4-1 Module 4 Financial Statement Analysis and Interpretation

Analysis and Interpretation of Company Profitability exercise

RESOLVER EN FORMA INDIVIDUAL

Balance sheets and income statements for Procter & Gamble follow. Refer to these
financial statements of P&G to answer the requirements below.
Balance Sheets
($ millions) 6/30/2003 6/30/2002 6/30/2001 6/30/2000
Cash...................................................... $ 5,912 $ 3,427 $ 2,306 $ 1,415
Marketable securities............................ 300 196 212 185
Accounts receivable.............................. 3,038 3,090 2,931 2,910
Inventories............................................ 3,640 3,456 3,384 3,490
Other current assets.............................. 2,330 1,997 2,056 2,146
Total current assets............................... 15,220 12,166 10,889 10,146
Plant assets............................................ 23,542 23,070 22,821 23,221
Accumulated depreciation.................... 10,438 9,721 9,726 9,529
Plant assets, net..................................... 13,104 13,349 13,095 13,692
Intangibles............................................ 13,507 13,430 8,300 8,786
Deposits and other assets...................... 1,875 1,831 2,103 1,742
Total assets............................................ $43,706 $40,776 $34,387 $34,366

Accounts payable.................................. $ 2,795 $ 2,205 $ 2,075 $ 2,209

Current portion of long-term debt............... 2,172 3,731 2,233 3,241
Accrued expenses................................. 7,391 6,768 5,538 4,691
Total current liabilities.......................... 12,358 12,704 9,846 10,141
Deferred charges (income)................... 1,396 1,077 894 625
Long-term debt..................................... 11,475 11,201 9,792 9,012
Other long-term liabilities.................... 2,291 2,088 1,845 2,301
Total liabilities...................................... 27,520 27,070 22,377 22,079
Preferred stock...................................... 1,580 1,634 1,701 1,737
Common stock, net............................... 1,297 1,301 1,296 1,306
Capital surplus...................................... 2,931 2,490 2,057 1,794
Retained earnings................................. 13,692 11,980 10,451 10,710
Other equities........................................ (3,314) (3,699) (3,495) (3,260)
Shareholders’ equity............................. 16,186 13,706 12,010 12,287
Total liabilities and equity.................... $43,706 $40,776 $34,387 $34,366

Income Statements ($ millions)

For fiscal years 2003 2002 2001 2000
Net sales................................................ $43,377 $40,238 $39,244 $39,951
Cost of goods sold................................ 22,141 20,989 22,102 21,514
Gross profit........................................... 21,236 19,249 17,142 18,437
Selling, general & admin expense........ 13,383 12,571 12,406 12,483
Income before deprec & amort............. 7,853 6,678 4,736 5,954
Non-operating income.......................... 238 308 674 304
Interest expense.................................... 561 603 794 722
Income before taxes.............................. 7,530 6,383 4,616 5,536
Provision for taxes................................ 2,344 2,031 1,694 1,994
Net income............................................ $ 5,186 $ 4,352 $ 2,922 $ 3,542

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4-2 Module 4 Financial Statement Analysis and Interpretation

Analysis and Interpretation of Profitability Ratios

1. Compute the following profitability ratios for each year shown:
a. Gross profit margin (GPM)
b. Selling, general & administrative expense as a percent of sales (SGA%)
c. Net operating profit margin (PM)
d. Net profit margin.
2. Your results in part 1 should have revealed an increase in net profit margin.
a. Is this increase due to an increase in the gross profit margin or a decrease in
selling, general, & administrative expense, or both? Provide evidence and
explain your answer.
b. Consider how much control that companies have or do not have over gross
profit margins. What factors must exist to allow them to increase selling prices
of their products? In what ways can they improve gross profit margins by
lowering product manufacturing costs? Explain.
c. What are the usual components of selling, general and administrative expense
for a company like Procter and Gamble? For which of these components are
companies likely able to achieve expense reductions? To what extent are these
expense reductions a short-term gain at the cost of long-term performance?
Explain.

Analysis and Interpretation of Asset Turnover Ratios

1. Compute the following turnover ratios for 2001 through 2003:
a. Accounts receivable turnover and the average collection period.
b. Inventory turnover and average inventory days outstanding.
c. Plant asset turnover.
2. Results from part 1 should reveal a slight improvement in receivables turnover
from 2001 to 2003. How can a company like P&G realize an improvement in this
ratio? Explain.
3. Results from part 1 should reveal no discernable improvement in inventory
turnover from 2001 to 2003. How can a manufacturer like P&G realize an
improvement in its inventory turnover? Explain.
4. Results from part 1 should reveal a slight decline in plant asset turnover from 2001
to 2003. Why is this ratio so difficult for companies to impact? Can you think of
ways in which a company can achieve an improvement in this ratio? Explain.

Disaggregation and Interpretation of Company ROE

1. Compute the following for 2001 through 2003:
a. Net operating profit margin (PM).
b. Return on net operating assets (RNOA).
c. Financial leverage (LEV).
d. Net borrowing costs (NBC)
e. Spread
f. Return on equity (ROE).
g. ROE from the formula: ROE = RNOA + (LEV×Spread). Confirm that this
amount equals that computed in part f.
2. Drawing on results from part 1, does P&G depend more on operations (RNOA) or
financial leverage to drive its ROE? Explain.
3. Drawing on results from part 1, is P&G’s level of ROE sufficient to attract capital?
Explain. What benchmark do you believe is appropriate in answering that
question? Explain.

Analysis and Interpretation of Liquidity and Solvency Measures

1. Compute its current ratio and quick ratio for 2001 through 2003. Do the trends, if
any, in these ratios indicate that P&G is becoming more or less liquid? Use
computations to support your analysis and inferences.

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4-3 Module 4 Financial Statement Analysis and Interpretation

2. Compute P&G’s financial leverage (LEV) and times interest earned for 2001
through 2003. Do these ratios indicate that P&G is becoming more or less solvent?
Explain.

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