I performed the financial analysis for two big players in the consumer product industry: Procter & Gamble (P&G) and Colgate-Palmolive Company (Colgate). This project was part of the accounting course and get a very high compliment from faculty,
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1 Executive Summary The Procter & Gamble (P&G) and Colgate-Palmolive Company (Colgate) are the American multinational consumer products companies. Both companies have a fair revenue recognition policy that recognizes when risk of ownership transfers to customers. In addition, both companies mainly use first-in, first-out (FIFO) inventory method; yet minor amounts of inventory are sorted the last-in, first-out (LIFO) method. Using the common sizing technique, we found that Colgate holds a significant higher percentage of current assets and less percentage of PPE than P&G. In term of liabilities, the percentage of current liability of P&G was almost unchanged during the past three and a half years while that of Colgate significantly decreased due to the current portion of long-term debt and accounts payable. One significant thing is Colgate has a high percentage of total liabilities of almost 80%, which means Colgate is most likely to have a greater risk indicating that the firm will experience more financial difficulties than P&G. Common size income statement reveals that P&G experienced a decreasing profit margin over the last three years as a result of an increasing cost of products sold to sales percentage, goodwill and impairment charges, increasing income taxes on continuing operations to sale percentage, and decreasing earnings from discontinued operations. On the Colgate side, it experienced a narrowly fluctuated profit margin over three years. The statements of cash flow of P&G and Colgate illustrate the cash flow pattern of a somewhat mature firm. It generates sufficient cash flow from operations to acquire new plants and equipment, and to repay financing and repurchase shares of its common stock. Nevertheless, both firms still invest at some level. Colgate has a lower short-term liquidity risk than P&G due to a higher current ratio, higher quick ratio, and higher OCF to CL. Note that Colgate has a slightly higher A/P turnover indicating that Colgate paid off its suppliers at a faster rate. On the other hand, P&G paid at a slower rate by extending its payables. Moreover, Colgate has a significant high debt financing that make the Liability-asset and debt equity ratio unfavorably higher than those of P&G; however the OCF to liability and interest coverage ratio reveal that Colgate has an ability to cover its obligations very well. Furthermore, profitability of Colgate is also higher than P&G leading to a higher ROA and ROE. Both P&G and Colgate have some important specific footnote disclosures such as Stock options, litigation, and pension plans. These footnotes should be thoroughly reviewed since they might affect the financial strength of the companies. Lastly, the stock prices of P&G and Colgate reveal the same pattern. As of November 23, 2012, P&G’s stock price is $69.59 per share, while Colgate’s stock price is $108 per share. Pornpong Lueang-A-Papong, MBA class of 2014
Transcript
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Executive Summary The Procter & Gamble (P&G) and Colgate-Palmolive Company (Colgate) are the American multinational consumer products companies. Both companies have a fair revenue recognition policy that recognizes when risk of ownership transfers to customers. In addition, both companies mainly use first-in, first-out (FIFO) inventory method; yet minor amounts of inventory are sorted the last-in, first-out (LIFO) method. Using the common sizing technique, we found that Colgate holds a significant higher percentage of current assets and less percentage of PPE than P&G. In term of liabilities, the percentage of current liability of P&G was almost unchanged during the past three and a half years while that of Colgate significantly decreased due to the current portion of long-term debt and accounts payable. One significant thing is Colgate has a high percentage of total liabilities of almost 80%, which means Colgate is most likely to have a greater risk indicating that the firm will experience more financial difficulties than P&G.
Common size income statement reveals that P&G experienced a decreasing profit margin over the last three years as a result of an increasing cost of products sold to sales percentage, goodwill and impairment charges, increasing income taxes on continuing operations to sale percentage, and decreasing earnings from discontinued operations. On the Colgate side, it experienced a narrowly fluctuated profit margin over three years.
The statements of cash flow of P&G and Colgate illustrate the cash flow pattern of a somewhat mature firm. It generates sufficient cash flow from operations to acquire new plants and equipment, and to repay financing and repurchase shares of its common stock. Nevertheless, both firms still invest at some level.
