P&G is the largest consumer goods manufacturer in the world according to global statistics. With over 84 billion USD in terms of net sales and also over $10 billion in net profits, P&G is arguably the most profitable company in this industry globally. It is with this understanding that we shall analyze the financial performance of the company. A deeper analysis of this company’s trend of performance and other disclosures will be analyzed.
1) Calculate the gross margin percentage (Gross Profit divided by Net Sales) for each period presented in the income statement. What trend in gross margin do you observe and what factors may be causing this trend?
2) Gross profit margin is calculated as gross profit as a percentage of the net sales. The margin for the years will be as follows
Note: Computation done in Excel and pasted here
This trend was also witnessed in the year 2009 with the full effects of the global financial crisis being felt in different parts of the world and especially in the Americas. During this year, the margin stood at a low of 50%, down from the previous 51%.
2010 saw a relative increase in revenue leading to an improved profit margin to 52% up from the previous 50% in 2009.
In 2011, marginal increase in revenue coupled with a sustained costs increase saw the company record a lower profit margin of 51%, a 1% drop from the previous high. However, 2012 has been a more difficult year for the company that saw a reduction in the profit margin by about 2% to 49% as a result of inflationary pressures and a more difficult operating environment especially in the European countries that can be blamed partly on the euro crisis coupled with a slight increase in the internal operational costs.
2. Where are the resources of your company employed (i. e., what percentage of the total assets of the company are invested in current assets, long-term assets etc.)?
The different categories of assets for P&G and their percentages to the total assets include:
Goodwill and other intangible assets
Focusing on the year 2012, the company’s investment in the three categories of assets is as outlined above. The company assets are majorly intangible assets and good will which account for approximately 68% in the year 2012. The remainder is shared between property, plant and equipment and current assets taking 15% and 17% respectively as shown above.
3. What method(s) of depreciation does your company use? Does the company use the same method of depreciation for all types of long-lived assets?
As explained in the company’s annual report, P&G’s assets are booked at cost less the accumulated depreciation over the period. As a policy, depreciation expense for property, plant and equipment is depreciated using the straight-line method of depreciation over the particular assets useful life. In this regard, buildings are depreciated for a period of 40years, furniture, fittings, fixtures and machinery and equipment for a period of 15 years while computer equipment and any capitalized software is depreciated for 3-5years depending on classification. Manufacturing equipment is depreciated in a range of 3 to 20 years. Impairment of assets is done periodically so as to determine the carrying amounts of the assets to avoid overstatement in the books.
Goodwill and other intangible assets are not amortized. However, they are evaluated for impairment on an annual basis or more often if there are indicators that such assets may be impaired as is required by the GAAP’S and IFRS’S .
The company confirms that the above policies and rates have been applied consistently in the past years unless otherwise stated
4. What method(s) does your company use to value its inventory? Compute the inventory turnover ratio for the last three years. Comment briefly on the trend observed
Inventory at P&G is valued using the lower of cost and the net realizable value. To achieve this, the company uses the first in first out method of stock valuation especially on product related inventories and last in first out for cosmetics and commodities, spare parts are however valued using the average cost method as explained in the company’s annual report.
Inventory turnover ratio is calculated as sales divided by inventory. It measures the number of times that the company inventory is realized and replaced again. For the three consecutive years, the turnover is calculated as