Introduction
Company Overview
The Proctor & Gamble (P&G) is a multinational corporation offering home and individual products of high quality and value. The company was established in 1837 by William Proctor and James Gamble in Cincinnati, Ohio and was incorporated in 1905. The market for the company’s products have expanded to over 180 countries through mass merchandisers, retail stores, membership clubs, pharmacies, departmental stores, beauty shops and supermarkets among others (Repp and Venkatraman 1). Its organizational structure consists of global business units, global operations and corporate functions. The business units help the company in developing suitable strategies and products in a given market. The company’s markets are very competitive with some of its major competitors being Johnson & Johnson, Unilever and Kimberley –Clark Corporation. However, the P&G holds a significant market share and position in the industry (Repp and Venkatraman 2).
Company Strength
As already been mentioned, the company is well positioned in the industry and is among the top manufacturers of household and personal products (Repp and Venkatraman 1). It also has clear budgetary objective and create markets that provide the best prospect for development. In addition, the company has taken numerous measures to cut down cost and be more cost effective. At the moment, P& G is the market leader in beauty products, household products, female products, and blade and razor products (Peter 8). Marketing strategy and product design are one of the most significant elements in the company. So as to maintain its supremacy in the global market, P& G effectively responds to market trends and changes in customer behaviour by modifying its marketing strategies and product mix. The company’s large volume of sales and revenue are largely attributed to its efficient distribution channel (Repp and Venkatraman 4; Peter 10).
Risk Factors
The greatest threat facing companies offering consumer products, including P&G is rapid technological change. As a result, these companies are always under pressure to come up with new products that are in line with the market trends and changes in customer behaviour. Companies that cannot keep up are often forced out of the business. In order to retain their most innovative and creative personnel, they are forced to pay excessive wages. The high cost of wages is passed on to consumers. This is one of the reasons why their products are always expensive (Repp and Venkatraman 12).
P& G is a manufacturer of consumer product and, therefore, depend heavily on the constant demand for its brand and products. A material change in consumer demand could have a significant impact on the business. Therefore, it must develop and sell products that appeal to all customers. This requires constant innovation, positive brand reputations and maintenance of exclusive rights. It must also be able to obtain exclusive rights and trademark, and respond to technological changes and rights granted to its rivals in the industry (Repp and Venkatraman 12; Peter 16).
The industry is characterized by high levels of competition. As a result, spirited advertising and marketing programs are needed to boost sales and improve the overall performance of the company. Proctor and Gamble need to control factors such as pricing, marketing incentives, business terms and its relationship with consumers (Vishnoi 18). Fluctuations of elements like commodity prices, production inputs, labour cost, interest rates, and foreign exchange rates can also have a major impact on the company. This can be managed through pricing actions, cost saving measures, hedging and outsourcing projects. Managing these elements is essential in maintaining a stable business (McCarthy 5; Chengappa 40).
Analysis of Financial Statements
Financial analysis is a very significant aspect of case study analysis. In any case, financial analysis reflects on the performance of the company in relation to its strategies and structure. Even though financial analysis is somehow complex, a great deal of the company’s financial position can be determined using ratio analysis. The financial ratios are classified into five main categories, namely: profitability tests, Liquidity tests, Activities tests, Leverage ratios, and Solvency tests (Poznanski, Sadownik and Gannitsos 1). This essay will compare the ratios of Proctor & Gamble and Johnson &Johnson.
Profitability test
These ratios show whether the company is making progress or going down.
Profit Margin
Profit margin shows the company’s level of profitability (Poznanski, Sadownik and Gannitsos 2). As you can see from the table below, Johnson & Johnson has a higher net income earned by every dollar of net sales compared to Proctor & Gamble in the last five years. This means the profitability in Proctor & Gamble is lower compared to Johnson & Johnson. Nonetheless, the level of profitability in Johnson & Johnson has been lower in the past three years compared to 2011 and 2010 (Gorsky 6).