Colgate has a lower short-term liquidity risk than P&G due to a higher current ratio, higher quick ratio, and higher OCF to CL. Note that Colgate has a slightly higher A/P turnover indicating that Colgate paid off its suppliers at a faster rate. On the other hand, P&G paid at a slower rate by extending its payables. Moreover, Colgate has a significant high debt financing that make the Liability-asset and debt equity ratio unfavorably higher than those of P&G; however the OCF to liability and interest coverage ratio reveal that Colgate has an ability to cover its obligations very well.
Furthermore, profitability of Colgate is also higher than P&G leading to a higher ROA and ROE.
Both P&G and Colgate have some important specific footnote disclosures such as Stock options, litigation, and pension plans. These footnotes should be thoroughly reviewed since they might affect the financial strength of the companies.
Lastly, the stock prices of P&G and Colgate reveal the same pattern. As of November 23, 2012, P&G’s stock price is $69.59 per share, while Colgate’s stock price is $108 per share.
Pornpong Lueang-A-Papong, MBA class of 2014
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Characteristics, Strategies, and trends
The Procter & Gamble (P&G) is one of the biggest American multinational consumer goods company. The company has five reportable segments under U.S. GAAP: Beauty; Grooming; Health Care; Fabric Care and Home care; and Baby Care and Family Care. While none of the reportable segments are highly seasonal, components within certain reportable segments, such as Batteries (Fabric Care and Home Care), Appliances (Grooming) and Prestige Fragrances (Beauty) are seasonal.
P&G’s products are sold in more than 180 countries around the world primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons and in high-frequency stores, the neighborhood stores which serve many consumers in developing markets. As of June 30, 2012, total number of employees, excluding interns, coops and employees of joint ventures is 126,000 employees approximately. Colgate-Palmolive Company (Colgate) is an American multinational consumer products company focused on the production, distribution and provision of household, health care and personal products, such as soaps, detergents, and oral hygiene products. Colgate manages its business in two product segments: Oral, Personal and Home Care; and Pet Nutrition. Colgate is a global leader in Oral Care with the leading toothpaste and manual toothbrush brands throughout many parts of the world according to value share data provided by ACNielsen. Colgate’s products are marketed in over 200 countries around the world. As of December 31, 2011, Colgate employed approximately 38,600 employees.
Significant Accounting Policies P&G’s policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized. P&G’s Inventories are valued at the lower of cost or market value. Product-related inventories are primarily maintained on the first-in, first-out (FIFO) method. Minor amounts of product inventories, including certain cosmetics and commodities, are maintained on the last-in, first-out method.
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Colgate’s sales are recorded at the time products are shipped to trade customers and when risk of ownership transfers. Net sales reflect units shipped at selling list prices reduced by sales returns and the cost of current and continuing promotional programs. Current promotional programs, such as product listing allowances and co-operative advertising arrangements, are recorded in the period incurred. The redemption cost of consumer coupons is based on historical redemption experience and is recorded when coupons are distributed. Volume-based incentives offered to trade customers are based on the estimated cost of the program. The Company accounts for inventories using both the first-in, first-out (FIFO) method (80% of inventories) and the last-in, first-out (LIFO) method (20% of inventories).
Balance sheet Common size analysis
Note that the Balance sheet was adjusted by operating lease payment Current Assets
P&G - The percentage of current assets to total assets gradually increased during the three and a half year period from June 30, 2010 to September 30, 2012 due to many factors. First of all, the company held more cash and cash equivalent from 2.25% in June 2010 to 3.90% in September, 2012. Second of all, the account receivable also increased from 4.16% in June 2010 to 5.15% in September 2012. Third of all, the inventories, too, increased from 4.98% to 5.40% in June 2010 and September 2012, respectively.
Colgate – The percentage of current assets slightly increased during the same period mainly due to the higher percentage of other current assets (e.g. Marketable securities consisted of bank deposits with maturities greater than 90 days) which increased from 3.37% in December 2009 to 4.55% in September 2012, and due to the higher percentage of cash and cash equivalents, which increased from 5.39% to 6.77%.
