Rationale For Choosing The Company For Investment Analysis Research Paper Examples
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Assignment 1: Financial Research Report (Financial Analysis of Procter & Gamble Co.)
Assignment 1: Financial Research Report (Financial Analysis of Procter & Gamble Co.)
Introduction to Procter & Gamble Company
On October 31, 1837, about more than 177 years ago, Procter & Gamble Company was founded by William Procter and James Gamble . Traded as a public company in New York Stock Exchange (NYSE), Procter & Gamble has headquarters located in Cincinnati, Ohio, United States. Operating in a consumer goods industry, this company serves the worldwide customer base (except in Cuba) where its key competitors include Johnson & Johnson, Kimberly-Clark Corporation and Unilever.
In 2014, Procter & Gamble Company reported sales revenue of $83.1 billion earned from five business segments and a product line of personal care products, cleaning agents and pet foods. Procter & Gamble is the largest worldwide manufacturer of personal and household products in terms of sales revenue by serving a market of four billion worldwide customers .
The prime rational or reason this publicly traded company for investment analysis is that, on the first day of August 2014, this business announced that Procter & Gamble Company is going to one hundred brands. Instead focusing on all of its brands, Procter & Gamble Company dropped other brands to focus only on those eighty brands which produced nearly about ninety five percent of the company's total profits . In view of this strategic decision, Procter & Gamble recorded a dramatic decline in its total sales revenue during the last quarter of 2014 by approximately ten percent compared to its competitors where the industry witnessed a decline in revenue generation by only three percent during the same period.
Therefore, in view of this withdrawal from brands and sharp decline in revenue relative to competitors and industry, it is necessary that this company should be analyzed against its financial performance of three years. This is because Procter & Gamble Co. has earned a reputation of first investment option for investors. This report will help them to have as to whether to invest in it or not in view of two issues mentioned in the previous paragraph.
Investors’ Profile Who Could Invest in Procter & Gamble Co. and Investment Strategy
Before making examination of the potential investor’s profile, it is important to understand that Procter & Gamble Co. is a publicly traded business. From an investor’s perspective, its stakeholders could be divided into suppliers (vendors), banks and financial institution which provide the debt-based finance, Venture Capitalists, Business Angels and common equity holders (shareholders). All of these parties may either have a long-term investment strategy or they may decide to provide the credit of short-term nature.
This company, Procter & Gamble, is a strategic fit for all those businesses which provide short-term credit as suppliers or vendors. They may analyze the financial performance to see whether Procter & Gamble is able to pay its short-term liabilities or not as its revenue has declined in 2014 and it has also withdraw to manufacture/market one hundred brands.
Three Year Financial Statement Analysis through Ratios of Procter & Gamble Co.
For potential investors identified in the previous section and depending upon their investment strategy, three years of financial data is extracted from the annual report of Procter & Gamble Company. This data is then used to calculate the financial ratios for three consecutive years to analyze the financial performance over this period. This investigation has been performed in the following manner:
Liquidity Ratio Analysis
This ratio analyzes the ability of the company under review to pay off its debt of up to one year when it is called back. It is calculated by dividing the current assets by current liabilities . The globally acceptable benchmark for this ratio is 2:1 which depicts that though the liquidity management of Procter & Gamble Co. improved over a three year period yet it operates far below the global industry standard. Internally, the liquidity strength of Procter & Gamble Co. has improved because during the last year of 2013, the company had only $0.8 to cover each dollar of its current liabilities. However, latest data reveals that Procter & Gamble Co. now has $0.94 ($0.14 more) to repay every dollar of short-term obligation. But, from external perspective the company is under performing.
Quick or Acid-Test Ratio
For a more thorough analysis, it is important that quick ratio should be analyzed. It is also called acid-test ratio because it is concentrated to include in the equation only those current assets which could be easily and readily converted to cash without even a slight decline in their value. Normally, it excludes inventories and prepayments from calculation because they are not easily cash convertible .
Unlike the current ratio, the global standard for this ratio is 1:1 which makes it apparent that Procter & Gamble Co. is still underperforming the global benchmark of the consumer goods industry. Comparing the current and quick ratios, it can be easily understood that the ratios have dropped significantly. This reveals that much of the current assets of Procter & Gamble Co. are tied or locked into unsold ending inventories and rising levels of prepayments.
The company may either find it difficult to sell its inventories of eighty brands on which it is focusing after withdrawing from the other hundred brands or may be facing problems with regards to its supply chain management as well as marketing activities. This also reveals that customers might not be less willing or there are fewer sales of existing eighty brands as the demand for them may be low.
Though it performs poorly from external perspective yet Procter & Gamble Co. has managed to improve its liquidity strength from 2013 to 2014. Previously, it had only $0.41 (in 2013) but now it has $0.1 more in 2014 to repay every dollar of short-term liability to creditors which is a sign that Procter & Gamble Co. is working on its liquidity management for improvement.
Risk Level of Procter & Gamble Co. From an Investor’s Viewpoint
Any slight decline in the value of current assets may greatly harm the ability of Procter & Gamble Co. to repay its current liabilities of short-term nature to its creditors. As the liquidity strength reflects the margin of safety to investments of short-term term creditors, Procter & Gamble Co. offers lower safety margin against investments of creditors. Therefore, one may say that, for Procter & Gamble Company, the risk of default and counterparty risk is really very high as dictated by liquidity ratios. The company is more vulnerable to go bankrupt even if its sales revenue declines dramatically in just one month.
