Accounting Financial Report Analysis

In this given report, the financial data obtained from the annual report of Procter & Gamble and Unilever is to be discussed. Financial data of three years is to be used for obtaining key ratio, which shows the performance of a company. Based on the ratios determined comparison will be done for the three years. Also, inter firm comparison will be made based on the ratios determined and after that recommendation will be given so that the company can improve their financial position in future (Weil, Schipper and Francis 2013). The variances in different ratios that determine the profitability, liquidity and activity position of P&G and Unilever during the period of three years is analyzed and assessed, based on which the predicted outcome is determined. The investors and other users of financial statement can use the above ratios to understanding of the overall position of the company. This will help them to decide in which they want to invest (Hoskin, Fizzell and Cherry 2014). The creditors who have given supplies to the companies can have an overview of the fact that their debts are secured or not and whether the company has the ability to pay off their debts quickly. They can have an idea of the liquidity position of the company by analyzing the current ratio of both the company. EPS and return on equity will help the investors to understand the earning capacity of P&G and Unilever on their investment, which will help them to decide in which company to invest further (Vogel 2014). Return on asset will help funders of the company to understand whether the company id efficiently using its asset to generate income. In this section, the financial ratios determined from the financial data available from the financial statement of Procter & Gamble and Unilever will be analyzed and assessed. Based on that recommendation will be given on the performance of those two companies.   The income statement, balance sheet and ratio analysis of Procter & Gamble for three years is discussed below based on which analysis is done. Earning before interest and and taxes Net margin (Net profit/Turnover*100) Return on asset (Net profit/Total asset*100) Return on Equity (Net profit/Equity*100) Asset Turnover (Turnover/Total   Asset) Earning per share (EPS) (Net profit/Number of shares) Current Ratio (Current Asset/Current Liability) Debt Equity ratio (Long term debt/Equity) Receivable turnover (Turnover/Account Receivable) Net profit margin shows the profit earning capacity of a company with respect to its turnover. For P&G, it has increased by 0.48% in 2014 but it has again decreased by 2.36% in 2015, which must a worrying factor for the management of P & G. However, year 2015 was a tough fiscal as addressed by Mr. A.G. LAFLEY, Chairman, President and Chief Executive Officer of Procter & Gamble in the annual report. P&G is a very renowned company, which has a very high brand value so it is expected that will turn around in its near future. Return on asset (ROA) has also decreased by 0.11% and 1.20% in 2014 and 2015 respectively. ROA determines how the management of the company is utilizing its asset to generate profitability. As it is decreasing it implies that management is not able to utilize its asset properly which must be take proper care of. Return on equity (ROE) has increased in the year 2014 by 0.09% whereas it has again decreased in the year 2015 by 2.58%. ROE implies the earning of the shareholder with respect to their investment in the company (Healy and Palepu 2012). If it has a deceasing trend then it is not at all beneficial from the view point of the company as shareholders will be de-motivate to invest further in the company if their investment is not earning well in P&G. New shareholders will also not be willing to invest if they analyze this ratio from the financial statement available publicly (Feng et al. 2014). Asset turnover ratio is used to determine whether the company is properly using its asset to generate revenue for the company. The higher the ratio is, the better it is for the company. Though this ratio has decreased during the three years period, P&G has maintained at this ratio at a range of 0.58-0.60, which is a good sign. However, it should try to increase this ratio in the near future. EPS has a huge implication in the stock market. It shows how the company has been performing with respect profitability per share (Weygandt, Kimmel and Kieso 2015). It has increased in 2014 by 0.12 but it has again decreased year 2015 by 0.92, which may be due to the economic down turn faced by the company. Therefore, it is expected that it will turn around in near future. Current ratio determines the capability of the company to pay off its short-term liability by selling its current asset in case of urgent need (Tan, Zhang and Liu 2013). This ratio should be maintained as high as possible. If it falls below 1 then it is danger sign for the company. However, it was below 1 during the year 2013 and 2014 P&G has been able to take this ratio to 1 in the year 2015. Debt-Equity ratio shows the mix of debt and equity funding of a company. This ratio should be kept as minimum as possible (Connolly, Hyndman and McConville 2013). Outside funding should never be more than own funding otherwise the company may be at risk of getting leveraged buyout. In case of P&G, it has been able to maintain it at a low level of 0.28 to 0.29 during the year 2013 to 2015, which is a very good indicator for the company. Receivable turnover ratio indicates how a company manages the credit issued to their customers (Harper 2016). If the ratio is high then it implies the company is efficient in collecting its receivable or it has a good customer base that can pay off debts fast. In case of P&G, this ratio has decreased by -0.89 in the year 2014 but it has again increased by 2.69 in the year 2015, which is a good sign. It has been able to maintain this ratio well above 10 that means it’s customers are capable in paying off their overdue quickly.   