Colgate holds a significant higher percentage of current assets than P&G do. (Colgate = 35.47%, P&G = 17.75%)
Non-Current Assets
P&G – The percentage of Net property, plant and equipment (PPE) almost unchanged during the past three and a half year. The only increased figure here is other noncurrent assets (e.g. Investment securities and derivative assets), which increased from 3.51% in June 2010 to 3.97% in September 2012.
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Colgate – The percentage of net property, plant and equipment obviously decreased since December 2010, from 33.06% to 27.45% because the absolute value of net property, plant and equipment grows at the slower rate of total assets. The only increased figure is also other assets which increased from 4.22% to 7% in 2010 and 2012 respectively.
As contrast to current assets, Colgate holds less percentage of PPE, Goodwill, and other noncurrent assets than does P&G.
Current Liabilities
P&G – The percentage of current liabilities fluctuated around 18% - 20% during the three and a half year period. Account payable stayed around 5% to 6%. Accrued and other liabilities stayed between 6.6% and 6.8%. However, Debt due within one year gradually decreased from 7.21% in June 2011 to 6.12% in September 2012 because of a reduction in commercial paper outstanding.
Colgate – The percentage of current liabilities gradually decreased from 32.32% to 27.56% in 2009 and 2012, respectively, mainly due to the percentage decreased of current portion of long-term debt and of accounts payable. In 2010, the current portion of long-term debt accounted at 5.02% while in 2012, it was only 1.86%. Account payable, also, decreased from 10.53% to 8.80% in 2009 and 2012, respectively. The percentage of current liability of P&G almost unchanged during the past three and a half years while that of Colgate significantly decreased due to the current portion of long-term debt and account payable.
Noncurrent Liability and Total Liabilities
P&G – The percentage of Long-term debt increased from 16.67% in June 2010 to 17.34% in September 2012. The percentage of Total liability is slightly increased from 50.85% in June 2011 to 52.20% in September 2012 due to the increased in the percentage of Long-term debt from 15.93% in June 2011 to 17.34% in September 2012. This indicates that P&G finances approximately 51%-53% of its assets with debt, implying that it finances the remainder (47%-48%) with equity.
Colgate – The percentage of Total liabilities increased from 70.75% in December 2009 to 79.91% in September 2012 due to the higher percentage of Long-term debt, which increased from 25.34% in December 2010 to 36.82 and September 2012 respectively ($3,585 million vs. $4,430 million). This indicates that Colgate finances almost 80% of its assets with debt.
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Note that Colgate is most likely to have great risk that the firm will experience financial difficulties, compared to P&G.
Shareholders’ equity
P&G - Total shareholders’ equity is between 47% and 49.15%. Two significant trends are that the percentage of Noncontrolling interest increased from 0.26% to 0.48% in 2010 and 2012 respectively, and that P&G is purchasing its stock back. We can see from the percentage of Treasury stock in which the absolute value was increasing from 48.63% in June 2011 to 52.31% in September 2012.
Colgate – Total shareholders’ equity accounts about 20% of Colgate’s assets. The increasing percentage of Treasury stock indicates that Colgate is purchasing its stock back. The percentage of noncontrolling interest increased from 1.27% to 1.42 in 2009 and 2012 respectively. Colgate has a significant lower percentage of total shareholders’ equity compared with that of P&G. Both companies have an increasing percentage of noncontrolling interest and treasury stock.
Income Statement Common size analysis
P&G – P&G experienced a decreasing profit margin percentage (Net earnings divided by Net sales) over three years, from16.56% for the year ended June 2010, to 14.71% for the year ended June 2011, and to 13.03% for the year ended June 2012. The decreasing profit margin results from
1. An increasing cost of products sold to sales percentage 2. Goodwill and impairment charges for the year ended June 2012 3. An increasing income taxes on continuing operations to sale percentage 4. A decreasing earnings from discontinued operations
However, for three month period during July – September 2012, the company’s profit margin slightly increased to 13.76%.
Colgate – Colgate experienced a narrowly fluctuated profit margin over three years, from 15.64% for year ended December 2009, to 14.86% for the year ended December 2010, and to 15.26% for the year ended December 2011.For nine months ended at September 30 2012, the profit margin increased to 15.59%. Almost every item is narrowly varied. For example,
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gross profit margin is about 57%-59% and operating profit is about 22%-24%. One obvious trend is the decreasing interest expense to sale percentage since2009.
