A. Is P&G a Good Company? Ratio Analysis The Mergent Online data service, Yahoo.coms financial web site, and P&Gs 2008 annual report are sources used to collect ten years of selected financial data. The collected data has been processed to yield a summary of financial ratios that can be used to assess P&Gs operational and management success over the past ten years. This table shows the ratio data with a column of current industry averages for some of the ratios:

Ratios Ind. Avg. 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

EPS ($) N/A3.86 3.22 2.79 2.83 2.46 1.95 1.63 1.08 1.31 1.38

Net Profit Margin (%) 12.1% 14.5% 13.5% 12.7% 12.8% 12.6% 12.0% 10.8% 7.4% 8.9% 9.9%

Dividend per share ($) N/A1.45 1.28 1.15 1.03 0.93 0.82 0.76 0.70 0.64 0.57

Dividend yield (%) 3.1% 2.4% 2.1% 2.1% 2.0% 1.7% 1.8% 1.7% 2.2% 2.3% 1.3%

P/E ratio 16.9 15.75 19.00 19.93 18.64 22.13 22.87 27.39 29.67 21.74 32.04

Net sales ($ B) N/A83.5 76.5 68.2 56.7 51.4 43.4 40.2 39.2 40.0 38.1

Return on Equity (%) 21.5% 17.7% 16.0% 21.6% 41.8% 38.6% 34.7% 33.9% 24.1% 29.0% 31.0%

Debt / Equity 1.1 0.530.53 0.61 1.39 1.21 0.84 1.09 1.00 0.99 0.78

The history of market price for P&G stock over the past ten years is also useful to see in the table below (note that the prices have been adjusted for a 2:1 stock split in fiscal year 2004):

Market Price ($) 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Adjusted for splits 60.81 61.19 55.60 52.75 54.44 44.59 44.65 31.90 28.38 44.06

More detailed analysis of important ratios is shown below, including a comparison to selected current industry averages.

The history of the P&G stock price is presented here since many ratios are based on the stock price. The stock price is now back to its level as of December, 1999, after dropping nearly thirty percent in the recent economic crisis in late 2008. P&G stock has lost much less in value than many companies from other industries (in the financial sector many companies have lost between forty and ninety percent). In the first calendar quarter of 2000, P&G stock price dropped over fifty percent (to below $30), caused mainly by a loss of confidence from investors. Procter & Gamble announced in March 2000 that it would not meet its projected first quarter earnings. About $85 billion in market capitalization was lost. Since March 2000, P&G stock price has risen steadily for eight years, surpassing its December 1999 price in early 2008.

The Earnings Per Share (EPS) steadily increased over the years (except for 2001) to nearly $4.00 per share in 2008 (compared to $1.38 in 1999) as did the dividend payment. The dividend yield remained relatively constant over the past years and is below the industrial average. A more detailed fundamental analysis of the development of EPS and Dividends is shown in the Calculated Ratios section below.

The Price to earnings (P/E) ratio has dropped steadily since 2001 indicating the decreasing growth potential of the company. By 2008 P&Gs P/E ratio was very close to the current industry average. While one might expect a very large company like P&G to have a lower P/E ratio than the industry average (given a counterbalancing effect of small firms in the industry), the fact that its P/E ratio is at the average indicates a potential nimbleness that will allow the company greater future growth than might be expected for a company of its size.

P&G was able to increase its sales over the last ten years, which is a very positive signal to the market. Whereas between 1999 and 2002, the sales were rather constant ($40 bn.), they increased to over $80 bn. by 2008. Increasing sales by 100% within six years is quite impressive, especially given the magnitude of the sales (growing from $40 bn. to $80 bn).

Over its recent period of steady sales growth, P&G was not simply increasing its prices. The growth rate of its sales is much higher than the inflation (change in the consumer price index). P&G was therefore really able to expand its business. The significant increase in sales in 2006 can be contributed to the acquisition of Gillette in late 2005.

The Book Value per share was quite constant at about $5 between 1999 and 2005 and increased to $23 per share in 2008. This development is rather surprising since the plowback ratio was quite constant over the 10 year period. The development is however favorable in the eyes of an investor if a company has a very high Book Value per share (compared to the price per share), the risk for the investor to lose money may be considered lower (since it is backed by real value). In this case, however, the reason for the increased Book Value is a significant increase in Goodwill (from $24bn. to $89 bn.). The acquisition of the Gillette company in 2005 was the reason for this significant change ($34.95 billion). Whether the shareholders are exposed to less risk due to the higher Book Value per share may be questioned.

The capital structure of P&G may be analyzed in a little more detail here. The Debt ratio is relatively constant over the last years and has even decreased. Though it is not possible to tell whether this Debt ratio is the most economic for P&G, a constant debt ratio can be considered rather favorable especially when the sales are increasing in such an astonishing way. The Current ratio is rather constant too. After the acquisition of Gillette, the Current ratio did improve between 2005 and 2006. After 2006, the Current ratio decreased. The reason for the improvement is not known. However, it seems as if the position Debts payable within a year which accounts for over $11 bn. is closely linked to the acquisition of Gillette and has the greatest impact on the Current ratio. The 2006 Annual Report stated that the acquisition was partly financed through a three-year debt. We can only speculate about this position. The Debt/Equity changed considerably over the past years but finally decreased (acquisition Gillette). The Debt/Equity ratio of the industry is 1.1. Since it is not known to which extent Intangible Assets do contribute to this number in the industry, a general conclusion shall not be given.

The Net Profit Margin has increased over the last few years and is now about sixteen percent above the current industry average. The reason for the decline in the Net Profit Margin between 1999