Profitability Ratio Analysis – Examination of Investment Returns
Under this section, three ratios will be analyzed which depict how much investing into Procter & Gamble Co. is for the banks and financial institutions (as debt holders) as well as for equity holders. For this, the following table has been referred to:
Return on Equity
This ratio is important to shareholders because it reveals the percentage of earnings which are made available to equity investors as returns to their investments in equity of Procter & Gamble Company. Analysis of financial ratios make it clear that the ability of Procter & Gamble Co. to make more earnings of the total business income available for shareholders declined by a slight margin from 2013 to 2014. This may be due to liquidity management issues which were identified by liquidity ratios.
Return On Invested Capital
This ratio is helpful to both the equity and debt holders because it help analyze the ability of Procter & Gamble Co. to use the capital provided by investors in an efficient and effective manner. This ratio reveals the capital management capacity of Procter & Gamble Company of how it allocates or channelizes the capital provided to profitable investments.
Financial analysis reveals that Procter & Gamble Co. made efforts in 2012 and 2012 to increase its strength for channelizing its capital to profitable investments where the return on overall capital investment increased by 0.53% approximately. However, during 2014 in view of liquidity management issues, Procter & Gamble Co. was able to generate 0.33% less against its overall capital investments. For every dollar provided by both the debt and equity holders, the company only generated 11.83%. From an investor’s perspective such a decline is not good and considered problematic not only by potential but actual investors as well. It seems like Procter & Gamble Co. is not efficient enough to generate sufficient returns from every dollar provided by equity and debt investors.
Interest Coverage Ratio
This ratio gauges the ability of Procter & Gamble Co. to pay its fixed interest obligations on its outstanding debt. This position shows a shaky position on part of the company that from 2012 to 2013, the interest coverage capacity improved. However, in 2014, this ability decline dramatically where one may say that the interest rate risk has increased for Procter & Gamble Co. or due to weak liquidity position, it is unable to cover fixed interest payments though the debt levels have remained the same through 2013 to 2014. This shows that Procter & Gamble Co. is burdened heavily by existing debt level where its ability to meet interest payments has become questionable. As already indicated by liquidity ratios, since Procter & Gamble Co. finds it difficult to repay fixed interest payments to holders of existing debt, it is more prone or vulnerable to fall easily into the verge of bankrupt position even if earning generation suffers for even a single month.
Key Strategies to Minimize Perceived Risks
It has already been indicated that counterparty and default risk for Procter & Gamble Co. is very high. The company is also heading towards bankruptcy where all these perceived risks are dictated by declining liquidity strength. It can be said that if the liquidity position is improved, Procter & Gamble Co. may again get on track of outperforming performance and has a potential to outperform global standards or norms in the consumer goods industry.
Therefore, it is necessary that Procter & Gamble Co. should redesign its marketing and advertising activities because the demand for its products may be declining due to which it is unable to generate lucrative income and provide good returns on investments. Equally important is that the management should investigate the supply chain and logistics management strategies because competitors are after the same customer base. Withdrawal from profit generating hundred brands does not seem to be a feasible idea which is certainly dictated in declined profit margin relative to global competition.
Recommendations of Procter & Gamble Co.’s Stock as an Investment Opportunity
The market reputation of Procter & Gamble Co. is also at stake because it is not generating lucrative returns to attract more investors. The company is more vulnerable to go bankrupt and its counterparty risk is also high. The company also faces a hard time to cover fixed interest payments to holders of existing debt though the debt level has remained the same from 2013. All this is due to the weak liquidity management position. Due to management issues related to liquidity, Procter & Gamble Co. is unable to utilize the capital invested by both the equity and debt holders in an efficient manner.
Therefore, we conclude from a careful analysis that Procter & Gamble Co. is not a best (but an average) strategic fit for investment by short-term creditors. This company is also not attractive for those suppliers who provide trade credit to it. This is because Procter & Gamble Co. is in difficult times to keep its short-term liquidity position strong to pay its debts. Though the financial flexibility of Procter & Gamble Co. is in controlled level yet it is not a good fir where banks and financial institutions should invest in as debt-holders.
Any investor willing to invest in equity should keep in mind that the counterparty risk or the default risk for Procter & Gamble Co. is very high as dictated by weak liquidity performance. For short-term investment, Procter & Gamble Co. is not a best place to invest in. due to a limited financial performance analysis through ratios, we may not conclude whether it is an attractive company for long-term investment or not.
Brigham, E., & Houston, J. (2015). Fundamentals of Financial Management. Cengage Learning.
Hill, C., & Jones, G. (2008). Essentials of Strategic Management. Cengage Learning.
NG, S. (2014, August 01). P&G to Shed More Than Half Its Brands . Retrieved March 06, 2015, from The Wall Street Journal: http://www.wsj.com/articles/procter-gamble-posts-higher-profit-on-cost-cutting-1406892304
Reuters. (2014, November 02). UPDATE 1-Argentina accuses Procter & Gamble of tax fraud, says suspends operations. Retrieved March 06, 2015, from Reuters News Agency Company: http://www.reuters.com/article/2014/11/03/argentina-procter-gamble-idUSL1N0ST04E20141103
Timberlake, C. (2014, August 01). P&G Plans to Shed 100 Brands to Focus on Top Performers. Retrieved March 06, 2015, from Bloomberg L.P. Media Company: http://www.bloomberg.com/news/articles/2014-08-01/p-g-plans-to-shed-100-brands-to-focus-on-top-performers
Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
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