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

Answer 1

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

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

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.