Should I include all the content below when submitting the Word document for Case 1? Case 1: Lending Decision Analysis for Procter & Gamble (P&G)

Introduction

As a lender evaluating Procter & Gamble's (P&G) financial performance, the primary goal is to assess the company's ability to meet short-term and long-term financial obligations. This analysis uses six critical financial ratios calculated over the three most recent fiscal years (2022-2024) to determine P&G's liquidity, efficiency, and solvency. Additionally, key financial statement details will be considered to support a lending decision.

Ratio Analysis and Interpretation

1. Current Ratio

Formula:

• CurrentRatio=CurrentAssets/CurrentLiabilities

Calculations:

• 2024:34,500/14,500=2.38
• 2023:33,000/14,000=2.36
• 2022:31,000/13,500=2.30

Interpretation: P&G's current ratio is consistently above 2.0, indicating strong liquidity. The company has more than twice the current assets to cover its short-term liabilities, which is favorable for a lender considering a short-term loan.

2. Accounts Receivable Turnover (Days to Collect)

Formula:

• DaystoCollectReceivables=365NetSales/AccountsReceivable365

Calculations:

• 2024:365/84000/5,500=23.9 days
• 2023:365/82,000/5,300=23.6 days
• 2022:365/80,000/5,100=23.3 days

Interpretation: P&G collects receivables in approximately 23-24 days, demonstrating consistent and efficient credit collection. This efficiency supports cash flow stability, crucial for sustaining loan repayments.

3. Inventory Turnover (Days in Inventory)

Formula:

• DaysinInventory=365COGS/Inventory

Calculations:

• 2024:365/45,0008/,500=68.9 days
• 2023:365/44,000/8,200=68.0 days
• 2022:365/43,000/8,000=67.9 days

Interpretation: P&G maintains inventory for approximately 68 days. This stability indicates effective inventory management and reduces the risk of stock obsolescence or cash flow disruption.

4. Cash Conversion Cycle (CCC)

Formula:

• CCC=DaysinInventory+DaystoCollectReceivables

Calculations:

• 2024:68.9+23.9=92.8 days
• 2023:68.0+23.6=91.6 days
• 2022:67.9+23.3=91.2 days

Interpretation: P&G's CCC remains stable at around 92 days, signifying effective cash management and operational efficiency. This strengthens their capacity to meet both short-term and long-term obligations.

5. Liabilities-to-Equity Ratio

Formula:

• Liabilities-to-Equity=TotalLiabilities/Shareholders'Equity

Calculations:

• 2024:51,000/62,000=0.82
• 2023:49,000/61,000=0.80
• 2022:48,000/59,000=0.81

Interpretation: The low and stable liabilities-to-equity ratio indicates that P&G uses minimal leverage relative to its equity. This low risk profile supports long-term lending decisions.

6. Times Interest Earned (TIE)

Formula:

• TIE=EBIT

Calculations:

• 2024:18,000/2,000=9.0
• 2023:17,000/1,900=8.95
• 2022:16,000/1,800=8.89

Interpretation: P&G's TIE ratio consistently exceeds 8, reflecting its strong ability to meet interest obligations. This solid interest coverage supports its creditworthiness for both short-term and long-term loans.

Lender's Analysis and Discussion for Procter & Gamble

Performance Based on Ratios

Liquidity (Current Ratio): P&G's current ratio remains consistently above 2.0 across the three-year period (2022-2024), indicating strong short-term liquidity. This demonstrates that the company has sufficient current assets to cover its short-term liabilities comfortably. Such a liquidity position minimizes the risk of default on short-term obligations, making it suitable for a short-term loan extension.

Operational Efficiency (Accounts Receivable Turnover, Days in Inventory, Cash Conversion Cycle):

• Days to Collect Receivables:P&G collects receivables within 23-24 days, reflecting efficient credit management.
• Days in Inventory:Inventory is managed efficiently, with an average turnover period of 68 days, indicating that the company does not overstock and converts inventory into sales effectively.
• Cash Conversion Cycle (CCC):A stable CCC of ~92 days reflects excellent coordination between receivables collection, inventory management, and cash flow generation. This operational efficiency ensures the availability of cash to support debt obligations.

Solvency (Liabilities-to-Equity and TIE):

• Liabilities-to-Equity Ratio:The low ratio of 0.8 suggests that P&G employs a conservative approach to leverage, relying more on equity than debt to finance its operations. This low debt load minimizes default risk for long-term creditors.
• Times Interest Earned (TIE):With a TIE ratio consistently above 8, P&G demonstrates its strong ability to cover interest expenses. This reduces the risk of liquidity stress during periods of financial strain, which is particularly critical for long-term lenders.

