Investment Plan Analysis: Procter & Gamble Research Paper

Pages: 11 (3186 words)  ·  Bibliography Sources: 1  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business  ·  Written: October 18, 2019

SAMPLE EXCERPT:

[. . .] With $6.6bn Gillette contributed 9% to Procter & Gamble’s net sales.

The net sales of all three competitors are Million figures therefore, P&G stands out with $8.124bn which contributed 12% of P&G’s net sales.

In the Fabric Care and Home Care segment, Unilever with $10.1bn comes closest to P&G’s numbers. The Fabric and Home Care carried 33% of Procter & Gamble’s net sales in 2019.

In the Baby, Feminine and Family Care, major competitor is once again Unilever. This segment accounted for 27% of P&G’s net sales. After analysing all market segments and numbers - Unilever is P&G’s largest competition.

4. Company Analysis

The assessment of a company’s performance is usually dependent upon financial statements. Ratio analysis is a method of evaluation that ascertains the key relationships between components of the financial statements. It is beneficial in assessing a company’s financial position and operations in addition to making comparisons with outcomes in previous years. This section conducts an analysis of financial ratios for Procter & Gamble.

4.1 Liquidity Measures
  • Current ratio = Current Assets / Current Liabilities
  • Quick ratio = Current Assets – non liquid CA / Current liabilities
  • Cash ratio = Cash / Current liabilities
2019

2018

Current Ratio

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0.748825

0.825867

Quick Ratio

0.581653

0.658073

Cash Ratio

0.141248

0.09098

Research Paper on Investment Plan Analysis: Procter & Gamble Assignment

The liquidity position of the company deteriorated in the past financial year. The current ratio of the company decreased from 0.83 in 2018 to 0.75 in 2019. This indicates that for every dollar of P&G’s current assets the company can only be able to cater to 0.75 cents in terms of its short-term obligations. This indicates that the company’s liquidity position is poor and needs improvement. The quick ratio of the company declined from 0.66 in 2018 to 0.58 in 2019. This implies that devoid of inventories, the company is in a worse position in catering to its short-term obligations. However, the cash ratio of the company did show some improvement by increasing from 0.09 in 2018 to 0.14.

4.2 Asset Management Ratios
  • Receivable turnover: credit sales/average account receivable
Days sales uncollected: 365 days/receivables turnover
  • Inventory turnover: Cost of sales / average inventory
Days inventory on hand: 365 days/inventory turnover
  • Total asset turnover: sales/total assets
2019

2018

Receivable turnover

14.0467

14.40345

Day sales uncollected

25.98476

25.34115

Inventory turnover

7.128242

7.355693

Days inventory on hand

51.20477

49.62143

Total asset turnover

0.588071

0.564889

The receivable turnover of P&G remained relatively the same between 2018 and 2019 at 14. This implies that on average the company’s accounts receivables turned over 14 times during the year. The day sale uncollected implies that the accounts receivables of P&G are turned over every 25 days in a year. The same case is perceived in the inventory turnover of the company. The inventory turnover of the company slightly declined from 7.35 to 7.12 and the days inventory on hand slightly increased from 49 days to 51 days. This implies that the company’s ability to sell goods remained relatively the same. The total assets turnover of the company increased from 0.56 to 0.59. This indicates that the total assets turnover of P&G slightly deteriorated in the past financial year. In overall, these financial ratios indicated that the company has upheld its effectiveness in managing its assets.

