Introduction
Procter & Gamble provides a wide array of personal products to customers by its focus on providing branded consumer goods. By selling its products in over 180 countries around the world via primarily many means like the mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, the company is one of the well-known global manufacturers in the industry. By the large variety of products made by the company, it has created six business segments under United States Generally Accepted Accounting Principles (GAAP), which include Beauty; Grooming; Health Care; Snacks; Fabric Care and Home Care, and Baby Care and Family Care. During fiscal year 2008 ending June 30, 2008, it had a one product category to account for 10% of more the consolidated net sales and that laundry category constituted also an approximately 15% of net sales during the said fiscal 2008 year. It was also during fiscal 2008, that Procter and Gamble has organized its three Global Business Units namely: Beauty, Health and Well-being and Household care (MSN, 2009). As any other company with shareholders to satisfy its goals include providing quality products and customers and clients wherever the latter may be found while attaining its profit and wealth objectives.
This paper seeks to analyze the annual report of Procter & Gamble for the year 2008. By examining its long-term objectives, financial performance in terms of profitability, liquidity, and efficiency, and other relevant financial ratios. This paper will also determine whether the company faces critical financial issues and make recommendations that improve the performance of the company.
What are the company’s long-term financial objectives?
The long-term financial objectives of the company include attaining leadership sales, creating profit, and share value as expected rewards while the company provides products and services of superior quality to its consumers at present ad for generations to come. The company expects also in return its people, shareholders, and the communities to prosper in the process of attain providing such goods and services (Procter & Gamble, 2009a). To attain the same long-term financial objectives, company needs to be profitable, efficient, liquid, and solvent at least at par with the industry where it competes or belongs.
Analyze the company’s financial performance
To analyze the financial performance of Procter & Gamble, this part evaluations the said performance of the company in attaining its financial objectives in terms of profitability, efficiency, liquidity, and solvency. Table I below summarizes financial ratios extracted from the financial statements of Procter and Gamble Procter & Gamble and industry data to facilitate analysis in terms of profitability, efficiency, liquidity, and solvency of the company.
Profitability and Efficiency
Procter & Gamble’s profitability and efficiency are obviously high. In terms of return on equity (ROE), the company reflected 10% in 2007 and then increased the same to 12% in 2008. With an average of 11% for the past two years, said profitability ratio is lower than industry average of 35%. Thus, it could be inferred that although a more than 10% ROE is already high for the company, it can still improve the same if the industry average could reach as high as 35%. In terms of return on assets (ROA), Procter & Gamble has shown 7% in 2007 and 8% in 2008. Compared with industry average 10.2% the company is less profitable than the industry average. See Table I.
Based on net profit margin for years 2007 and 2008 Procter & Gamble had 14% for both years. The same high profitability behavior may be observed in terms of gross margin where Procter & Gamble had a 52% and 51% for 2007 and 2008 respectively. Although there was decline in gross margin, the company managed to have similar net profit margin. This means that the company was able to control on operating expenses in 2008 to offset what was loss in gross margin of 1%. See Table I above. This means also that from average 52% gross margin being reduced to 14% average net profit margin, the company was spending a more a great part of its gross margin to operating expenses. Compared with average competitors’ net profit margin in the personal products industry with industry average of 9.1%, the company’s average net profit margin of 14% is still higher which means that company is more efficient. See Table I.
It may be noted that ROA is more of a measure of efficiency while ROE is more of a measure of profitability. The better industry average of ROE and better ROE as against those of Procter & Gamble created a conflict with an earlier finding based on net profit margin and gross margin since the company showed better efficiency under the latter. To resolve the seeming conflict, there is a need to look at the inventory turnover and total asset turnover of Procter and Gamble compared with the industry. As far as to inventory turnover is concerned, the company is more efficient since it reflected 5.11 as against industry average turnover of 5.0. However in terms of total asset turnover, it came out the industry had o.90 as against 0.57 averages for the past two years in the case of company. Thus, the company may not be convincingly declared as more efficient than the industry in all aspects. Procter & Gamble may have managed to have faster turnover in inventory, which means that it takes faster for company to sell than competitors; it however means also that in term of other assets, competitors are better on average. Moreover, since profitability should weight more than efficiency, it may be asserted that the company is less attractive than industry average.
