Accounting for decision making
Question 3
To better understand the performance of companies, four types of ratios are normally used: First, profitability ratios, which indicate the company’s ability to generate profits to satisfy and attract investors; second, liquidity ratios, which suggest the capability of company to meet its obligations timely; third, efficiency ratios, which assess the company’s operating efficiency; fourth, financial leverage ratio, which shows rationality of company’s financial structure. (Mautz and Angell 2006, p.27)
Specifically, we apply ratio analysis to Unilever based on its annual reports in 2013 and 2011 and compare its 2013 figures to that of L’oreal and P&G, two competitive companies in the same industry as follows :
1. Profitability comparisons over time ---Unilever
Ratios
2011
2012
2013
Return on equity
0.43
0.45
0.48
Return on assets
0.14
0,.14
0.16
Net Profit margin
0.13
0.13
0.14
Gross profit margin
0.40
0.40
0.41
Earnings per share
1.46
1.54
1.71
The ROE shows that for each dollar of shareholders’ investment, the Unilever generated the profit of more than 0.43 dollar from the 2011 to 2013. Compared with its main competitors L’oreal and P&G whose ROE is less than 0.33, its business strategy named Compass is definitely a more effective one and implemented successfully. The ROA indicates the Unilever’s better ability in generating revenue from its assets, which shows efficient assets management. Unliever’s net profit margin although remain stable over the time, is much lower than that of P&G and L’oreal, but considering its continuously rising EPS, Unilever’s profit is still promising to shareholders. It is also true that Unilever could do more such as finding cheaper suppliers and centralizing manufacturing to cut costs in order to achieve higher profit.
2. Liquidity
Unilever’s current ratio is 0.70 nearly the same with P&G, it may suggests that Unilever’s comparatively low ability to pay the debt in the short
To better understand the performance of companies, four types of ratios are normally used: First, profitability ratios, which indicate the company’s ability to generate profits to satisfy and attract investors; second, liquidity ratios, which suggest the capability of company to meet its obligations timely; third, efficiency ratios, which assess the company’s operating efficiency; fourth, financial leverage ratio, which shows rationality of company’s financial structure. (Mautz and Angell 2006, p.27)
Specifically, we apply ratio analysis to Unilever based on its annual reports in 2013 and 2011 and compare its 2013 figures to that of L’oreal and P&G, two competitive companies in the same industry as follows :
1. Profitability comparisons over time ---Unilever
Ratios
2011
2012
2013
Return on equity
0.43
0.45
0.48
Return on assets
0.14
0,.14
0.16
Net Profit margin
0.13
0.13
0.14
Gross profit margin
0.40
0.40
0.41
Earnings per share
1.46
1.54
1.71
The ROE shows that for each dollar of shareholders’ investment, the Unilever generated the profit of more than 0.43 dollar from the 2011 to 2013. Compared with its main competitors L’oreal and P&G whose ROE is less than 0.33, its business strategy named Compass is definitely a more effective one and implemented successfully. The ROA indicates the Unilever’s better ability in generating revenue from its assets, which shows efficient assets management. Unliever’s net profit margin although remain stable over the time, is much lower than that of P&G and L’oreal, but considering its continuously rising EPS, Unilever’s profit is still promising to shareholders. It is also true that Unilever could do more such as finding cheaper suppliers and centralizing manufacturing to cut costs in order to achieve higher profit.
2. Liquidity
Unilever’s current ratio is 0.70 nearly the same with P&G, it may suggests that Unilever’s comparatively low ability to pay the debt in the short