P&G (June 2011 – June 2012) Colgate (Dec 2010 – Dec 2011) Gross profit margin 49.34% 57.3% Operating profit margin 15.88% 22.95% Net profit margin 13.03% 15.26%
Colgate’s profit margin of 15.26% for the year ended December 2011 is about 1.17 times P&G’s ratio of 13.03% for the year ended June 2012. Common-Size income statements reveal that both operating and nonoperating items contributed to Colgate’s higher profit margin. Colgate has a higher gross profit margin (57.3%) than P&G (49.34%). In addition, Colgate also has a higher operating profit margin (22.95%) than P&G (15.88%). Colgate’s higher operation profit margin comes from a lower cost of sale ratio (42.69% versus 50.66%). In term of nonoperating activity, Colgate reports an interest expense of 0.31%, compared to P&G’s 0.92%.
P&G – Operating cash flow of P&G decrease from $16,072 for the year ended June 2010 to $13,284 for the year ended June 2012 due to the lower net earnings ($12,736 vs. $10,904) and higher account receivable( change in AR is more negative).
Investing cash flow is only -597 for the year ended June 2011 because of a high number “Cash proceeds from asset sales” of $3,068. Interestingly, P&G’s Capital expenditures still increase since 2010; yet the company also sale some assets. So that makes investing cash flow to fluctuate during the past three years.
Financing cash flow was less negative in 2012 compared to 2010 (-$10,410 vs. -$17,255) because of the increasing Additions to long term debt and decreasing Treasury stock purchases. It means the company turns to invest more and do less stock repurchase for the year ended June 2012. One significant trend is the increasing number of “Impact of stock option and other”.
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Colgate – Although net income of Colgate increased during the last three years, operating cash flow of Colgate decrease from $3,277 for the year ended December 2009 to $2,896 for the year ended December 2011 due to the changes in many items. For instance, a higher “Gain on sale on non-core product lines”, a higher Voluntary benefit plan contributions, a higher “Receivables”, and a higher “Inventories” All of these changes decrease the operating cash flow.
Investing cash flow decreased from -$841 in 2009 to -$1,213 in 2011 because the company purchase more marketable securities and investments ($289 vs. $356). Also Colgate made an acquisition, net of cash, of $966 in 2011.
Financing cash flows was less negative in 2011 compared to 2009 (-$2,270 vs. -$1,242) because of the higher debt financing that we can see from a higher amount of “Proceeds from issuance of debt”. However, for the last nine months period, Colgate’s financing cash flow was at -$1,458, higher than 12 months period in 2011. One reason is that Colgate issue less debt compared to the last year.
In short, P&G and Colgate’s statement of cash flows illustrate the cash flow pattern of, somewhat, a mature firm. It generates sufficient cash flow from operations to acquire new plant and equipment and to repay financing and repurchase shares of its common stock. Nevertheless, both firms still invest at some level.
Cash Conversion Cycle (CCC) CCC is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. Below is the Cash Conversion Cycle for P&G and Colgate
P&G Colgate
Jun 2012 Jun 2011 Jun 20120 Dec 2011 Dec 2011 Dec 2011 CCC 17.91 20.91 25.56 40.29 40.78 43.44 Days Inventory Outstanding 60.70 63.02 65.35 65.12 69.76 69.49
Days Sale Outstanding 26.92 26.12 26.28 35.83 37.94 38.32
Days Payable Outstanding 69.71 68.23 66.07 60.65 66.92 64.37
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P&G – The decreasing CCC is a result from a decreasing Days Inventory Outstanding, which indicates that P&G has a better inventory flow, and an increasing Days Payable Outstanding, which indicates that P&G pays off its supplier at slower rate. Colgate – The decreasing CCC is a result from a decreasing Days Inventory Outstanding, which indicates that Colgate also has a better inventory flow. Both companies have a shorter CCC which is a good sign. In addition, P&G’s CCC is lower than Colgate’s CCC.
