There are 4 questions required by this exercise (at the very bottom). Show your

Question

There are 4 questions required by this exercise (at the very bottom). Show your calculated ratios. Make sure you show the data used to calculate the ratios.

The Procter & Gamble Company

Consolidated Balance Sheets

Amounts in millions; As of June 30

2018

2017

Assets

CURRENT ASSETS

Cash and cash equivalents

$             2,569

$             5,569

Available-for-sale investment securities

9,281

9,568

Accounts receivable

4,686

4,594

INVENTORIES

Materials and supplies

1,335

1,308

Work in process

588

529

Finished goods

2,815

2,787

Total inventories

4,738

4,624

Prepaid expenses and other current assets

2,046

2,139

TOTAL CURRENT ASSETS

23,320

26,494

PROPERTY, PLANT AND EQUIPMENT, NET

20,600

19,893

GOODWILL

45,175

44,699

TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET

23,902

24,187

OTHER NONCURRENT ASSETS

5,313

5,133

TOTAL ASSETS

$        118,310

$        120,406

Liabilities and Sharesholders' Equity

CURRENT LIABILITIES

Accounts payable

$          10,344

$             9,632

Accrued and other liabilities

7,470

7,024

Debt due within one year

10,423

13,554

TOTAL CURRENT LIABILITIES

28,237

30,210

LONG-TERM DEBT

20,863

18,038

DEFERRED INCOME TAXES

6,163

8,126

OTHER NONCURRENT LIABILITIES

10,164

8,254

TOTAL LIABILITIES

65,427

64,628

SHAREHOLDERS' EQUITY

Convertible Class A preferred stock, stated value $1 per share (600 shares authorized)

967

1,006

Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized)

—

—

Common stock, stated value $1 per share (10,000 shares authorized; shares issued:
2018 - 4,009.2, 2017 - 4,009.2 )

4,009

4,009

Additional paid-in capital

63,846

63,641

Reserve for ESOP debt retirement

(1,204)

(1,249)

Accumulated other comprehensive income/(loss)

(14,749)

(14,632)

Treasury stock, at cost (shares held: 2018 -1,511.2, 2017 - 1,455.9)

(99,217)

(93,715)

Retained earnings

98,641

96,124

Noncontrolling interest

590

594

TOTAL SHAREHOLDERS' EQUITY

52,883

55,778

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$        118,310

$        120,406

The Procter & Gamble Company

Consolidated Statements of Earnings

Amounts in millions except per share amounts; Years ended June 30

2018

2017

NET SALES

$         66,832

$         65,058

Cost of products sold

34,268

32,535

Selling, general and administrative expense

18,853

18,568

OPERATING INCOME

13,711

13,955

Interest expense

506

465

Interest income

247

171

Other non-operating income/(expense), net

(126)

(404)

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

13,326

13,257

Income taxes on continuing operations

3,465

3,063

NET EARNINGS FROM CONTINUING OPERATIONS

9,861

10,194

NET EARNINGS FROM DISCONTINUED OPERATIONS

—

5,217

NET EARNINGS

9,861

15,411

Less: Net earnings attributable to noncontrolling interests

111

85

NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE

$            9,750

$         15,326

BASIC NET EARNINGS PER COMMON SHARE: (1)

Earnings from continuing operations

$              3.75

$              3.79

Earnings from discontinued operations

—

2.01

BASIC NET EARNINGS PER COMMON SHARE

$              3.75

$             5.80

DILUTED NET EARNINGS PER COMMON SHARE: (1)

Earnings from continuing operations

$              3.67

$              3.69

Earnings from discontinued operations

—

1.90

DILUTED NET EARNINGS PER COMMON SHARE

$              3.67

$              5.59

DIVIDENDS PER COMMON SHARE

$              2.79

$              2.70

Selected Ratios

2018-06

2017-06

Profitability

Net Margin %

Return on Assets %

Return on Equity %

Financial Health or Debt Management Ratios

Total Liabilities or Total Debt

Financial Leverage or Equity Multiplier

Debt/Equity

Interest Coverage

Liquidity Ratios

Current Ratio

Quick Ratio

1. Calculate the selected ratios shown for 2017 and 2018

2. Indicate whether the change in each ratio is a strength or weakness

3. Use the short DuPont equation below to indicate what drove the change on the return on assets from 2017 to 2018

Return on Assets = Net Margin X Total Asset Turnover

4. Use the long DuPont equation below to indicate what drove the change on the return on assets from 2017 to 2018

Return on Equity = Return on Assets X Equity Multiplier

The Procter & Gamble Company

Consolidated Balance Sheets

Explanation / Answer

Answer 1 & 2 in the table below. Calculation for each year with numbers also provided.

