 4.49 3.86 3.22 2.79 2.70
Diluted Net Earnings per Common Share:
Earnings from continuing operations 3.53 3.39 3.40 2.84 2.49 2.33
Earnings from discontinued operations 0.58 0.87 0.24 0.20 0.15 0.20
Diluted Net Earnings per Common Share 4.11 4.26 3.64 3.04 2.64 2.53
Dividends per Common Share 1.80 1.64 1.45 1.28 1.15 1.03
Research and Development Expense $ 1,950 $ 1,864 $ 1,946 $ 1,823 $ 1,682 $ 1,538
Advertising Expense 8,576 7,519 8,520 7,799 7,010 5,804
Total Assets 128,172 134,833 143,992 138,014 135,695 61,527
Capital Expenditures 3,067 3,238 3,046 2,945 2,667 2,181
Long-Term Debt 21,360 20,652 23,581 23,375 35,976 12,887
Shareholders’ Equity 61,439 63,382 69,784 67,012 63,171 18,655

Appendix II

Procter and Gamble.

Liquidity ratios
2009 2008 2007 2006 2005
Current Ratio Current Assets / Current
0.7 0.79 0.78 1.21 0.81
Quick Ratio Current Assets – Inventory /
Current Liabilities
0.45 0.52 0.56 0.90 0.61
Net Working Capital Current Assets – Current
-8996 -6202 -6686 4046 -4710
Operational Efficiency
Receivables Turnover Net Revenue/Accounts
13.54 12.09 11.28 11.91 13.55
Average Collection
365/Receivables Turnover 29.95 30.19 32.35 30.64 26.93
Inventory Turnover Cost of Sales/Inventory 5.65 4.69 5.2 5.2 5.5
Average Inventory
365/Inventory Turnover 64.6 77.8 70.1 70.1 66.3
Solvency Ratios
Debt to Equity Ratio Total Liabilities / Total Equity 1.13, 1.07 1.06, 1.15, 2.33
Times Interest Earned
(Interest Coverage
EBIT / Interest Paid 11.87, 11.3, 11.5, 11.8, 12.55
Profitability Ratios
Gross Profit Margin Gross Profit / Net Revenue 20.4% 20.3% 20% 19.4 18%
Net Profit Margin Net Profit / Net Revenue 19.3% 19.1% 19% 18.19% 17%
Asset Turnover Net Revenue / Total Assets 58.61% 56.77% 54.22% 50.2% 92.22%
Return on Equity Net Profit / Total Equity 24.2% 22.4% 21.3% 19.7% 54%
Return on Assets Net Profit / Total Assets 11.3% 10.58% 10.33% 9.1% 16.22%
Market Measures
Earnings Per Share Net Profit Attributable to Common Shareholders /
Number of Outstanding Shares
$ 3.76 $3.77 $3.13
Price Earnings Ratio Market Price (30 Sept) / EPS 29.47 21.21 39.05
Price Book Ratio Market Price / Book Value 6.04 4.88 9.39

Works cited

Goingsocialnow. P&G Brand at risk of developing a rash.  2010. Web.

jigsaw. Procter & Gamble Company – P&G. 2008. Web.

P&G. Shareholder Information. 2009. Web.

Singh, Shiv. P&G Brand at risk of developing a rash? 2010. Web.

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