P&G Financial Report

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The debt remains relatively stable as we can see between 2016 (0,2975) and 2017 (0,295). However, the cost of the debt has increased of 3%. The Financial Leverage Effect (FLE) represented respectively 3,89% and 3,42% of the return for shareholders for 2016 and 2017, which means that the funds borrowed by P&G has been invested and that these investments generate operating profit.

Economic profitability analysis

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Sales efficiency

The Net Operating Margin (NOM) increased from 15.44% in 2016 to 16.49% in 2017. This 1-point improvement is related to the increase of the EBIT of 3.82%. Also, the percentage margin affected to the theoretical EBIT was even more important on the actual EBIT of 2017. In fact, P&G realized scale saving which explains the increase of actual EBIT reaching 13 955 million dollars in 2017.

The growth of sales decrease of 0,37% over the two years which represent a loss of 241 million dollars. Also, we notice a slight decrease of the cost of goods sold of 0.39%. Basically, both sales and cost of goods sold decreased nevertheless sales remain higher, which means that the company well managed the operating costs (variable costs) between 2016-2017 and the growth of activity is under control. Sales efficiency reveals that the company is profitable.

Assets productivity

The economic profitability is influenced by sales efficiency and asset productivity fluctuations over 2016 and 2017. P&G’s results reveal that both increasing factors caused the rise of Return On Capital Employed (ROCE).

The capital employed turnover (CETO) rise from 0,868 to 0,9007, mainly due to a little decrease of the capital employed between the two years. It is good to have a fastest increase of sales rather than working capital because it means that the company is under control.

Compared to the Net Operating Margin (NOM) increasing of 1.05%, the capital employed turnover (CETO) rise to 3.2% between 2016 and 2017 which impact slightly the Return On Capital employed (ROCE).

The increase of capital employed and more precisely the relevant decrease of working capital explains the positive growth of the Capital Employed Turnover (CETO).

Furthermore, Procter & Gamble keeps investing (fixed assets increased). Its capital expenditure is 93 912 – 93354 + 3078 = 3 636, and its depreciation for 2017 is $2 820, so we conclude

That Procter & Gamble is expending (CAPEX > $2 820).

Working capital [pic 13]

Procter & Gamble sold between 2016 and 2017 $7,185 of their current assets (which are current assets held for sales in 2016) and they disappear in 2017, so we suppose that they are sold because they have $5,217 of net earnings from discontinued operations in 2017. This, therefore, generates a decrease of the working capital between 2016 and 2017.

This led to a decrease in the Capital Employed of $3,000 from 2016 and 2017 (respectively $75,233 and $72,233). As a consequence, the Return of the Capital Employed (ROCE) and the Return on equity (ROE) increased. The lower the working capital is, the better it is for the company. As a consequence, the working capital is well managed at P&G.

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In spite of the decrease of the Working Capital, the days’ receivables, inventories and accountable remained relatively stable. Respectively, the days’ receivables increased of a day (+1.11%) whereas the days’ inventories slightly decreased of half a day (-0.42%) between 2016 and 2017. Concerning the days accountable, they still remained at zero.

However, the days’ payables increased of +5.26% -from 118.94 to 124.27-. This is

the direct consequence of the slight increase of the accounts payables (+300) and slight decline of the cost of product (-400). Despite the small fluctuation of the days’ payables, the firm has succeeded in maintaining thanks to an effective corporate management and strategy.

Leverage Analysis

The financial leverage effect (FLE) decreased from 3.89% to 3.42% over the period 2016-2017. The company evaluates the risk through level of net debt employed and interest. P&G have an important increase of the cost of debt of 9.4% and the net debt remains almost the same from 0.297 to 0.295. Also, cost of debt increasing from 0.3131% to 3.26% is responsible for the decrease of financial leverage effect.

ROE increases and FLE tends to decrease, to conclude, it is a very low risk situation. P&G have a prosperous financial position over the year.

3 Financial Risks

Now, we will analyze if Procter & Gamble is profitable or has financial losses thanks to a financial risk analysis.

For this, we will analyze the solvency and the liquidity of the company between 2016 and 2017. The main question we wonder is: “Is Procter & Gamble making money or not?”. Because the risk is uncertain and an operation which seems profitable, can also lead to financial losses. The main financial risk is the “default risk”, if Procter & Gamble can meet obligations to debt holders.

Solvency risk

Can Procter & Gamble repay his debt? Higher the long-term debts are, higher the bankrupt risk is. We will see the gearing ratio, solvency ratio and interest coverage ratio to analyze if Procter & Gamble is solvent. In other words, the solvency is the degree where the current assets exceed the current liabilities of a company (a company is solvent when all its assets are sufficient to meet all its obligations to the debt holders).

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First of all, with the gearing ratio, we compare the equity of the long term debt (or the funds borrowed). We can notice that between 2016 and 2017 the ratios remain pretty stable, 0,32 to 0,33, and they both are really low. The decrease of 0.01 point between 2016 and 2017 is due to the little decrease of the long-term debt by 4%. The lower the ratio is, the lower the risk is, and this ratio should not exceed 1, so here it shows that Procter and Gamble doesn’t have too many long term debts due compare to its equity, it is well managed and it is a really good observation.

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With the solvency

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