3) Return on Assets = Net Margin X Total Asset Turnover
Total Asset Turnover = Net Sales/Total Asset
= 65058/120406
      = 0.54
ROA = 23.56*0.54
      = 12.73% for 2017

Total Asset Turnover 2018 = 66832/118310
      = 0.56
ROA 2018 = 14.59*0.56
   = 8.24%
  

ROA decreased from 12.73% in 2017 to 8.24% in 2018, particularly because the net profit margin has decreased . Though sales have gone up in 2018, expenses during the period was high and there were no income from discontinued operations in FY2018, which resulted in lower net income for the company.

4) ROE = ROA*Equity Multiplier
    ROA = ROE/Equity Multiplier
   = 27.48/2.16
   = 12.73% for FY2017
   
   ROA = 18.44/2.24
   = 8.24% for FY2018.
The decrease in ROA for FY2108 is again due to drastic decrease in Return on Equity which is primarily due to decrease in the company's net profit for 2018, as discussed. Also, the debt of the company has increased as compared to its total equity leading to a relatively more interest expenses for the company which has impacted the income.

Selected Ratios 2018-06 2017-06 Change in Ratio from 2017 to 2018 (Increase/Decrease) Strength/Weakness Profitability Calculation Result Calculation Result Net Margin % Net Profit/Sales =9750/66832 14.59% Net Profit/Sales =15326/65058 23.56% Decrease Weakness. This is because the profitability of the company as compared to sales has come down. Hence the company shpuld focus on reducing its cost and expenses related to operations and others Return on Assets % Net Profit/Total Assets = 9750/118310 8.24% Net Profit/Total Assets=15326/120406 12.73% Decrease Weakness. ROA has decreased which means percentage of profit has reduced indicating lower profitability per dollar of its asset. Return on Equity % Net Profit/Shareholder's Equity = 9750/52883 18.44% Net Profit/Shareholder's Equity =15326/55778 27.48% Decrease Weakness. Decrease in ROE indicates relatively lower return on equity invested. Financial Health or Debt Management Ratios Total Liabilities or Total Debt Long Term Debt+Short Term Debt =20863+10423 31286.00 Long Term Debt+Short Term Debt =18038+13554 31592.00 Decrease in Total Debt Strength. The company has reduced its leverage which is a positive as a highly leveraged company has more obligations to its debtholders Financial Leverage or Equity Multiplier Total Assets/Shareholder's Equity = =118310/52883 2.24 Total Assets/Shareholder's Equity=120406/55778 2.16 Increase Weakness. Though the debt has reduced but since shareholder's equity has also reduced, the company seems to have high leverage. Increase in Equity Multiplier indicates that greater amount of the company's assets are financed by debt. Debt/Equity Total Debt/Shareholder's Equity= (20863+10423)/52883 0.59 Total Debt/Shareholder'sEquity = (18038+13554)/55778 0.57 Increase Weakness. Debt as compared to equity has increased indicating an increase in the company's leverage. Interest Coverage EBIT(Operating Income)/Interest Expense =13711/506 27.10 EBIT(Operating Income)/Interest Expense=13955/465 30.01 Decrease Weakness. Lower interest coverage ratio idicates that the company's ability to meet its ingterest expense has gone down. This happens particularly when the company is highly leveraged or its operating expenses has increased Liquidity Ratios Current Ratio Total Current Assets/Total Current Liabilities =23320/28237 0.83 Total Current Assets/Total Current Liabilities=26494/30210 0.88 Decrease Weakness. Current ratio less than 1 means the company's short term assets are not sufficient to meet its short term obligation and a further decrease in the ratio weakens the liquidity profile further Quick Ratio (Total current Assets-Total Inventories)/Total Current Lliabilities =(23320-4738)/28237 0.66 (Total current Assets-Total Inventories)/Total Current Lliabilities =(26494-4624)/30210 0.72 Decrease Weakness. Decrease in Quick Ratio is also not good as the company does not have sufficient liquidity to meet its short term obligations

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