Earning before interest and and taxes Net margin (Net profit/Turnover*100) Return on asset (Net profit/Total asset*100) Return on Equity (Net profit/Equity*100) Asset Turnover (Turnover/Total   Asset) Earning per share (EPS) (Net profit/Number of shares) Current Ratio (Current Asset/Current Liability) Debt Equity ratio (Long term debt/Equity) Receivable turnover (Turnover/Account Receivable) In case of Unilever, its net profit margin has increased during 2014 by 0.95% but it has again decreased in 2015 by 1.46% that means its operating and other expenses have increased during this year (Needles, Powers and Crosson 2013). Therefore, Unilever must take measures to control its operating and other expenses. ROA has increased by 0.13% in 2014 but it has again decreased by 1.46% in 2015 that means Unilever is not able to utilize its asset efficiently to generate profit. This may have a negative impact on the stakeholders of the company, which must be taken into account by the management of the company immediately (Collier 2016). ROE has increased during 2014 by 0.13% whereas it has again decreased during 2015 by 1.38% that means it has not been able to generate higher return for the shareholders on their investment. This may discourage their shareholders to invest further in Unilever. Therefore, management must make sure this ratio does not fall further otherwise it may hamper the reputation of the company (Zakaria and Islam 2014). EPS has increased in 2014 by 0.11 whereas it has again decreased in 2015 by 0.09, which is not a good indicator for the company. The management of Unilever must take initiatives to increase its EPS in future years. Asset turnover ratio, which has decreased in 2014 by 0.09, has again increased in 2015 by 0.01, which indicates that Unilever is efficiently using its asset to generate revenue, which is a good sign for the company. Current ratio, which has decreased by 0.07 in 2014, has again increased in 2015 very insignificantly and it is well below 1, which must be a worrying factor the management of Unilever (Needles, Powers and Crosson 2013). Debt-Equity ratio is currently ZERO for Unilever that means it has no outside funding, which is very good sign. Receivable turnover ratio, which has decreased by -0.74 in 2014, has again increased by 1.46 in 2015 that means it is managing its credit period efficiently.   In this part, detailed discussion will be done on any one coefficient of P&G and Unilever and comparison will be done between them. It is better to select current ratio for the analysis purpose as it is one of the most important or key ratio for determining the liquidity and financial position of a company. A company is said to be in a good position if its current ratio is at least 2 that means its current asset is two times its current liabilities. It implies that a company can easily use its current asset to pay its short-term debts and if required can also repay some of its long-term debts. It is also known as working capital ratio and should not fall below 1. If it falls below 1 then it is an indicator for the management of the company that its liquidity position is in danger and it will not be able to pay off its debts at this point of time (Elshahat, Freedman and Elshahat 2015). However, it does not necessarily mean that company will go bankrupt. In case of P&G (Table-1), it can be seen that its current ratio was 0.80 in 2013 then it increased to 0.94 in 2014 and finally it became 1 in 2015. Though it was below 1 in 2013 and 2014, it was not much below 1 and made up the gap in 2015. Currently, P&G is in a position where it has the ability to pay off its short-term debts in case of any emergency from its current asset. Therefore, it can be said that P&G is financially stable at this point of time but it should try to increase these ratio further in future as during the past three years it has shown a increasing trend. On the other hand, in case of Unilever (Table-2), it can be seen that its current ratio was 0.70 in the year 2013, which decreased to 0.63 in 2014 and stayed at that level in the year 2015, which is well below one.   By analyzing, the above data it can be said that its liquidity position of Unilever is not that good which means   it will not be able to pay of its short-term debts currently. This indicates that the financial position of the company is in danger and if it is not able to increase its liquidity ratio immediately then its creditors will lose faith in the management of the Unilever. However, this does not mean company will be liquated immediately. It is definitely possible for Unilever to turn around in near future, as it is big brand in the market and very well known for its reputation and high values. While comparing the current ratio of both the company, P&G and Unilever, it can be said that currently P&G is in a better position than Unilever since its current ratio is more by 0.37. In addition, the current ratio is P&G is equal to 1 which is the minimum level that a company should maintain (Sharma and Panigrahi 2013). Whereas for Unilever it is much below than 1. Therefore, it can be said that P&G has a better working capital position and it has managed its liquidity efficiently. However, for both the company it is well below 2 which is considered as an appropriate Current Ratio for a company so the management of both the company should take measures to increase its current ratio in future years. A higher current ratio does not always indicate a better financial position of a company as there are many current assets, which are very slow moving and are not easily salable in the market. From the above analysis, it can be seen that P&G is better in some aspects whereas Unilever is better in some other aspects. Both the company should improve in certain fields as if current ratio is better for P&G whereas debt equity ratio is better for Unilever. Both this ratio reflects the liquidity position of the company so P&G should try to improve its Debt-equity whereas Unilever should try to improve its current ratio. P&G should try to decrease its operation cost in future to increase its profit margin. If profit margin increases then it will automatically increase its return on asset, return on equity and earning per share of the company unless asset and equity base of the of the company changes. Current ratio of P&G is maintained at its minimum level of 1 which is required to be increased to 2 to ensure a better liquidity position. Debt equity ratio of P&G is currently much below 1 i.e. 0.29 which must be worrying factor for the management of P&G as its outside funding is much higher than internal funding. P&G must take initiatives to increase its Debt-equity ratio by introducing new source of equity or by increasing its transfer to general reserve so increase it to above 1 immediately. Otherwise, P&G is at high risk of being leveraged buyout i.e. takeover of the company by the debt funders. On the other hand, Unilever should also try to control its operating expenses so that its net profit margin increases which in turn will increase the return on equity and return on asset of the company. Unilever’s current ratio is very low i.e. it is well below 1 which indicates a danger position for the company. Management of Unilever must take immediate step to increase its current ratio otherwise; its creditors will lose faith in the company.   From the above analysis, it can be said that both the company’s performance has decreased during the fiscal year 2015, as it was a tough year for the whole industry. Both the companies have a very good background and high consumer value so it is expected that their performance will definitely increase in future and they will again turn around. Both the company must focus on controlling their operating cost or increase their revenue to increase their market share. This will help them to increase other ratios also, which have an impact on other aspects of financial position. Both the company must focus on their current ratio especially Unilever since its current ratio is well below one whereas P&G has just maintained the minimum level. Debt equity ratio of P&G indicates a red signal so immediate action must be taken by its management to improve it whereas for Unilever it is ZERO, which shows that it does not have any external funding. Therefore, Unilever must introduce some external funding to get a good mix of external and internal funding. Both the company has a good receivable turnover so they should try to maintain this ratio in future. This above recommendation and comparison is based on ratio analysis that may not always give best results, as there is many limitation and drawbacks of ratio analysis. Since ratio analysis is based on past data, it does not show the future prospects of a company. 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Evidence from firms' inventory management.  The Accounting Review,  90(2), pp.529-557. Harper, D., 2016. Accounting Financial Statements Analysis. Healy, P.M. and Palepu, K.G., 2012.  Business Analysis Valuation: Using Financial Statements. Cengage Learning. Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014.  Financial accounting: a user perspective. Wiley Global Education. Needles, B.E., Powers, M. and Crosson, S.V., 2013.  Financial and managerial accounting. Nelson Education. Needles, B.E., Powers, M. and Crosson, S.V., 2013.  Principles of accounting. Cengage Learning. Sharma, A. and Panigrahi, P.K., 2013. A review of financial accounting fraud detection based on data mining techniques.  arXiv preprint arXiv:1309.3944. Tan, L., Zhang, W. and Liu, B., 2013. Forecast Management Based on Enterprise Financial Accounting Report.  Management & Engineering, (13), p.60. Vogel, H.L., 2014.  Entertainment industry economics: A guide for financial analysis. Cambridge University Press. 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