L’Oreal and Procter & Gamble Companies Financial Analysis

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Topic: Business & Economics
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Introduction

Procter and Gamble (PG) is a manufacturer of cosmetic products. Its products are mainly sold to wholesalers, retail stores, and grocery stores. PG’s floods ship brands include an assortment of beauty, health, and household care products. PG operates in the personal and household products industry.

L’Oreal (LRCLY ) is a close competitor, and thus its performance has been used for comparison with that of PG. The objective of this essay is to perform a trend analysis of the performance of PG in terms of its profitability, liquidity, solvency, and efficiency with a comparison to that of LRCLY.

Profitability

Based on the horizontal analysis, PG’s sales increased by 9 percent between the year 2008 and 2009. However, following the global economic meltdown in the year 2009 and 2010, sales dipped by 5 percent. On the other hand, LRCLY’s sales increased by 8 percent between years 2008 and 2009wiht no growth recorded in the year 2009 but a 12 percent growth in the year 2010.

Profits for PG grew by 17 percent in the year 2008 and 11 percent in the year 2009. There was however a decrease in profits by 5 percent in the year 2010. In the case of LRCLY, its profits declined by 27 percent in the year 2008 and 8 percent in the year 2009. In 2010, there was a profit of 25 percent. Similar changes are notable from the trend analysis presented by the following table.

Trend Analysis
2008 2009 2010
Trend parentage (PG) 100% 95% 95%
Trend percentage (LRCLY) 100% 100% 111%

ROA shows the profitability of an organization’s assets (Bierman, 2009). It is measured as the percentage of the net income to total assets of a company. LRCLY had a superior ROA than PG. PG’s ROA was 11% in years 2008 and 2009 and 12% in the year 2010 while LRCLY’s ROA was 17% in the year 2008 before falling to 15 percent in the year 2009 due to the economic meltdown. Recovery from the economic downturn led to an improvement in profits in the year 2010 where ROA rose to 17%.

Return on sales is a measure of the relationship between net income and sales for the period. PG generates higher net margins from sales as compared to LRCLY. For instance, in the year 2008, the company generated a return on sales of 14% as compared to a return of 11% earned by LRCLY.

In 2009 PG’s return on sales was also superior (17%) to that of LRCLY (10%). A similar trend was noted in year 201- where PG’s return on sales was 16 percent compared to 11% earned by LRCLY the following table provides a summary of return on sales ratios for the two companies.

Rate of Return on net sales
2008 2009 2010
PG 14% 17% 16%
LRCLY 11% 10% 11%

It is also worth noting that LRCLY generated higher returns to common equity holders due to its relatively lower value of outstanding shares as at year end. The following is a summary of the rate of return for the two companies over the review period.

Rate of Return on Common Stockholders’ Equity
2008 2009 2010
PG 19% 21% 19%
LRCLY 213% 266% 170%

Based on the analysis of profitability ratios above, it is worth noting that PG is more profitable than LRCLY. However, the two companies had a decline in profitability in the year 2009, mainly due to the impacts of the global economic meltdown.

Liquidity

The two companies were in a poor liquidity position. Their current ratios are well below the standard benchmark of 2:1 and similarly for their quick ratios which are below the standard benchmark of 1:1. In 2010, PG’s current ratio was 0.79 in the year 2008 (LRCLY: 0.90), there was a slight decline in the current ratio in the year 2009 where PG’s ratio fell to 0.71 whereas that of LRCLY increased to 1.10. The following is a summary of current ratios for the two companies.

Current ratio
2008 2009 2010
PG 0.79 0.71 0.77
LRCLY 0.90 1.10 1.06

Quick ratios exhibited a similar trend to that of current ratio. PG’s quick ratio was 0.52 in the year 2008, 0.49 in the year 2009 and 0.51 in the year 2010. LRCLY’s ratios were better than those of PG. in the year 2008; its quick ratio was 0.68, in the year 2009, 0.83 and 0.79 in the year 2010. LRCLY has relatively stronger liquidity than PG. However, the liquidity position for both companies is below the standard benchmark. There is a need for the management to adopt better working capital management practices.

Efficiency

Efficiency ratios evaluate how well an organization utilizes its assets and liabilities to generate revenues. One of the main efficiency ratios is the average debtor’s collection period is a measure of the period taken by an organization in collecting amounts due from trade receivables (Helfert, 2001).

Having a high debtors’ collection period exposes an organization to credit risk in the form of high instances of bad and doubtful debts. The ratio is computed by the diving number of days in a year (365) with the debtors’ turnover. In the case of PG, it took 27 days to collect from debtors in the year 2010 whereas LRCLY took 48 days. Therefore, LRCLY has poor collection strategies as compared to those of PG.

Solvency

Evaluation of an organization’s solvency is a determination of its ability to meet its long term financial obligations (Shim and Siegel, 1999). Several financial ratios have been devised to evaluate the solvency of an organization such as the debt ratio. Organizations with high debt ratios are highly insolvent since there are likely to be unable to pay debt obligations.

The two companies have been very conservative in the use of debt capital having debt ratios that were lower than 50 percent. Therefore none of the companies had solvency risks. However, LRCLY had made use of more debt in its capital structure as compared to PG.

Gearing ratio
2008 2009 2010
PG 30% 30% 33%
LRCLY 48% 42% 38%

Conclusion

PG has faced intense competition from its peer, LRCLY during the period under review. Its profitability was better than that of the peer, mainly due to its high efficiency. However, the impact of the economic meltdown had a more severe impact on the company’s sales than it had on the peer company.

It is also worth noting that PG had made very minimal use of debt as compared to the peer company. Therefore if I were to choose a company to invest in, I would choose PG. This is due to its superior financial performance in terms of its profitability and better financial position about liquidity and solvency ratios.

Reference list

Bierman, H. (2009) An introduction to accounting and managerial finance. Boston: World Scientific

Helfert, E.(2001). Financial analysis: tools and techniques: a guide for managers. New York: McGraw-Hill Professional

Kapil, S., (2010) Financial management. India: Person Education.

Shim, J and Siegel, J., (1999). Schaum’s Outline of Financial Management, Third Edition. Chicago: McGraw-Hill Professional