Short-term liquidity risk
All of the ratios calculated here represent the company’s ability to cover its short-term obligation. Since both P&G and Colgate have operating lease agreement that consider to be Off-balance sheet financing, we would recalculate certain items in the balance sheet by adding the operating lease amount in order to reflect the real obligation the company face. The following table shows the example of the changes and effects before and after adjustment the operating lease to the balance sheet for most recent year ended. (Millions of dollar) P&G
For year ended June 2012 Colgate For year ended Dec 2012
Before After %∆ Before After %∆ Current Liabilities 24,907 25,196 1.16% 3,716 3,917 5.41%
The table above reveals that after add back operating lease payment, P&G’s long-term debt increase 7.25% and total liabilities increased 2.66%. On the other side, Colgate shows a significant increase in long-term debt of 24.40%, and total liabilities of 12.59%, indicating that Colgate use a lot of operating lease agreement. We will use the operating lease adjusted items to calculate the short-term liquidity risk ratios, Long-term liquidity risk, and ROA. Note that ROE would not be affected.
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Short-term liquidity risk ratios
P&G Colgate
June 2012 June 2011 Comment Dec 2011
Dec 2010 Comment
Current Ratio 0.87 0.80 ↑ Favorable 1.12 0.95 ↑Favorable
P&G – Current ratio reveals the firm’s ability to pay its short-term obligations with short-term assets. P&G’s current ratio increased from 0.80 to 0.87, due to a slightly decrease in current assets and a larger decreased in current liability1. Every item in current assets decreases except cash and cash equivalent which increased from $2,768 million to $4,436 million. In contrast, every item in current liabilities – account payable, Accrued and other liabilities, and Debt due within one year – decreased during the fiscal year 2011 and 2012. Typically a higher current ratio is considerably favorable. Colgate – Colgate’s current ratio increased from 0.95 to 1.12, due to a significant increase in current assets and a slightly decrease in current liabilities. An increasing cash and cash equivalent from $490 million to $878 million is the main reason along with the increase in another current asset items. In contrast, a decreasing current portion of long-term debt is a major reason caused current liabilities to decline. Again, a higher current ratio is considerably favorable for Colgate. Both P&G and Colgate have a better short-term liquidity position, based on current ratio. However, Colgate’s position is slightly better.
Quick Ratio P&G – Current ratio reveals the firm’s ability to pay its short-term obligations with its high liquid assets: cash and cash equivalent, marketable securities, and account receivables. P&G’s quick ratio increased from 0.33 to 0.42 due to an increase in cash and a decrease in current liability. Colgate – Colgate’s quick ratio increased from 0.54 to 0.65, due to a significant increase in cash and cash equivalent along with the increase in another current asset items. A higher quick ratio is considerably favorable for both Colgate and P&G. 1 If both nominator and denominator decrease, a larger decrease of denominator would causes the ratio to go up
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OCF to CL P&G – This ratio measures how well the operating cash flow covers current liabilities. This reflects a company’s liquidity position in the short term based on cash basis. P&G’s OCF to CL ratio slightly decreased from 0.51 to 0.50. The marginally decrease of this ratio came from the increased in average current liabilities, implying that P&G’s liquidity is a little bit worse off. Healthy mature firms, however, typically have a ratio of 0.4 or more2. Thus, P&G’s ratio was higher to the 0.4 benchmark. Colgate – Colgate’s OCF to CL ratio decreased from 0.83 to 0.74, due to both an increase in average current liabilities ($3,850 million to $3,916 million), and a decrease in operating cash flow ($3,211 million to $2,896 million). Comparing the ratio of P&G and Colgate, we found that both firms have the decreasing ratios, which are considerably unfavorable. Nevertheless, the ratio of Colgate is better since it is significantly higher than that of P&G, and the 0.4 benchmark.
A/P Turnover P&G –A/P turnover measures how fast a company pays off its suppliers. P&G’s A/P Turnover decreased from 5.35 for the year ended June 2011 to 5.24 for the year ended June 2012. A falling ratio means that P&G paid off its suppliers at a slower rate. In other words, Days Accounts Payable outstanding increased from 68.23 days to 69.71 days. In terms of liquidity, P&G is better off. Colgate –Colgate’s A/P Turnover increased from 5.45 for the year ended December 2010 to 6.02 for the year ended December 2011. A rising ratio means that Colgate paid off its suppliers at a faster rate. In other words, Days Accounts Payable outstanding decreased from 66.92 days to 60.65 days. In terms of liquidity, Colgate is worse off. In short, while Colgate paid off its suppliers at a faster rate, P&G paid at a slower rate by extending its payables.