Profit margin= Net Income/Net Sales Revenue
Actual Calculation= Net Earnings Attributable to P& G/ Net Sales
Earning per Share
Earning per Share= Net Income/Average Number of Common Stock Outstanding
Earnings per Share
EPS shows the efficiency of earning from each share. Earnings per share for Proctor & Gamble start to decrease from 2010 to 2012. It may be because of changes in the global market environment and some economic factors, rather than poor performance of the company. The values of Proctor & Gamble are generally smaller than Johnson & Johnson, but this cannot be compared directly since the prices of shares always vary from one company to another.
Return on Equity (ROE)
The ratio computes the earning from every unit of equity. It is more reliable than earnings per share when comparing performance of different companies. The ratio decreases from 2010 to 2014 for Proctor & Gamble (Marketwatch 1). ROE for Johnson and Johnson is much better than Proctor and Gamble.
Return on Equity=Net Profit or Income/ Average Stakeholders’ Equity
Actual calculations= Net Earnings Attributable to a company/ (Beginning Equity Closing Equity/2)
Return on Assets (ROA)
Return on Assets= Net Income/ Average Total Assets
Actual calculations= Net Earnings/ (Beginning + Closing Assets)
The ratio indicates how the company effectively turns asset into earning. The ratio of P&G starts decreasing from 2009, which may be affected by the drop of sales efficiency.
Quality of Income
Quality of Income= Cash Flow Operating Activity / Net Income
Actual Calculations= Total Operating Activities/Net Earnings
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 Johnson & Johnson is larger than P&G, which means that P&G has a lower ability to finance its operations and the cash needs from the inflows of operating cash, and cash may not be effectively collected due to bad debt (Marketwatch 3).
Fixed Asset Turnover Ratio
Fixed Asset Turnover Ratio= Net Sales Revenue/ Average Net Fixed Assets. The fixed asset turnover ratio measures a company’s capability to make sales given an investment in fixed assets. Johnson & Johnson have made good use of their investment in fixed assets compared to Proctor and Gamble. This may reflect a poor and less effective management of P&G.
Liquidity Test
These ratios measure the ability of the company to meet its short term obligations.
Current Ratio
Current Ratio=Current Assets/Current Liability
The current ratios of Proctor & Gamble are below 1.0 in the last 5 years, which means the company is unable to pay off the current debt. This is not a good financially. However, the ratio keeps on increasing showing that the company is improving the situation. On the other hand, Johnson & Johnson has a high current ratio, which is financially sound. However, high current ratio, particularly the current ratio larger than 2 may mean the company is using its resources unproductively.
Quick Ratio (Acid Test)
Quick Ratio= Quick Asset/ Current Asset
Actual Calculations= (Cash Equivalent Investment Securities+ Account Receivable)/ Total Current Liabilities
The quick ratio confirms a solid level of Proctor & Gamble liquidity. It is a more reliable ratio than current ratio as it considers 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 increasingly growing.
Receivable Turnover Ratio
Receivable Turnover Ratio=Net Sales/ Average Net Receivable
Actual Calculations= Net Sales/ (Beginning Account Receivables + Closing Account Receivables)
The company has a high receivable turnover ratio than Johnson & Johnson. It suggests that Proctor & Gamble is more effective in its credit-granting and collection of debts. In other words, Proctor & Gamble use its assets more effectively.
Inventory Turnover Ratio
Inventory Turnover Ratio= Cost of Sales/ Average Inventory
Actual Calculation= Cost of Goods Sold/ (Beginning Inventory+ Closing Inventory/2)
The company has a higher inventory turnover ratio, which means the inventory of the company moves more quickly through the production processes to clients. This helps in reducing other costs like storage or obsolescence. In addition, the inventory turnover ratio keeps increasing, meaning Proctor & Gamble sells and replaces its inventory in a more efficient way.
