Case Study: Procter & Gamble Income Statement Analysis

2. What additional information would be interesting for your analysis as a decision maker?
We identified the following 6 aspects/pieces of information that could help us as decision
makers:
1. Having the Balance Sheet would help us a lot as decision makers to have a better
understanding of the main investments, the Debt/Equity composition, the liquidity, etc.

2. Horizontal Analysis (changes of accounts Vs previous year). We run this analysis

obtaining the following table:

Change Vs LY
2017/18 2016/17 2015/16
Net sales 2.7% -0.4% -7.7%
Cost of products sold 5.3% -1.1% -11.2%
Selling, general and administrative expense 1.5% -2.0% -8.1%
Goodwill and indefinite lived intangible asset impairment
     
charges
Operating income -1.7% 3.8% 21.6%
Interest expense 8.8% -19.7% -7.5%
Interest income 44.4% -6.0% 22.1%
Other non-operating income/(expense), net -68.8% -224.3% -26.1%
Earnings before income taxes 0.5% -0.8% 21.4%
Income taxes from continuing operations 13.1% -8.3% 22.6%
Net earnings from continuing operations -3.3% 1.7% 21.0%
Net earnings from discontinued operations -100.0% 804.2% -150.5%
Net earnings -36.0% 45.3% 48.4%

3. Once we had the previous table the next step is to understand the changes in three
accounts:
a. COGS: this account grew at a higher rate Vs LY compared to Sales (5.3% Vs 2.7%).
This is a similar insight to which we got observing the evolution of the Gross
Margin as % of sales. Hence, the information that now would help us as decision
makers is to dig deeper on what is happening; are costs increasing and not being
compensated by revenue increase? Are we experiencing underperformance in
the manufacturing process? etc.
b. Interest Expense: Why did we increase our Interest Expense? Did we acquire
new loans for investment? For liquidity? Are we having loans indexed to a
variable rate?
 c. Interest Income: Why did our Interest Income increase? Are we having too much
cash surplus that we are not investing in our core operation?

4. Break down on the main components of the accounts “COGS” and "Selling, general and
administrative expense". In this way the decision makers could more easily understand
changes in the operational expenses

5. We found out that income tax as percentage of Earnings Before Income Tax had a
relevant increase in the last period:
2017/18 2016/17 2015/16
% Income Tax 26.0% 23.1% 25.0%

In this way, we came up with the hypothesis that maybe in the last year the company
had differentiated growth rates among the different geographies, leading to a higher
weight of total sales of high tax jurisdictions. Hence, the information that could help us
to have a clearer picture would be the break down of financial statements by
aggregated main geographies.

6. Financial Statements per line of business: since P&G is a consumer goods company with
several and differentiated lines of business, it would be very useful to understand the
performance of each line in order to deploy resources optimally according to the
corporate strategy