## Case Study Calculating Ratios and Analyzing PGs Financials 12

okay let’s get started with trying to

analyze P&G s financials or at least its income statement and balance sheet

this is the index of the report which will allow us to find the information

that we need much faster according to the index we will be able to find the

company’s statement of earnings the income statement on page 45 while its

balance sheet is on page 47 very well

here is the company’s income statement we can disregard the information that is

below the net earnings line as it is out of the scope of our exercise let’s go to

page 47 here is the company’s balance sheet most

of the accounts are exactly like the ones that we’ve seen so far in this

course very well now I’ll transfer the information that

we have in this PDF file into Excel as this will allow me to work with the

numbers much easier I’ll see you in a moment

right so here we are this is how the numbers look in Excel I’ve used the

exact same numbers as the ones that we saw in the PDF file in the two sheets

here we have P&L and balance sheet numbers that are ready to be examined we

can calculate each of the ratios that we mentioned in our previous lesson which

would allow us to gain an idea about the company’s business I’ll calculate the

ratios in the cells that are colored in gray in our previous lesson we started

with liquidity ratios in fact the first ratio that we saw was the so called

current ratio let’s calculate it on the right side of the screen

you’ll be able to see the name and formula of the ratio that we’re

calculating the current ratio is given by current assets divided by current

liabilities for the respective year and the result is that P and G’s current

ratio in 2014 was 0.94 and precisely one in 2015 it is a bit low but at the same

time the company’s business is well established and it has strong bargaining

power when negotiating with suppliers and clients this allows P&G to operate

comfortably okay let’s continue if we want to calculate P and G’s net trading

cycle we’ll have to calculate its DSO d io and dpo DSO is equal to trade receivables / the company’s sales for that year

which is then multiplied by 360 okay here’s the result we can copy it to

the right perfect let’s calculate D IO and dpo in order to

obtain d io we need to divide inventories by the firm’s cost of goods

sold for the respective year and multiplied by 360 I’ll have to put a

minus sign in front of the formula because cogs are negative in the income

statement that we have here very well let’s do the same exercise for

dpo we have to divide accounts payable by

cogs and then multiplied by 360 again we’ll need a minus sign in front

of the formula because we are calculating days and days can’t be

negative excellent we can now calculate P and G’s

net trading cycle which is equal to D s o plus di o- DP o you shouldn’t be surprised that the

number became negative in 2015 in fact we can see that the company was able to

reduce its DSO and di Oh figures while continuing to pay in more than 70 days

two suppliers P&G is able to operate its business without significant working

capital investments this is proof of the company’s strong bargaining power its

clients pay in every three to four weeks while P&G pays its suppliers in more

than ten weeks perfect the next two ratios that will calculate will give us

an idea of the company’s solvency do you remember the solvency ratios that we saw

earlier the debt ratio shows the business’s ability to pay long-term debt

and the interest coverage ratio gives us an idea about the company’s ability to

pay interests starting with the debt ratio both of the parameters can be

found in the balance sheet and I’ll calculate it here we have total

liabilities divided by total assets and voila copying the formula to the

right we can see that the ratio remained flat in both years the value of 0.5 1 is

below the threshold of 0.67 that we mentioned earlier so that’s good let’s

go to the income statement sheet where we’ll be able to calculate P and G’s

interest coverage ratio we’ll have to divide EBIT and interest expenses I’ll

put a minus sign in front of the formula in order to have a positive result okay so we can see that P&G s operating

income EBIT is approximately twenty four times

its interest expenses this is completely reassuring and shows that the company

will not face any solvency issues in the near future let’s take a short break and

we’ll continue our ratio analysis in the next video