A Financial Analysis research paper

Financial statements are important during the investment process because they allow the investor to assess the risk associated with investing in a particular company. In this regard, investors are likely to concentrate on businesses that promise them the highest profits and those with low collapse risks. The balance sheet and the income statement are the two principal financial statements that should be taken into account in this situation. The balance sheet is a financial statement for a business that depicts its financial situation at a specific period (Gibson, 2009). The financial statement provides data that is used to form other financial statements, including the cash flow statement, income statement, and profit and loss. This report analyses the financial statement for Proctor and Gamble, a consumer goods company in the last three years as the base company. The documents under consideration will be the balance sheet and the income statement. The report will have comparative analysis with the main competitor Unilever Company over the last three years thus giving an investor the chance to decide on the best company to invest in.

Investors spend a considerably high amount of time observing a company before making any financial commitments. The balance sheet is an important base for financial analysis. Most investors use the balance sheet as a guideline when it comes for their investment (Gibson, 2009). On the other hand, the income statement measures the profitability of a business at a specific time. The balance sheet illustrates three categories of a business financial status; assets, liabilities and the shareholders capital (Fridson,Fridson & Alvarez, 2011). Indeed, an investor would desire to invest a company with a good capital mix and that which promises him maximum returns. In this case, the investor would be most interested in the time taken to turn over debts to cash or even make sales in the market. The turn over period is hence vital for an investor, especially in a consumer goods or a retail company. On the other hand, the capital mix can also signal the health of a company. Above all, the investor also seeks to analyse how a company utilize is retained payments. Unlike other financial statements, the balance sheet gives a clear picture on how the company operates and whether it is a risky business or not. The balance sheet informs the investors on the utilization of investment hence assisting them in making good strategic plans.

Proctor and Gamble

The income statement of Proctor and Gamble over the last three years provides details on the profitability of the company. Indeed, the stock price of company would mostly be defined by their earnings and their turn over time for the debts. There is therefore a need to have a balance between the revenues and the expenses with some profits to entice a potential investor(Gibson, 2009). Investors want to be certain that they will recover their investments and even make extra income within a specified period of time.

Three items on the income statement that would be important to an investor

The main areas under consideration would be the net sales, which give results to the net revenue; the cost of products sold and diluted earnings per share (Penman& Penman, 2007). The net revenue would most likely inform the investor on the financial standing of the company. A company must therefore successfully makes sales and have increasing revenue over time to be considered attractive. In this case, a financial analysis of the revenue for the income statement for different financial years would illustrate the profitability status of a company (Epstein, Jermakowicz& Damstra,2010). A company that consistently increases its sales informs the investor that it is growing and hence has the potential for expanding and becoming more profitable. The revenues detail the exact cash that the company makes from delivering goods or services to the customers. Proctor and gamble’s revenue however remains the same between 2013 and 2016. The net profit records also indicates the time that an investor would take to recover their initial investments in a copany.by checking the trend of a company’s profits, an investor can hence decide whether to invest in a certain company or not. Also, some companies use the bet profit as their basis for making payments to the shareholders. In that case, the investor would determine the amount that he would probably receive as dividends if he took partial or full ownership in that company. The gross margin seems to be increasing over the three year period.

Three items on the balance sheets that would be of most importance to an investor

The balance sheet also known as the statement of financial position illustrates the activities and the income of a business over a specific period of time. Unlike an income statement that is spread over a one year period, the balance sheet can be evaluated on a monthly basis. Looking at the balance sheet, the investor can manage to evaluate the company’s assets and check if they match with their liabilities. The assets ought to be great enough to pay off all the company’s debts. Among the things that would be of consideration in the balance sheet is the assets, liabilities and equity.

Assets

Assets are the properties that the company has at a specific time. Assets can in this case be categorised as fixed or current assets. The current assets can easily be converted to cash while the fixed assets take a longer time to be converted to cash.an investor would most likely favour a company that has more liquid properties unlike one that would not easily be converted into cash. More cash enables a company to settle its debts on time. Also, the cash would likely offer opportunities for growth hence better suited for an investor who desires to change their businesses over time (Penman& Penman, 2007). Fixed assets in this case include buildings, chattels and even vehicles. The current assets would include debtors, stock, prepaid expenses and marketable securities. The assets can enable a company pay for interests in their future debts. Investors however needs to be certain that the cash within the company is used for investment purposes because pilling so much cash would mean that they do not take advantage of the available investment opportunities.

Liabilities

The current liabilities are the debts or the obligations that the company must meet within one year. The long term liabilities are the debts that must be covered beyond one year (Penman& Penman, 2007). A company should have more assets than liabilities meaning that it can comfortably pay off their loans.an investor would hence shy away from a company that has higher debts than assets because that would be risky for a business.

Capital

The capital forms the foundation of any business (Penman& Penman, 2007). Capital is usually formed of the owner’s capital and even debt. The capital is usually computed by subtracting the liabilities from the total assets. Equity is composed of retained earnings and the paid up capital. The paid up capital represents the money that the company obtains from the public after issuing their shares. The retained earnings represent the funds that the company reinvests on the company after paying up their shareholders (Fridson,Fridson & Alvarez, 2011). In this case, the investor observes how the company optimizes the retained earnings and the kind of projects that it chooses to invest in. The working capital for proctor and gamble has increased between 2013 and 2016.

Identify two items not included in (or derived from) the financial statements that you think

Would be important to someone considering whether to invest in your company.

The off-balance sheet debt is important component for analysis because it helps an investor to identify the debts that the company has not recorded but yet has used it in their investments. Some companies fail to list all the debts in the financial statements to look more profitable to a prospective investor. The investor would also be interested in evaluating the company’s employees. Evidently, employees reflect the principles and the mission of the company. Indeed, a company that treats and pays its employees well is able to retain them and by extension make more returns. Also, the employment method can also detail the values of a company.an investor would prefer a company that is not biased in their recruitment but yet used the best techniques to recruit their employees.

Compare your base company’s financial statements with those of the second company you

chose. If you were deciding to invest in one of the two companies, which company would

you choose? Why? (Note: your answer in this section must include, but need not be limited

to, financial issues.)

Proctor and Gamble would be a better investment than Unilever looking at the increase in its revenue which can be attributed to its increase in sales with a prospective increase of 2% as at 2017. The payout ratio for proctor and gamble is higher which is supported by a payout ratio of 75%.infact,the company’s dividend’s keep on increasing revealing further on the profitability of the business. Unilever however has inconsistent dividends which align to their payout ratio of 71%.

References

Epstein, B. J., Jermakowicz, E. K., & Damstra, D. (2010). Wiley IFRS 2010: Interpretation and application of international financial reporting standards. Indianapolis, IN: Wiley Pub., Inc.

Fridson, M. S., Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner’s guide. Hoboken, N.J: Wiley.

Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: South-Western Cengage Learning.

Penman, S. H., & Penman, S. H. (2007). Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill.