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    Evaluating an Annual Report: Proctor & Gamble

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    Chosen Company: Proctor & Gamble

    Review Appendix A for details to include in your analysis of your chosen company's financial health.

    ? Prepare a word paper that includes performance ratios based on the company's last two annual reports and data available on the company's Web site.

    Compute the eight ratios listed below for two consecutive years. Discuss their significance for management and compare them to industry averages.

    ? Current Ratio
    ? Quick Ratio
    ? Inventory Turnover Ratio (Note: on the Dunn and Bradstreet Web site this ratio is labeled Sales to Inventory)
    ? Debt Ratio (Note: on the Dunn and Bradstreet Web site this ratio is labeled TotalLiabilities to Net Worth)
    ? Net Profit Margin Ratio (Note: on the Dunn and Bradstreet Web site this ratio is labeled Return on Sales)
    ? ROI (Note: on the Dunn and Bradstreet Web site this ratio is labeled Return on Assets)
    ? ROE (Note: on the Dunn and Bradstreet Web site this ratio is labeled Return on Net)
    ? Price-to-Earnings Ratio (P/E) Ratio

    Analyze the company's working capital management. Explain why the company's operating and cash cycles are currently optimized. If you think they are not optimized,explain why.

    Based on the company's financial statements, list the long-term debt held by the corporation, maturity dates and yield to maturity. List the types of stock issued by the company, the stocks' current selling price, and the 52-week average selling price.

    o Compute the weighted average cost of capital (WACC) for both years and discuss your findings.

    o Write a brief analysis that summarizes how your company compares to industry averages.

    o Write your recommendations on whether as an investor you should buy this company's stock and why.

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    Solution Preview

    As students of finance and potential investors, you can estimate the financial health and profitability of a company using financial ratios and other industry tools. The tools and skills practiced in this course can be used to help you determine whether or not to invest money in a company. Research into the financial health of the company can help make the decision.

    1. Find the Dun & Bradstreet Key Business Ratios under Company Directories and Financials heading. http://kbr.dnb.com/login/KBRHome.asp
    To access industry averages for the price-to-earnings ratio (P/E ratio), complete the following steps:
    1. Navigate to The Business Week Investment Outlook Scoreboard at http://bwnt.businessweek.com/investment_outlook/2005/index.asp.

    2. Accounting is the means by which information about an enterprise is communicated and, thus, is sometimes called the language of business. Accountants use the term financial position to describe an entity's financial resources and obligations at one point in time and the term results of operations to describe its financial activities during the year. Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources.
    Accountants summarize this information in a balance sheet, income statement, and statement of cash flows.
    In financial analysis, we need qualitative information and try to read between the numbers. We have to ask all the right questions. Over the years, there are some ratios, which have become more popular and handy for rule of thumb analysis of financial statements. Our purpose in this note is not deride them but to advice the reader to use them properly to derive the correct results.

    Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.
    (Pandey, I.M.)

    Liquidity is a company's ability to meet its maturing short-term obligations. Liquidity is important for conducting business activity especially in times of adversity such as when operating losses occur due to economic conditions or drastic price increases of raw materials or parts. Liquidity must be sufficient to cushion such losses. If not, serious financial difficulties may result. For this we have calculated following ratios:

    Current Ratio. The current ratio is another way to express the relationship between current assets and current liabilities. It is computed as follows:

    A current ratio of less than 1:1 is usually unacceptable since in that case current liabilities would exceed current assets?a warning that there may soon be a cash flow problem. A general rule of thumb calls for a current ratio of 2:1.

    Quick Ratio. The acid-test ratio is a more rigorous test of a company's ability to meet its short-term debts than the current ratio since it excludes less liquid current assets such as inventories and prepaid expenses. The acid-test ...

    Solution Summary

    This gives the steps to evaluate an Annual Report: Proctor & Gamble