Return on Equity
It is important to take a look at the return of equity (ROE) of Colgate, which measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Colgate has a ROE of .885; whereas, P&G has a ROE of .202. Colgate has a higher return on equity, thus, better capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. However, I believe a lot of this high ROE has to deal with the restructuring program that began in 2004 and has slowly been putting money back to shareholder’s equity. This was the first year when ROE saw a drop for Colgate (the first year the restructuring program ended), so if it drops again next year than the ROE can be due to the restructuring of the company.
To get a better idea of ROE, I wanted to break it apart. First, the net profit margin is .149 for Colgate and .175 for P&G. The numbers are very close to one another, with P&G having the higher net profit margin. A company with a higher profit margin is much more successful because it shows how much out of every dollar of sales a company actually keeps in earnings. Thus, even though P&G has a much lower ROE it still beats Colgate in profit margins.
Next, assets turnover for Colgate is 1.389 and .550 for P&G. Colgate has more than double the asset turnover than P&G. This shows that Colgate is much more efficient at using its assets in generating sales or revenue. The higher asset turnover also explains the lower profit margin that Colgate has because companies with low profit margins tend to have