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