Solvency Test
Debt-to-Equity Ratio
Debt-to-Equity Ratio= Total Liabilities/ Stakeholders’ Equity
Actual Calculations= Total Liabilities/ Total Shareholders’ Equity
Based on the Debt-to-Equity Ratio, for each dollar of stockholders’ equity, the company has greater worth of liabilities than that of Johnson & Johnson. A high ratio suggests that Proctor & Gamble depends heavily on funds provided by creditors, which puts the business at a high risk.
Times Interest Earned Ratio
Times Interest Earned Ratio= (Net Income Interest Expenses+ Income Tax Expenses)/ Interest Expenses
Actual Calculations=Earnings from Operations before Income Tax/ Interest Expenses
The Times Interest Earned Ratio compares the income generated by Proctor & Gamble to its interest obligation for the same period. A high Times Interest Earned ratio in earlier years represents a margin protection for the creditors. On the other hand, a high ratio may also mean an undesirable lack of debt or the company is paying down too much debt with earnings that could be used for other projects.
Activities Test
Sales Efficiency
Sales Efficiency = Sales/ Assets
From 2010 to 2014, the sales efficiency decreases. This may be due to the emergence of some competitors in the same market. The average total asset also fluctuates from one year to another. This may be due to asset depreciation, purchase of treasuring stock for cash and payment of cash dividends. High efficiency in 2011 and 2012 may be attributed to sales strategy used to attract more customers.
Return on Assets
Return on Assets= Net Profit/ Total Assets
From 2010 to 2014, the return on assets increases. It may be due to several reasons. Firstly, the sale of goods increases and expenses reduces. Secondly, the asset turnover increases. This may also be attributed to efficiency in revenue collection and inventory management (Marketwatch 3).
Leverage Ratios
These ratios show the amounts of debt or equity used to finance the business. Businesses are highly leveraged if they use more borrowings than equity. The balance between the two is normally referred to as capital structure. The main leverage ratios include Debt to Asset ratio and Debt to Equity ratio. Debt to Equity Ratio has already been computed.
Debt to Asset Ratio
Debt to Asset Ratio= Total Debt/Total Assets
From 2013 to 2014, the company had a small increase in debt. It may be due to long and short term borrowing for some new product inventions. From 2010 to 2012, the demand of debt had decreased by 0.081, which may be because of the payment of debt after collecting cash from accounts payable.
Conclusion
From the above analysis, it is evident that Proctor & Gamble is not performing well compared to its rival and, therefore, it is not rational to invest in the company. The analysis shows that P & G is not stable and healthy financially. The profit margin shows that the profitability of P&G keeps on decreasing. The Earnings per Share and Return on Equity are also decreasing. The current ratio further suggests the company is not able to pay off current liabilities. The quality of cash is not good, which means that there is no enough cash for running the business, especially when money is needed for emergency purposes. The debt-to-equity ratio also shows that the company mainly relies on creditors, which is not a healthy condition for any business. The fixed asset turnover ratio also shows lack of efficiency in management. In a nutshell, investing in P & G is a risky venture. As competitors like Johnson & Johnson keeps growing and improving, it may take the company a considerably long time to reverse the situation. This may require radical changes in both management and marketing strategies.
References
Chengappa, Marthur. 2010, Retail Management: Text and Cases, New Delhi, India: International Pvt Lited. Print.
Gorsky, Alex. Company Analysis, Cincinnati, Ohio Print: J & J Inc., 2014. Print.
Marketwatch. Annual Financials for Johnson and Johnson. n.d.Web.
McCarthy, Scott. Hedging and invoicing strategies to reduce exchange rate exposure: a Euro-area perspective, Brussels: European Commission, 2014. Print.
Poznanski, Julie, Bryn Sadownik and Irene Gannitsos. Financial Ratio Analysis. 2013. Web.
Repp, Amanda and Padma Venkatraman. Proctor and Gamble, Washburn: Washburn School of Business, 2012. Print.
Vishnoi, Peter. Proctor and Gamble Hygiene and Health Care Limited, Mumbai, India: Vicks, Inc., 2015. Print.
Appendices
