Investment analysis report: Gillette

Introduction

This comparative analysis will set a foundation on the basis of which the researcher can identify the opportunities available to the company as well as their risk exposures. Following the identification of these factors strategies will be recommended to the company that are aimed towards opportunity implementation and mitigation of risk exposures.

Calculation steps

Profitability ratio analysis of Gillette Company

Net profit margin: Calculated by dividing the net profit by the revenue, this ratio indicates how well a company has been able to convert each dollar of revenue earned into net income (Robinson and Henry, 2012). Figure 1 given below shows that Gillette Company’s net profit margin increased from 14.3% in 2002 to 14.9% in 2003. This highlights that the company’s managers have been successful in implementing effective business strategies that are aimed towards reducing the operating and financial expenses that has greatly contributed to the augmentation in net profit margin.

Figure 1: Gillette's net profit margin
(Source: Gillette, 2003)

Gross profit margin: This ratio is the quantifier of a company’s financial health by denoting the amount of capital remaining after the cost of goods sold by a company is deducted from the revenue generated. As is evident from figure 2 given below, indicates that Gillette’s gross profit margin increased marginally from 0.585 in 2002 to 0.599 in 2003. The values highlight the company’s stable financial health in terms of its ability to pay off its financial and operating expenditures. According to Berk and DeMarzo (2007), it is extremely important for a company to maintain a stable gross profit margin and such has been the same in case of Gillette company which is a good indicator of the company’s financial performance as the company is in good position to accumulate sufficient saving for future investments.

Figure 2: Gillette's gross profit margin
(Source: Gillette, 2003)

Return on Asset: This ratio is calculated by dividing net income by total assets. The ratio provides a good indication of the extent to which a company is making profit with respect to its assets (Wahlen, Stickney and Brown, 2010). As is evident from figure 3 given below Gillette’s ROA has increased steadily from 12.3% in 2012 to 13.8% in 2013. The increasing value of ROA suggests that Gillette’s management strategies were very effective which in turn allowed the company to translate every dollar of asset invested into net income. The managers efficiently utilized the assets in its business operations which in turn contributed to this gradual increase in ROA.

Figure 3: Gillette's ROA
(Source: Gillette, 2003)

Return on capital employed: Computed by dividing the earnings before interest and taxes by the capital employed, this metric indicates how effectively a company has used its capital in order to generate value for the shareholders (Thukaram, 2007). Figure 4 given below indicates that Gillette’s ROCE has increased considerably from 28% in 2012 to 32% in 2013. This drastically increasing value of ROCE suggests that the company has used its capital very efficiently. The increasing value clearly indicates a company’s stability in relation of its ability to provide healthy returns to company associates..

Figure 4: Gillette's ROCE
(Source: Gillette, 2003)

Liquidity ratio analysis of Gillette Company

Acid test ratio: Acid test ratio is one of the fundamental indicators of an organization’s capability to fulfil its short term obligations with adequate short term asset reserves.  Ratio less than 1 indicates that the company does not have adequate short term assets that can be used to pay off short term liabilities (Ormiston and Fraser, 2009). As is evident from figure 5 given below, it can be seen that not only has the acid test ratio decreased considerably from 0.823 in 2012 to 0.699 in 2013, the values are less than 1. This suggests that the company does not have sufficient short term asset reserves and thus will have to sell its inventories in order to meet its short term obligations. In such strenuous situations the company’s financial performance has to be monitored very cautiously.

Figure 5: Gillette's acid test ratio
(Source: Gillette, 2003)

Cash ratio: Cash ratio is a primary indicator of a company’s short term liquidity. This metric helps companies to determine the amount of most liquid assets available at their disposal in order to meet short term liabilities (Ingram and Albright, 2009). It is evident from figure 6 given below that the cash ratio of Gillette Company is significantly less than 1. In fact that the cash flow decreased from 0.230 in 2012 to 0.186 in 2013. This is not a good sign as the company’s level of liquid assets is decreasing gradually which in turn limits its scope to meet short term obligations. The company’s liquidity position is highly unstable and therefore appropriate measures needs to be taken.