Business Finance - Assessment - Essay Example

Business Finance The assignment required to analyze the financial ments of a company preferably which is growing and is not a financial institution. The chosen company is Procter and Gamble. The data under analysis is from years 2006 to 2002.the consolidated balance sheet and the statement of earnings is given in appendix for year 2006. The sales growth for years 2006 through 2002 is as follow: 2006 2005 2004 2003 2002 Sales (millions of $) 68,222 56,741 51,407 43,377 40,238 Growth rate (%) 20.23 10.03 18.5% 7.8 ---- (Source: http://www.pg.com/annualreports/2003/pdf/pg2003annualreport.pdf) (Source: Procter and Gamble’s website Investor’s information) Sales Forecast a) Simple averaging method Average growth rate = sum of percentage growth of all the years Number of years = 20.23 + 10.03 + 18.5 + 7.8 4 = 14.14 the growth rate for sales comes out to be 14.14 % Hence the forecasted sales for the next year i.e. 2007 would be: Sales for 2007 = sales in 2006 (1+ growth rate) = 68,222 (1 + 0.1414) = $ 77, 868.5 million b) Geometric mean method Average Growth rate = = (Sn/S1)1/(n-1) – 1 = (68222/40238)1/(5-1) – 1 = 0.14109 = 14.109% Hence the growth rate comes out to be 14.109% The forecasted sales for the next year can be calculated now: Sales for 2007 = sales in 2006 (1+ growth rate) = 68,222 ( 1 + 0.14109) = $ 77, 847.44 million Forecasting the income statement for the next year 2007(millions) % 2006 (millions) Net Sales 77, 847.44 14.109* 68222 Cost of Goods Sold 37798.6 14.109* 33125 Selling, general and admin. expense 21848 21848 Operating Income 18200.84 13249 Interest 604.25 3.11% 1119 Non operating income 260** 283 Earning B/f Tax 17856.59 12413 Tax 5356.97 30% 3729 Net Earning 12499.613 8684 *Sales and costs are assumed to be incresed by same rate. **Non operating other income is calculated by taking average of the past three years other incomes 2007 2006 Accounts Payable 5602.75 14.109% 4910 Accrued liabilities 10939.62 9587 Tax Payable 5356.97 3360 Debt due in 1 yr 2428.23* 2128 Total current 24327.57* 19985 Long term debt 19429.4 35976 Deferred tax 14097.0* 14.109% 12354 Other liabilities 62843* 4472 Total liabilities 120197.63 72787 Total stock 27242 27242 Retained earning 7374.77 35666 Total share hold. Eq. 34616.77 62908 Liability + equity 154814.4 135695 2007 2006 Current Assets 27756.956 14.109% 24329 Non current Assets 127057.46 14.09% 111366 Total Assets 154814.4 14.109% 135695 Clarifying points It is assumed that assets are increasing at the same rate as that of sales Total Assets are increasing by the amount 191194 Retained earnings 35666. Therefore the increase in assets will be funded by retained earnings. Still after the funding a large amount of retained earning is still left and hence would be used to pay off some long term debts. Div. payout ratio is assumed to constant and is equal to 41%, it means retained earnings will be 59% (calculated from Balance sheet figures) The variation is put in other liabilities to balance both the sides of balance sheets. Current Debt to Equity Ratio is = Total debt / Total equity = 3.1722 for 2007 as compared to 1.15 for last year Current ratio = current asset / current liabilities = 1.1409 for 2007 as compared to 1.217 for last year ROA = N. Income / Total Assets = 8.07% for 2007 as compared to 6.39% for last year Debt to Asset ratio = Total Debt / Total Assets = 77.63% for 2007 as compared to 53.64% for 2006 Times Interest earned = Earning before interest and taxes / Interest payment = 30.121 as compared to 8 % for last year. Summary Sales growth for this is forecasted to be 14.109% using the geometric mean method. Since the increase in Assets was not large enough therefore no extra funding was required and hence no new debt was raised or no new stocks will be issued. All the funding required will be done through retained earnings the company has from previous years. Most of the ratios are estimated to improve next year in the favor of company showing that the organizaiton’s performance is expected to improve next year. Bibliography Procter and Gamble (2007). Retrieved on April 19, 2007: http://www.pg.com/annualreports/2003/pdf/pg2003annualreport.pdf Read More