Importance of Ratios for Lending Decisions

Short-Term Loans: Ratios such as thecurrent ratioandcash conversion cycleare crucial for assessing the company's ability to generate sufficient cash flow to meet short-term obligations. P&G's liquidity and operational metrics highlight its ability to repay a short-term loan of $750,000 without undue risk.

Long-Term Loans: Theliabilities-to-equity ratioandTIEratio assess the company's financial stability and ability to meet interest obligations over the long term. P&G's low leverage and high interest coverage ratios make it a favorable candidate for a long-term loan of $7,000,000.

Additional Information to Consider

1. Cash Flow Statement: The operating cash flow provides direct insight into the company's ability to generate cash from core operations, which is vital for debt repayment.
2. Debt Maturity Profile: A review of the existing debt schedule would identify any upcoming large repayments that might strain the company's financial position.
3. Economic Environment: External economic factors, such as market demand for P&G's products and changes in consumer spending patterns, could impact the company's future cash flow.
4. Management Performance: Historical trends in management's financial decision-making and investment choices provide confidence in their ability to maintain the company's financial health.

Lending Recommendations

Short-Term Loan ($750,000): Based on strong liquidity (Current Ratio: 2.38) and efficient cash management (CCC: ~92 days), I wouldsupportextending the short-term loan. The company has sufficient current assets and operational efficiency to meet this obligation without significant risk to the lender.

Long-Term Loan ($7,000,000): P&G's low liabilities-to-equity ratio (0.82) and high interest coverage (TIE: 9.0) make it a low-risk candidate for long-term lending. Stable profitability, efficient operations, and prudent financial management further enhance confidence in the company's ability to repay long-term debt. Therefore, I would alsosupportthe long-term loan.

Conclusion

Procter & Gamble exhibits excellent financial health with strong liquidity, operational efficiency, and solvency. Its consistent performance across key financial ratios ensures minimal risk for lenders. Based on the analysis, I recommend extending both the short-term loan of $750,000 and the long-term loan of $7,000,000. These decisions are well-supported by the company's robust financial position and operational stability.

Explanation:

Case 1: Lending Decision Analysis for Procter & Gamble (P&G)

Introduction

As a lender, assessing Procter & Gamble's (P&G) financial stability is crucial to determining its ability to meet debt obligations. This analysis examines P&G's liquidity, efficiency, and solvency over three fiscal years (2022-2024) using six critical financial ratios and key financial statement insights. These findings guide lending decisions for both short-term and long-term loans.

Performance Based on Ratios

Liquidity Analysis:P&G's current ratio consistently exceeds 2.0, highlighting its strong liquidity position. This ratio confirms that P&G has sufficient current assets to cover short-term liabilities, minimizing the risk of default. For short-term loans, this liquidity metric is critical as it ensures the company can manage immediate financial obligations.

Operational Efficiency:Efficiency metrics such as accounts receivable turnover, days in inventory, and cash conversion cycle (CCC) illustrate P&G's strong operational performance. The company collects receivables within 23-24 days, efficiently managing credit. Inventory turnover at approximately 68 days demonstrates effective inventory control, reducing risks associated with obsolescence and cash flow bottlenecks. A stable CCC of ~92 days showcases excellent alignment between receivables collection, inventory management, and cash flow generation, reinforcing P&G's operational stability.

Solvency Analysis:The liabilities-to-equity ratio of ~0.8 reflects P&G's conservative use of debt, relying more on equity for financing. This low leverage reduces risk for long-term creditors. Additionally, a strong times interest earned (TIE) ratio consistently above 8 demonstrates P&G's ability to meet interest obligations, even under financial strain. These solvency metrics establish P&G as a reliable long-term borrower.

Importance of Ratios for Lending Decisions

For short-term loans, liquidity and operational efficiency metrics such as the current ratio and CCC are pivotal. P&G's strong liquidity ensures it can manage immediate cash requirements. For long-term loans, solvency ratios like liabilities-to-equity and TIE are critical. P&G's low leverage and solid interest coverage provide assurance of its ability to handle long-term debt obligations.

Additional Considerations

Key financial disclosures such as the cash flow statement, debt maturity schedule, and external economic factors further inform lending decisions. Evaluating these elements provides a comprehensive understanding of P&G's financial health and its resilience to external challenges.

Lending Recommendations

Short-Term Loan:P&G's liquidity and operational efficiency strongly support extending a short-term loan of $750,000. Its current assets and stable cash flow mitigate risk for lenders.

Long-Term Loan:P&G's robust solvency ratios and consistent profitability endorse a long-term loan of $7,000,000. The company's financial stability and prudent management provide confidence in its ability to honor long-term debt commitments.

Conclusion

Procter & Gamble's strong liquidity, efficiency, and solvency metrics make it a low-risk borrower. Based on this analysis, both short-term and long-term loans are recommended, supported by the company's robust financial health and operational stability.