Financial Analysis: Procter & Gamble vs Unilever (Essay Sample)

Financial Analysis: Procter & Gamble vs Unilever Student’s Name Affiliation Course Name and Number Instructor Due Date Financial Analysis: Procter & Gamble vs Unilever Introduction Financial statements provide essential information about a company’s financial performance, position, and cash flows in a given period. However, these statements provide raw data that may not always paint a complete picture about the company’s financial health. It is challenging to determine, for example, the liquidity or solvency of a business by looking at the financial statements alone. Furthermore, a company may record high profitability levels, but the profits are driven by debt. For such a company, it may be misleading to conclude that the company’s performance is good since it is highly leveraged. Financial analysis helps identify trends and patterns among the financial statement items to understand the company’s overall performance. Financial analysis supplements the financial statements. It is the process of establishing the strategic relationships among the items presented in the income statement, the statement of financial position, and statement of cash flows (Robinson et al., 2015). Financial analysis yields information about the profitability, liquidity, efficiency, leverage, and market value. Synthesizing financial numbers and data enables the various stakeholders of a company to understand the company’s financial health, its strengths, weaknesses, and areas for improvement. Management uses financial analysis information to make important decisions to improve future performance, identify potential risks, and allocate resources effectively. Creditors are interested in the company’s liquidity to assess whether the company will be able to meet its financial obligations as and when they fall due. Investors can also utilize the financial analysis information to decide whether or not to invest in the company. The most important techniques for financial analysis are ratios, horizontal analysis, and vertical analysis. Ratio analysis is the process of analyzing and comparing figures in the financial statements by computing value percentages. Ratios facilitate the identification of trends, financial risks, and operational efficiency of a firm. They are also vital in comparing the financial performance of different companies as well as company versus industry performance. There are five main types of ratios, including:   Description Types 1. Liquidity ratios Measure the company's ability to meet its short-term obligations. Current ratio, quick ratio 2. Solvency ratios Measure the company's ability to stay afloat in the long-run. Debt ratio, debt to equity ratio, interest coverage ratio 3. Efficiency ratios Assess how effectively a company is utilizing its assets to generate sales. Asset turnover ratio, inventory turnover ratio, receivables turnover ratio, payables turnover ratio, days sales in inventory, days payables and receivables outstanding. 4. Profitability ratios Assess how well a company generates profits from its operations. Gross margin, net margin, return on assets, return on capital employed. 5. Market Value Ratios Measure how valuable a company is. Earnings per share, Price earnings ratio, book value per share, dividend yield. Horizontal analysis compares changes in performance overtime (such as current versus previous years’ performance) while vertical analysis expresses each financial statement item as a percentage of a base amount (total revenue for income statements and total assets for statements of financial position). This paper uses ratio, horizontal, and vertical analyses to compare the performance of Procter and Gamble and Unilever plc, the two leading firms in the global consumer goods industry. Overview of Procter & Gamble and Unilever Procter & Gamble and Unilever are multinational consumer goods corporations. They are the two largest and most established consumer goods companies in the world with both operating in multiple product categories including personal care, beauty, grooming, snacks, beverages, and home care (Shaikh, 2022). While Unilever is a British company headquartered in London, UK, Procter and Gamble is an American corporation with its global headquarters in Cincinnati, Ohio. Both companies are present in over 180 countries and sell their goods through mass merchandisers, grocery stores, specialty-beauty stores, drug stores, and e-commerce. P&Gs major brands include Tide, Pampers, Ariel, Gillette, Oral B, and Vicks while Unilever’s largest brands are Dove, Lux, Lifebuoy, Knorr, Omo, Sunlight, and Rexona. Financial Analysis (FY2021 – FY2023) Liquidity As Table 1 below shows, Unilever had a better liquidity than P&G in the three years under analysis. Unilever had a current ratio of 0.7 or higher over the period while P&G had a current ratio of 0.7 only in 2021. In 2022 and 2021, P&G had current ratios of 0.65 and 0.63 respectively. The current ratio indicates a company’s ability to pay off its current liabilities with its current assets with a good current ratio being greater than 1. While none of the two companies had an ideal current ratio, Unilever had a stronger current ratio than P&G. Unilever’s stronger liquidity position is cemented by its better quick and cash ratios compared to P&G’s. Unilever had a quick ratio of over 0.5 in all the three years under review while P&G had quick ratios of lower than 0.5 in 2021 and 2022. The quick or acid-test ratio measures the ability of a company to meet its short-term obligations with its most liquid assets and therefore excludes inventories from current assets. The cash ratio only considers cash and cash equivalents to provide the most conservative insight into a company’s liquidity. A good cash ratio is 0.5 or higher. In 2021, 2022, and 2023, Unilever had a cash ratio of 0.18, 0.23, and 0.25 compared to P&Gs 0.31, 0.22, and 0.23 respectively. Except for 2021, Unilever had better cash ratios than Unilever. In 2021, Unilever recorded a poor cash ratio of 0.18 compared to P&G’s 0.31 in the same year. Overall, however, the liquidity ratios indicate Unilever was better positioned to meet its short-term obligations than P&G.     2023 2022 2021 Formula P&G Unilever P&G Unilever P&G Unilever Current ratio Current assets/Current liabilities 0.63 0.76 0.65 0.75 0.70 0.70 Quick ratio (Current assets-stock)/ Current liabilities 0.44 0.54 0.45 0.52 0.52 0.51 Cash ratio Cash & cash equivalents/ Current liabilities 0.23 0.25 0.22 0.23 0.31 0.18 Table 1: Liquidity Ratios for P&G and Unilever Profitability Profits, given by gross profit, operating income, and net income are the most common method of evaluating financial performance. Profitability ratios indicate how well a company is able to utilize its assets to produce profit and add value to shareholders. The higher the profitability ratios, the better the firm’s performance.     2023 2022 2021   Formula P&G Unilever P&G Unilever P&G Unilever Gross margin (%) Gross profit/net sales 47.9% 42.2% 47.4% 47.2% 51.2% 49.2% Net margin ratio (%) Net income/sales 18.0% 10.9% 18.4% 14.9% 18.9% 13.4% Return on assets ratio Net income/Total assets 12.2% 6.9% 12.6% 9.3% 12.0% 6.8% Return on equity ratio Net income/ Shareholder's equity 31.3% 25.1% 31.6% 33.4% 30.8% 25.9% Return on total capital Operating income/ Employed capital 21.3% 15.6% 21.2% 16.7% 20.9% 16.2% Table 2: Profitability Ratios for P&G and Unilever In terms of profitability, P&G was more profitable than Unilever. As shown in Table 2 below, P&G had gross margins of 51.2%, 47.4%, and 47.9% compared to Unilever’s 49.2%, 47.2%, and 42.2% in 2021, 2022, and 2023 respectively. This indicates that Unilever has a higher cost of sales than P&G. The net margin ratio, which reflects the firm’s ability to generate profits after all expenses and taxes have been deducted. In the three years under analysis, P&G had higher net margins than Unilever. While P&G recorded net margins of 18% or higher in each of the three years, Unilever had a net margin of less than 15% with the lowest recorded in 2023 at 10.9%. This shows that P&G better able to keep costs under control and is generating enough profit from its revenues. Moreover, P&G had better return on assets (ROA), return on equity (ROE), and return on total capital employed (ROCE) ratios than Unilever in the period under analysis. ROA indicates how efficient a firm in utilizing its assets to generate profits. In all the three years, P&G had an ROA of 12% or higher while Unilever ROA ratios were less than 9.5% with the highest in 2022 at 9.3%. ROE, on the other hand, measures the company’s ability to generate income from the money invested by shareholders. P&G had higher ROE ratios than Unilever in 2021 and 2023; in 2022, Unilever recorded an ROE of 33.4% compared to P&G’s 31.6%. While both companies are using shareholder’s equity effectively to generate profits as indicated by their ROEs of higher than 20% in all the three years, P&G had better ROE ratios generally. Meanwhile, ROCE shows how much profit is generated from each dollar of capital invested. In the three years under review, P&G had higher ROCE ratios of 20% or higher while Unilever’s were below 17%. This shows that P&G had higher profitability and greater efficiency of employing capital to generate income than Unilever....