2 p. 267, Financial Accounting – An introduction to concepts, methods, and uses, 13th edition
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Long-term liquidity risk
P&G Colgate June 2012 June 2011 Comment Dec 2011 Dec 2010 Comment
Liabilities-Assets 52.23% 51.38% Almost
unchanged 81.86% 77.28% Higher financial risk
Debt-Equity 0.3304 0.3301 Almost unchanged 0.70 0.62 Higher financial risk
OCF to TL 18.73% 18.89% Almost unchanged 27.52% 34.27% Unfavorable
Interest Coverage 17.28 18.65 Unfavorable but
still high 73.87 59.14 Favorable/Obvious high
Liabilities – Asset ratio P&G - This ratio shows the proportion of liabilities a firm has compared to its total assets. The ratio gives an idea how the company finances its assets along with the potential financial risk. P&G’s Liabilities-assets ratio stayed at 51.38% and 52.23% for year ended June 2011 and 2012, respectively, indicating that P&G used almost the same proportion of debt financing and had the same financial risk during the period. Colgate - Colgate’s Liabilities-assets ratio increased from 77.28% to 81.86% for year ended December 2010 and 2011, respectively, indicating that Colgate used the more debt financing. Colgate’s long-term debt increased from $3,853 million to $5,511 million. Note that we already included operating lease payment to long-term debt. The operating lease payments were $1,038 million and $1,081 million in 2010 and 2011 respectively. In short, Colgate has a significant higher financial risk than P&G
Debt-Equity P&G - This ratio stayed almost at the same level at about 0.33. Colgate - Colgate’s Debt-Equity ratio increased from 0.62 to 0.70 due to the increases in long-term debt. Note that the more stable the earnings and cash flow, the higher is the debt ratio they deem acceptable or safe. Again Colgate clearly has a significant higher financial risk than P&G.
OCF to TL P&G - This ratio reveals a company’s ability to cover short-term and long-term liabilities with its cash flow from operations. A mature, financially healthy company typically has a cash
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flow from operation to total liabilities ratio of 20% or more3. P&G’s OCF to TL ratio was approximately at 17%-18% a little below the 20% benchmark level. Colgate – Colgate’s OCF to TL ratio decrease from 34.27% to 27.52%, mainly due to the decrease in OCF, from $2,896 to $2,133, and the increased in average total liabilities, from $9,370 million to $10,523 million. The decreasing ratio suggests that Colgate has higher financial risks, compared to the previous year. Although Colgate has the decreasing OCF to TL ratio, Colgate, based on this ratio, has a better financial risk position than has P&G.
Interest Coverage P&G – This ratio attempts to indicate the relative protection that operating profitability will meet required interest payments. P&G’s interest coverage ratio decreased from 18.65 to 17.28. One reason is that operating income declined from $15,495 million to $13,292 million for the year ended June 2011 and 2012, respectively. Interest expense, however, slightly decreased from $831 million to $769 million in the same period. Although P&G’s ability to cover interest expenses decreased, it is not a serious problem since the ratio is still high. Analysts generally view an interest coverage ratio below 3.0 as risky. Colgate – Colgate has a considerably high interest coverage ratio increased from 59.14 to 73.87 for the year ended December 2010 and 2011 respectively. The increasing interest coverage ratio results from both an increased operating income and decreased interest expense. In short, the decreasing of interest coverage ratio of P&G is likely unfavorable. On the other hand, the increasing of interest coverage ratio of Colgate is likely favorable.
3 p. 270, Financial Accounting – An introduction to concepts, methods, and uses, 13th edition 4 Effective tax rate differs from the company’s stated rate due to some accounting factors. The effective tax rate gives a good understanding regarding to the tax rate P&G and Colgate are facing.