Liquidity
The companies’ liquidity indicates their capacity to meet currently maturing obligations, which is measured by the quick ratios and current ratios. Procter & Gamble’s quick ratios reflected average quick ratio of 0.36 for the past two years and which very much lower than industry average of 0.70. The same liquidity behavior of the Procter & Gamble is observed in terms of current ratios, where Procter & Gamble reflected an average of 0.79 for the past two years as against industry average of 0.90. The poorer liquidity of the company compared with the industry is understandable in the light also of its profitable or partly less efficient performance compared with an average competitor.
In comparing quick ratio from current ratio, it may be noted that quick ratio is better measure for liquidity since the same excludes inventory and other current assets in the composition of the quick assets. It is worth emphasizing that the results of the profitability analysis appear to create some consistency or confirmation in the resulting liquidity ratios of the Procter & Gamble.
Solvency
Solvency like liquidity also measures the ability of an enterprise to pay its debts but this time the issue is long terms debts of the company hence solvency tells more about long-term heath where a stable company is deemed stronger than an unstable one. Using debt to equity ratio as an expression of solvency, Procter & Gamble reflected an average of 1.07 for the past two years as against industry of 1.05. See Table 1 and Appendix A. Note that this time, the lower the ratio, the better the solvency or financial leverage, thus company is therefore a riskier company to invest and its average competitor.
Does the company face any critical financial issues?
Yes, the company faces some critical financial issues that must be addressed. As found in company’s profitability, efficiency, liquidity, and solvency analysis, the company was found generally lower than its average competitors were in the personal products industry. This would therefore indicate a wide room for the company to improve or a gap for improvement based on the premise that if other companies could attain a higher level then there is no reason that it cannot attain the same. It has something to do therefore on how the company improves itself in four aspects.
As found earlier, the company outperformed its average competitors in terms of gross margin and net profit margin but it reflected lower ROA which means that company need to improve management of its other assets particularly its fixed assets. This is also supported by the fact that it has a lower total asset turn over than industry average. Its higher inventory turnover however is an indication that as far as its inventory management is concerned the company is above industry average but not for total asset utilization.
In so improving its management of fixed assets and other assets than its inventory, the company would improve its efficiency and its liquidity and solvency position.
What could the company do to improve its financial performance?
To improve the company’s performance, there is need to improve its sales revenues, to reduce its cost, choose it long-term investments properly investments, and craft and implement strategies in accordance with its company strengths and weakness as wells as industry opportunities and threats. Because of lower total asset turnover than industry average, the company it advised therefore to increase utilization of its non-inventory assets which constitute 95% in 2007 and 96% in 2008 as shown in Table 2 below.
Conclusion
Based on the foregoing analysis and discussion, this paper concludes that Procter and Gamble is less profitable and less efficient in some aspects, less solvent and less liquid than its average competitor in the personal products industry is. Such situation are signs of issues to be resolved by the company if it has to attain its long term objectives financial of creating profits and share value in order to reward its shareholders, the employees and the community. The fact that the industry averages are generally are motivation enough to move the company to attain greater heights of success. The strategy is what would make the assets other than its inventory since the company has higher inventory but lower total asset turnover than its average competitors do in the industry.
Appendices
References
MSN (2009a) Company Report, Web.
MSN (2009b) Industry Profit ratios, Web.
MSN (2009c), Industry Financial Condition ratios, Web.
MSN (2009d), Industry investment ratios, Web.
Procter & Gamble (2009a) Company Website.
Procter & Gamble (2009b) Annual Report for Procter & Gamble, Web.