Procter & Gamble is a Multinational consumer goods company which was incorporated in 1905 in Ohio, United States. It manufactures several consumer products and offers around 65 different brands under several product categories such as “Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care” (The Procter & Gamble Company, 2016). The company sells its products in almost 200 countries and conducts on-the-ground operations in almost 100 countries.
Balance sheet
P&G follows generally accepted accounting principles applicable in the Unites States for presentation and preparation of its financial statements. Much like other publically traded companies, P&G also electronically files its annual, quarterly and current financial reports with the SEC. The company follows historical cost accounting and going concern assumption for the preparation of its balance sheet. P&G’s balance sheet reflects the high quality of its financial condition; its increased ability to generate cash flows and penetrate highly competitive capital markets during the fiscal year 2016. As on 30th June 2016, the company had total shareholders’ equity worth $58 billion and retained earnings worth $88 billion.
Cash and cash equivalents
The company reported to have $7.1 billion as cash & cash equivalents during the fiscal year 2016 which had increased by almost 4% since the previous year. Its cash & cash equivalents include in-hand cash, bank deposits, demand deposits with financial institutions and short-term liquid investments. During 2016, the company earned $15.4 billion through its operating activities and made cash investments worth $5.6 billion. It also spent its cash in several financing activities including investment in treasury stock related to its Batteries business divestiture.
Accounts Receivable
P&G reported to have total accounts receivable of $4.4 billion during 2015-16. Its accounts receivable includes “amounts that customers owe for goods sold and services rendered on account” and not paid within the normal operating cycle (Edwards & Hermanson, 2010). During 2016, accounts receivable worth $0.4 billion and $0.2 billion were generated in the ‘Beauty’ products and ‘Batteries’ segments, respectively. Improved sales mix and timely collection reduced accounts receivable by almost 0.2 billion in 2015-16, which ultimately resulted in increasing cash by $85 million (The Procter & Gamble Company, 2016).
Inventories
The company reported to have total inventories worth $4.7 billion during the 2016 fiscal year. P&G values them at cost or market value, whichever is lower and excludes non-current inventory from its total inventory balance. It uses the FIFO method to maintain product-related stocks and the average-cost method to value spare part stocks (The Procter & Gamble Company, 2016). The company’s inventory levels declined during the year due to improved efficiency in supply chains that resulted into cash generation of $116 million.
Property, Plant & Equipment
P&G reported to have total net property, plant & equipment worth $19.3 billion during 2015-16. These assets have been shown at cost as reduced by accumulated depreciation. As per the 10-K report, P&G uses the straight-line method to calculate depreciation over the useful lives of these assets. Useful lives are periodically assessed and asset values are accordingly impaired and adjusted.
Goodwill
P&G reported to have goodwill and intangible assets, worth $44.35 billion during 2015-16. The company does not amortize goodwill but follows procedures to impair it annually, if required. Intangible assets with definite lives are amortized on an annual basis. According to Berman (2002), P&G reportedly files almost 3,000 patents annually; spends around $50 million per annum to maintain patent fees and keep these patents active and invests around $2 billion for research and development projects.
Income Statement
The company records revenues only when they have been realized or are realizable. Net sales depict total net revenues generated which include the list price of the product sold as reduced by trade discounts and local and other taxes. According to Procter & Gamble’s consolidated statement of earnings, it generated lower revenues but higher net earnings during the 2016 fiscal year. As per the 10-K report, net sales decreased by almost 8% which were mostly caused due to foreign exchange fluctuations. Net earnings, on the other hand, increased by 21% which were mostly due to the deconsolidation of subsidiaries in Venezuela and an improved gross margin.
During 2015-16, the highest net sales were generated in the ‘Fabric and Home care’ division of the company and around 44% of the total net sales were generated in the North American region. The unit sales were however lower by 3% than the previous year. The cost of goods sold and selling and administrative expenditure decreased by 11% and 8%, respectively which ultimately caused net earnings to increase. Consequently, The Company’s All-in Earnings per share increased by 51% however, it’s Core EPS declined by 2% to $3.67 at the end of the fiscal year 2016.
P&G is a company best known for the management of several valuable brands and is considered as a market leader in the consumer goods industry (Berman, 2002). The above financial statement analysis reveals that P&G is a financially sound and stable organization. The company strictly adheres to U.S. GAAP procedures and has a strong internal control system. It has also been estimated that P&G’s “organic sales will grow 2 percent for fiscal 2017, but will likely face headwinds from foreign exchange and brand divestitures” just like in the fiscal year 2016 (Whitten, 2016). This signifies that the company has immense potential to grow in the international market and maintain the top position in the industry at a risk of minor global economic fluctuations.
References
Berman, B. (2002). From Ideas to Assets: Investing Wisely in Intellectual Property (1st ed., pp. 149-287). New York: John Wiley & Sons.
Edwards, J. & Hermanson, R. (2010). Accounting Principles: A Business Perspective First Global Text Edition, Volume 1 Financial Accounting (1st ed., p. 397). The Global Text Project.
The Procter & Gamble Company. (2016). P&G 2016 Annual Report (p. 1). Retrieved from http://www.pginvestor.com/CustomPage/Index?keyGenPage=1073748359
Whitten, S. (2016). Procter & Gamble earnings: 79 cents per share, vs. expected EPS of 74cents. CNBC. Retrieved 23 January 2017, from http://www.cnbc.com/2016/08/02/procter-and-gamble-earnings-fiscal-fourth-quarter-2016.html