Return on asset for P&G (without adjusting operating lease payment) declined from 9.34% in June 2011 to 8.36% in June 2012 because of the decreasing profit margin from 15.34% to 13.52%. Note that total asset turnover is almost unchanged. On the other hand, return on asset for Colgate increased from 20.11% to 20.64% mainly due to the higher profit margin.
After we take the operating lease payment into account, ROA for both P&G and Colgate decreased as shown below.
Note that Off-balance sheet financing such operating lease will not affect ROE since it is not affect net income or equity.
P&G - Return on common equity for P&G decreased from 17.87% to 15.90% for the year ended June 2011 and 2012 respectively. The reason behind a declining ROE is a falling profit margin5 that decreased by 171 basis points, from 14.26% to 12.55%. However, total asset turnover ratio, which indicates how well a company manage its assets, and Equity multiplier, which indicates financial leverage, were stable at approximately 0.62 and 2.05 respectively. Colgate - Return on common equity for Colgate significantly increased from 71.42% to 90.74% for the year ended December 2010 and 2011 respectively. The reasons behind a rising ROE are an increasing profit margin that increased by 59 basis points, from 13.94% to 14.53%, and an increasing equity multiplier from 3.67 to 4.46, while total asset turnover stays constant.
In short, Colgate has somewhat a surprisingly higher ROE than that of P&G, resulting from a higher profitability (profit margin) and a higher financial leverage (equity multiplier).
5 Note that profit margin for ROE is different from profit margin for ROA
P&G – Annualized ROE from a three months period, July to September 2012, is 17.01%, a bit higher than ROE for year ended June 2012 at 16.29%
Colgate – Annualized ROE from nine months period, January to September 2012, is 89.77%, a minimal less than ROE for year ended December 2012 at 90.74%
Annualized ROEs for P&G and Colgate reveal that both firms perform almost the same as they did last year. Comparing the same Period (June 2011 to December 2011) Since P&G has a year ended at June, while Colgate has a year ended at December. Comparing these two firms using the data from the same period would give a clear picture how well the companies perform during the same time. Thus, the following section will show the calculation of ROE and ROE of both companies using data from June 2011 to December 2011.
For the six months period from June to December 2011, Colgate has higher Return on Equity and Return on Asset than P&G. A higher ROE (46.02% vs. 7.09%) is a result of a higher profit margin (14.41% vs. 10.70%), a higher total asset turnover (0.7160 vs. 0.3231), and a
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significantly higher financial leverage, which is reflected in the Equity multiplier (4.4599 vs. 2.0516). Return on Asset reveals the same information.
Specific Footnotes Stock options
Both P&G and Colgate have stock-based compensation plans under which the companies annually grants stock option, restricted stock, restricted stock unit, and performance stock unit awards to key managers and directors. The following table shows the impact of compensation cost to net income. (Millions of dollar)
P&G Colgate Jun 2012 Jun 2011 Dec 2011 Dec 2010
Net income after considering stock option expense via the Fair Value Method
$10,756 $11,797 $2,554 $2,313
Net income before considering stock option expense via the Fair Value Method
$11,031 $12,094 $2,636 $2,394
$ Decline in Net Income from stock option expense via the Fair Value Method
$275 $297 $82 $ 81
% Decline in Net Income from stock option expense via the Fair Value Method
Since net income before considering stock option expense via the Fair Value Method is different from bet income after due to the stock option expense, calculating ROA using net
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income before considering stock option expense via the Fair Value Method would reveal another aspect of operating performance to investment without regard to financing. Table below represent ROA for the current fiscal year from three different aspects:
Litigation
P&G – P&G is subject to various legal proceedings and claims which cover a wide range of matters such as antitrust, trade and other governmental regulations, product liability, patent and trademark matters, advertising, contracts, environmental issues, labor and employments matters and income and other taxes. Several regulatory authorities in Europe have issued separate decisions pursuant to their investigations alleging that the Company, along with several other companies, engaged in violations of competition laws in those countries. The Company has accrued the assessed fines for each of the decisions, of which all but $15 has been paid as of June 30, 2012. Most of those are on appeal. As a result of our initial and on-going analyses of other formal complaints, the Company has accrued liabilities for competition law violations totaling $18 as of June 30, 2012. Colgate – Colgate is subject to a wide variety of legal proceedings. These include disputes relating to intellectual property, contracts, product liability, marketing, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, environmental and tax matters. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $ 0 to approximately $ 200 million (based on current exchange rates).