4.3 Long-term Solvency
  • Equity Multiplier: total assets/total equity
  • Debt-equity ratio: total debt/total equity
  • Debt-ratio: total debt/(total debt + total equity)
  • Equity-ratio: total equity/(total debt + total equity)
  • Times earned interest ratio: EBIT / Interest expense
2019

2018

Equity multiplier

2.419029

2.237203

Debt-equity ratio

1.419029

1.237203

Debt ratio

0.586611

0.553013

Equity ratio

0.413389

0.459473

Times earned interest ratio

10.77996

26.40909

The equity multiplier of the company for 2018 was 2.25 whereas that for 2019 was 2.42. This ratio indicates the percentage of assets that are financed or owned by the shareholders. Based on these figures, only 41 percent of the company’s assets are financed by the shareholders. Secondly, the debt-to-equity ratio shows the proportions of equity and debt a company is using to finance its assets. The debt-to-equity ratio of the company was 1.24 in 2018 and 1.42 in 2019. These figures indicate that the company has a good debt-to-equity ratio. The debt ratio of the company in 2018 was 0.55 whereas in 2019 the ratio was 0.58. The inference of this is that the company has slightly higher debts than assets. This implies that the company would not be able to fully pay off its debt obligations using its assets. The equity ratio indicates the amount of assets that are funded by the shareholders as compared to the total equity of the company. The equity ratio of the company was 0.46 in 2018 and 0.41 in 2019.

4.4 Profitability Measures
  • Profit Margin: net income/total sales
  • Return on Assets: net income/average total assets
  • Return on Equity: net income/average total equity
2019

2018

Profit margin

0.057576

0.145888

Return on assets

0.033859

0.082411

Return on equity

0.081906

0.184369

The profit margin of the company significantly declined from 14.59 percent in 2018 to 5.76 percent in 2019. This indicates that the profitability of P&G significantly deteriorated in the past financial year. The same case applies to the return on assets of the company. The ROA of the firm declined from 0.082 in 2018 to 0.034 in 2019. This indicates that for every dollar of assets, the company generated a return of 0.082 cents in 2018 and this significantly declined to 0.034 cents in 2019. The return on assets of the company in 2018 was 0.18 whereas that in 2019 declined to 0.082. The inference of this is that for every dollar of shareholders’ equity, the company generated a return of 0.18 cents in 2018 and this significantly declined to 0.08 cents in 2019.

4.5 Investor Ratios
  • Earnings per share (EPS) = Net income / total number of outstanding shares
  • Price-Earnings ratio (P/E-ratio) = Price per share / earnings per share
  • Dividend Yield = Dividends per share / current share price
  • Dividend pay-out ratio = Dividends per share / earnings per share
  • Market-to-Book ratio = Market value per share / book value per share
2019

Earnings per share

1.611338

Price-earnings ratio

75.14874

Dividend yield

0.006162

Dividend pay out ratio

0.462969

Market to book ratio

6.545405

5. Gordon Growth Model

The Gordon Growth Model is a tool that is used by analysts and investors to calculate the intrinsic value of a company’s stock and helps in making a decision whether to buy or sell. The Gordon Growth Model uses the following formula;

Where;
  • P0 = Current Stock Price
  • D1 = Value of next year’s dividends
  • R = Rate of Return
  • G = Yearly growth rate
In this chapter the Gordon Growth Model will be used in order to evaluate the current price of the stock and make a recommendation on whether it is currently a good time to invest in Procter & Gamble.

Firstly, the yearly growth rate will be calculated – this is done by using the geometric growth rate formula. Based on the information retrieved from Procter & Gamble EPS - Earnings per Share 2006-2019: PG, October 2019 - the below represent the relevant EPS scores over the 5 years;

2013

2014

2015

2016

2017

2018

$3.86

$4.01

$2.44

$3.69

$5.59

$3.67

Generic Formula: 2013 EPS * (1 + G)5 = 2018 EPS

Applying the Formula: (Using the EPS scores above)

3.86 * (1+G)5 = 3.67

(1+G)5 = 3.67 / 3.86

(1+G)5 = 0.951

1+G = 5

1+G = 0.99

G = 0.99 - 1

Therefore:

Reverting back to the original formula, we now know that;

Now that the growth rate has been calculated, we need to establish what D1 is. D1 represents the value of next year’s dividend and can be determined by using the following formula;[END OF PREVIEW] . . . READ MORE

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