Financial Position of Proctor & Gamble

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Objective of paper

This report provides a comprehensive review of a US based company Procter and Gamble. The report covers findings regarding the company, Description of firm and its management, a discussion of its competitive environment, how the economic climate has either positively or natively affected the firm’s operations and expectations and an outlook of future strategies the firm will adapt to avert any losses contributed by unfavorable economic climates. Also looked into are other factor likely to affect the firm profitability and strategy such as governmental regulations, labor relations or litigations. In a bid to access the financial position of Proctor & Gamble.

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This statement has gone further and evaluated the Financial Statement statements from the year 2005 to 2009 of the company and came up with a conclusion which is supported by the following ratios as calculated and scrutinized. To measure liquidity, this report has used the Short-term liquidity measure, to measure the company’s operational efficiency in converting their products to sales; this statement has used the operating efficiency measure; to determine the suitability and sustainability of Proctor and Gamble’ capital structures, this report has relied on the Capital structure and long-term solvency measurements.

The profitability ratios have also been used to determine the profitably of this global giant whose marketing capitalization is said to be greater than the GDP of many third world countries. The PE ratio has been used to evaluate and measure its market. This report has gone further to comment on the quality of P & G financial reporting. Last but not least, the report has made a note on P & G current and future performance and also a projection of expected earnings in future. To aid investors, this report contains advice to potential investors with P&G based on which such investor will make an informed decision. The report has also touched on the credit worthiness of Procter and Gamble before wrapping with a summarized conclusion about Proctor and Gamble.

Summary of findings

Procter & Gamble is a force in the corporate world. It serves consumers in more than 180 countries with a workforce of over 125,000 employees making it one of the strongest companies. The company was founded in 1837 by two immigrants from England who settled Cincinnati Ohio. The two Procter a soap maker and Gamble a candle maker joined forces and formed this corporation which has achieved milestone after mile stone.

Today, the company is rated the 5th best as per fortune 500. Procter & Gamble is a member of the U.S. Global Leadership Coalition. P & G prove it stability by successfully struggling past the current economic predicament that faced economies worldwide. These hardships lead to its net revenue to dwindle in all segments worldwide. However, it still recorded increased sales and earnings in 2009 above its projections. This increase made its share price 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 in favour of other products in some of its products such a pampers and Gillette.

Firm and its management

Procter and Gamble is a US base multinational public corporation whose head office is in Cincinnati, Ohio. The company manufactures, produces and distributes a range of branded products which include, Beauty & Grooming, Household Care, Health and Well-Being (Procter and Gamble ) that are sold in over 80 countries in the world. Procter and Gamble is supported by a global workforce of over 127,000 members of staff.

The current CEO is Bob McDonald who is assisted by other member of the board and president of different segments of Procter and Gamble. To date P&G manages more than 20 well known brands which are available in North America, Latin America, Europe, the Middle East, Africa, and Asia through mass merchandisers, grocery stores, membership club stores and drug stores in at least 80 countries worldwide.

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Competitive Forces

To ensure that Procter and Gamble remains completive, the has embarked on the most efficient work force and has not hesitated to adopted new technology as well as embark on expansive market research that have lead to the developed of new product sufficient to satisfy the needs of the market. Procter and Gamble has also been very extravagant when it comes to marketing and advertising its products. It is on record that it’s spending much more than any of its competitors. Procter & Gamble has maintained its competitive edge by focusing in innovation and expansion. This explains why P & G has the bigger market share in revenue amongst its completion.

Economic climate and outlook

The current economic downturn has hit many companies hard and P & G not left behind. Despite the company not losing much in from of net revenue, the company may be forced to roll back some of it price so that it will maintain its market inch. The major reasons for this include shrinking demand for its products because of the available cheaper substitutes that have flooded the global market and an overall attitude amongst customers leading to delays in buying in decisions as consumers tend to save more rather than spend. Consumers have less money to spend on consumer products, aside from necessities. Procter & Gamble CEO has already announced that the company is intending to grow in 2010. There are Plans to expand product lines of Pampers, Ariel, Dash and Gillette which have already been revealed along with a campaign to reformulate Pantene Hair Care.

Other factors

The company has recently faced a rebellion on some of its products like; pampers and skin care products as not being user friendly. This has gotten so grave that P&G is being sued in the USA and Canada (Goingsocialnow). If the company fails or delays to take steps to restore consumer confidence, then it is likely that the company will loses a lot of revenue. The ongoing global political instability and catastrophes are likely to affect the company’s business and could even lead to possible loss of sales, closure of segments, shrinking market domination and growth. Moreover, the company’s products are subject to several laws, regulations and quality standard which if not adhered to could lead to litigations.

Evaluation of Financial Statement

Overview

The company’s net assets have decreased by 6.36% in 2009 to $134,833 as compared to $ 143,992 in 2008. The company’s cash flows have also increased by 44.3% from 3313 to 4781in 2009. Its 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

These ratios show the ability of the company to meet its financial obligations. From the ratios one can conclude, 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

This ratio measures the efficient at which the company is converting its products to sale and also the rate at which the company is collecting its debts. 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.

Capital Structure and long-term solvency

This ratio measures mix the between equity and borrowed capital being the element that make up the capital structure. 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 company’s operating income is not well sufficient to pay off its interest expense.

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Profitability

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 ROE is 24.2% and ROA is 11.3% in 2009 and this is an increase which implies that the shareholders can expect higher returns on their investment.

Quality of financial reporting

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

The company has a higher dividend cover than the market average an indication 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. The reasons for this expectation are due to the demand for and products still growing strong especially outside the US.

Summary and conclusions

This report demonstrates that the company is in good shape and will most likely continue to grow and increase its net earnings as a whole. Furthermore the company has a great reputation and a world class array of prominent products which are popular with consumers not to mention the economies of scale benefits. The management is looking to reinvest earnings and continue to expand product lines as well as reach new markets. In conclusion the great success of Procter &Gamble in the past will most likely to be reflected in the future since even the great financial downturn 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
Liabilities
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
Liabilities
-8996 -6202 -6686 4046 -4710
Operational Efficiency
Receivables Turnover Net Revenue/Accounts
Receivables
13.54 12.09 11.28 11.91 13.55
Average Collection
Period
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
Period
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
Ratio
(Interest Coverage
Ratio)
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.

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

P&G. Shareholder Information. 2009. Web.

Procter and Gamble. All Brands. 2011. Web.

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