P&G Colgate General ROA 8.36% 20.64% ROA with operating lease adjusted 8.26% 18.68%
ROA with operating lease and stock option adjusted 8.46% 20.23%
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Defined-benefit pension plans
P&G Colgate Jun 2012 June 2011 Dec 2011 Dec 2010
PBO 13,573 12,229 2,025 1,952 FMV of plan asset 7,974 7,962 1,426 1,377 Funded status (5,599) (4,267) (599) (575) ABO 11,763 10,436 1,892 1,808
Both P&G and Colgate have a negative funded status. One significant trend is the funded status become more negative in the last two years.
Auditor’s opinion
P&G - The auditing firm of Deloitte & Touche LLP gives Procter & Gamble Company a clean opinion. According to the form 10-K, it states that “In our opinion, such Consolidated Financial Statements present fairly, in all material respects … in conformity with accounting principles generally accepted in the United States of America.”
In addition, the auditing firm of KPMG also gives an unqualified opinion to Procter & Gamble Company.
Colgate - The auditing firm of PricewaterhouseCoopers LLP gives Colgate-Palmolive Company a clean opinion. According to the form 10-K, it states that “In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects … in conformity with accounting principles generally accepted in the United States of America.”
However, at the end of Report of Independent Registered Public Accounting Firm section, it states that “Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.”
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Accrual effects P&G Colgate
Year Ended June 2012 Year Ended December 2011 Accruals (0.0088) 0.0537
The accruals metrics of both P&G and Colgate are considerably low. The accruals metric reveals that both companies are unlikely to manage earnings or that they have a limited growth.
Basic and Diluted Earnings per Share (EPS) P&G Colgate
Jun 2012 Jun 2011 Dec 2011 Dec 2011 Basic EPS $3.82 $4.12 $4.98 $4.45 Diluted EPS $3.66 $3.93 $4.94 $4.31 % Diluted 4.37% 4.83% 0.81% 3.25%
P&G – Basic EPS decreased 7.85% from the previous year to $3.82 in fiscal year 2012. Diluted net earnings per share decreased 7% from the prior year to $3.66 in fiscal 2012 behind a decrease in net earnings from continuing operations, partially offset by an increase in net earnings from discontinued operations and a reduction in shares outstanding. The reduction in the number of shares outstanding was driven by treasury share repurchases of $4.0 billion, which were made under our publicly announced share repurchase program.
The percentages of dilution were 4.37% and 4.83% in fiscal year 2012 and 2011, respectively.
Colgate – Basic EPS increased 11.91% from the previous year to $4.98 in fiscal year 2011. Diluted net earnings per share increased 14.62% from the prior year to $4.94 in fiscal 2011. Net income attributable to Colgate-Palmolive Company was $2,431, or $4.94 per share on a diluted basis, in 2011 compared with $2,203, or $4.31 per share on a diluted basis, in 2010 and $2,291, or $4.37 per share on a diluted basis, in 2009.
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Performance of the companies’ stock
P&G and Colgate’s stocks are currently traded on the New York Stock Exchange (NYSE), which is the largest stock exchange market. P&G’s ticker is “PG”. Colgate’s ticker is “CL”
According to the chart from BigChart.com, during the past two years P&G’s stock and Colgate’s stock have almost the same price pattern. During last two years, P&G’s stock price reached the lowest price at 59.83 on January 22, 2011, and reached the highest price at $69.63 on October 5, 2012. The stock price on November 23, 2012 is at 69.59, close to the highest level reported on October 5.
On the other side, Colgate’s stock price reached the lowest price at 76.24 on February 4, 2011, and reached the highest price at $108.45 on October 5, 2012 (the same date as P&G!). The stock price on November 23, 2012 is at $108.00, also close to the highest level reported on October 5.
Market capitalization P&G has the market capitalization of 190.93 billion as of November 30, 2012 Colgate has the market capitalization of 51.26 billion as of November 30, 2012
