Business Overview Colgate-Palmolive is a leading consumer products company with businesses in two main product segments – Oral, Personal and Home Care; and Pet Nutrition. The company operates in more than 200 countries and this geographic diversity and balance help to reduce the Company’s exposure to businesses and other risks in any one country or part of the world. The company’s main competitors are Proctor & Gamble (PG), Johnson & Johnson (JNJ), Church Dwight & Company (CHD) and Clorox & Company (CLX).
Section II – Ratio Analysis
Return On Equity (ROE) The ROE has declined for Colgate-Palmolive from 93% in 2008 to 72% in 2010. But the debt to equity ratio has declined from 4. 19 to 2. 96 during the same period. The total liabilities have increased 3. 6% from 2008 to 2010 but they have increased at the same rate as its assets that have increased by 11. 9%. So the reduction in ROE is not necessarily bad for Colgate-Palmolive as the ROE has dropped due to increase in assets and reduction in liabilities.
DuPont Ratio Components Profitability Profitability has increased from 12. 7% in 2008 to 14. % in 2009 and has dropped to 14. 1% in 2010. So to understand the reason behind the drop in profitability, we need to look at total sales and net income. Total sales have increased from $15. 3 billion in 2009 to $15. 6 billion in 2010 but net income has dropped from $2. 3 billion to $2. 2 billion. So this means that the increased sales have come at the expense of diminishing profit margins for Colgate-Palmolive in 2010. Efficiency The asset turnover ratio has dropped from 1. 52 in 2008 to 1. 39 in 2010. So every dollar of asset generated roughly 8% less sales revenue in 2010 compared to 2008.
LT Debt to Assets Ratio The financial leverage of Colgate-Palmolive has reduced from 4. 77 in 2008 to 3. 67 in 2010. Since this ratio measures the extent to which a company relies on debt financing in its capital structure, a decrease in this ratio is a good sign for the company. Further, the risk of the equity position is decreased by the presence of debt holders having lesser claim to the assets of the firm. Section III Cash Conversion Cycle (CCC) The cash conversion cycle for Colgate-Palmolive has decreased from 45. 5 days in 2008 to 40. 6 days in 2010.
So to understand the reason behind this reduction, the individual components need to be analyzed. The Days Receivables Outstanding (DRO) component of CCC has not changed much from 2008 to 2010. But the Days Inventory (DI) has increased from 64. 4 days to 69. 7 days, meaning that the number of days for Colgate-Palmolive to sell its entire inventory increased by 5 days in this time period. The last component Days Payables Outstanding (DPO) has increased from 57. 9 days to 67 days which means that Colgate-Palmolive can retain cash 10 days longer in 2010 compared to 2008 before making a payment to its suppliers.
This could have happened through better agreements with its suppliers or due to the increased buyer power in the industry. Cash Liquidity and Cash Sources & Uses Working Capital The working capital of Colgate-Palmolive has consistently declined from 2008 to 2010. So an analysis of the individual components of Current Assets and Current Liabilities would be needed to understand the reason for the declining working capital. As seen from the financial statements in 2010, the Cash and Cash Equivalents component of Current Assets decreased by $110 million (by 18%) and the Current Portion of Long-Term Debt has increased by 72% to $561 million.
This could be a problem for Colgate-Palmolive if this trend continues in the longer term. Current Ratio The current ratio has been declining (similar to working capital) from 1. 3 in 2008 to 1 in 2010. Since the current ratio gives an idea about the company’s ability to pay back its short term liabilities (debt and payables) with its short term assets (cash, inventory and receivables), a company will usually prefer a higher current ratio. In the case of Colgate-Palmolive, the current ratio has declined because of its decline in cash position and increase in total current liabilities.
Though current ratio does not take into account future sales and other cash inflows in future, the declining trend might be a problem if it continues in the future. Quick Ratio The quick ratio reflects on a company’s ability to meet its current liabilities without liquidating inventories that could require markdowns. It is a more stringent test of liquidity than the current ratio and may provide more insight into company liquidity in some cases. For Colgate-Palmolive, the quick ratio has declined from 0. 73 in 2008 to 0. 58 in 2010.
While this does not necessarily mean a problem, a higher current ratio and quick ratio analysis will mean that the company will not have difficulty in meeting its short-term obligations from its operations and not by liquidating its assets. Section IV Conclusions The ratio analysis indicates mostly positive outlook for Colgate-Palmolive as most of the measures look healthy. The ROE has reduced by increasing assets and reducing liabilities, the cash conversion cycle has decreased and the days payables outstanding has increased.
But Dupont analysis indicates that profitability and efficiency have become lower. Additionally, the working capital has become lower and the current and quick ratios have declined. To understand the impact of these declining ratios on this company, the industry trend has to be analyzed to see if this happening throughout the industry or just with Colgate-Palmolive. If it is happening only with Colgate-Palmolive, then the company needs to analyze the possible reasons and improve these ratios.
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