so picking up where we left off we have
got P and G’s income statement and balance sheet and we already have the
liquidity and solvency ratios our task here is to calculate profitability and
growth ratios let’s start with profitability ratios namely ROA and ro e
ROA is equal to e bit divided by the company’s total assets for that year I’m
dividing EBIT by total assets and obtaining a ratio of 10.2% in 2014
and 9.1% in 2015 please note that we don’t
calculate a ratio for 2013 because our balance sheet contains only two years
okay but is an ROA of 9 or 10% good perhaps we don’t know in order to make a
reasonable judgment we need to consider the average figure for P and G’s
industry this can be done by opening the financial statements of companies like
Unilever kimberly-clark Colgate Palmolive and Hinkle calculate
the respective ratio and then compare P and G’s ROA with the one that these
companies had when this is done we’ll be able to tell whether its performance was
satisfactory ok let’s calculate our oe we have to
divide net income by owners equity in 2014 our OE was equal to sixteen
point eight percent while in 2015 it decreased to fourteen point two percent
I’d like to give you a task now you should take the file that is attached to
this lesson and use it in order to decompose our owee once you are ready
with the calculation try to analyze which were the main drivers for the
change of the ratio in 2014 and 2015 those of you who post their answers in
the discussion board will receive a gift do we have a deal very well now I’d like
to calculate another profitability ratio that we did not see before I’ll divide
EBIT and net income by revenues this will allow me to understand what the
reason was for the lower ROA that we observed
and in fact the company’s EBIT to revenues ratio was lower in 2015 P&G was not able to convert into profit
as much of its revenues as it was able to do in 2014 nevertheless 15.5% of EBIT
is pretty good for most industries and finally we’ll calculate some growth
figures we already know how it’s done so I’ll be quick in the calculation
I’d like to calculate the growth of sales
and that’s why I’ll divide the value for 2014 by the value in 2013 and we’ll
subtract 1 then I can copy the formula to the right and we’ll have the growth
of sales between 2014 and 2015 sales grew marginally in 2014
0.5% and then decreased significantly in 2015
– 5.3 percent we should dig deeper into the notes in order to understand what
caused the decrease and here we are page 25 includes a
bullet point that explains the decrease of sales according to this information
the negative impact of foreign exchange – 6 percent was the main reason behind
lower sales this is how we can calculate growth
ratios which helps us determine important trends in a company’s income
statement parameters slower growth shouldn’t surprise us though the company
that we are analyzing is a mature firm with an established business it is
difficult to continue to grow with double-digit figures after a certain
size has been reached