DaysPayable OutstandingProcter & Gamble (P&G), the world’slargest consumer packaged goods (CPG) company, announced in April 2013, that itwould extend its payment terms to suppliers by 30 days and on July 1, 2013, it implemented a new standardpayment terms policy to harmonize their terms to a global standard of minimumnet 75 days for all their External Business Partners (EBP) wherelegally allowed. By this increase in the time it takes to pay its suppliers from 45 daysto 75 days can free up to $2 billion in cash as reported by the Wall StreetJournal which will gave it a competitive advantage and helped improve itsperformance compared to its competitors. Below table shows the days payable ofits competitors.
Comparing the Days payable outstanding of Procter and Gamble with its competitorin the above table, we can observe that the DPO of Procter and Gamble is goodcompared to its competitor Colgate Palmolive which is 69.83. It is bettercompared to most of its competitor except its competitor Coty Inc which has186.65 days payable outstanding which indicates that Procter and Gamble is in agood position compared to its competitors but still has the room forimprovement.After increasing of the DPO by P,it could use that cash to fund investments in new factories overseas or to helppay for stock buybacks which will give it competitive advantage compared to itscompetitors. Cash Conversion Cycle (CCC) is a measure that tells how fasta company can convert cash on hand into even more cash on hand. This metric takesinto consideration the amount of time needed to sell inventory, the amount oftime needed to collect receivables and the length of time the company isafforded to pay its bills without incurring penalties.
The lower the number is,the better it is for the company. The company with the lowest CCC is often theone with better management. Decreasing or steady CCCs are good. The followingtable compares the cash conversion cycle of Procter and Gamble with its competitors.
Metrics considering the three months ended in Sept. 2017 Procter and Gamble Co. Colgate-Palmolive Co.
Days Sales Outstanding 27.08 35.13 Inventory days of supply 53.49 68.
94 Days Payable outstanding 104.88 66.76 Cash Conversion Cycle – 24.
31 37.31 Procter and Gamble Co.has the cash conversion cycle of -24.31whereas its competitor Colgate Palmolive Co.
‘s has 37.31 which indicates thatthe management and health of Procter and Gamble Co. supply chain is better thanColgate-Palmolive Co. Also the cash conversion cycle of Procter and Gamble was12.
6, positive in 2013 which became -3.5 in 2015 and still reduced to -24.31 in2017 which is a good improvement in just 2 years. Its negative shows that the DPO (Days Payable Outstanding) ishigher than the total DOS (Inventory days of supply) and DSO (Days SalesOutstanding). The more negative cash conversion cycle, the better. The higherDPO indicates that Procter and Gamble Co. does not makes payments to its suppliers immediately after receiving thematerial and the negative cash conversion cycle indicates that this availablecash is utilized in production operations generating more revenue before payingit to the suppliers.
The shorter cycle compared to Colgate-Palmolive tells thatProcter and Gamble Co. holds cash for alonger period of time than Colgate-Palmolive which gives more opportunities toProcter and Gamble Co. to invest in production operations giving competitiveadvantage over Colgate-Palmolive. Inventoryturnover is a measure of thecompany’s ability to flip its products for cash. A low turnover means weak sales andhence excess inventorywhereas a high ratio impliesstrong sales. Inventory turnover versus peersWe can say from the above graph that the inventory turnover metric forP for fiscal 2015 came in at 6.
4x, which was the highest among peers, dueto increases in sales for all product segments except the beauty segment. Itscompetitors Estée Lauder (EL) andColgate-Palmolive (CL) reported inventory turnover metricsof 1.7x and 5.1x, respectively, in fiscal 2015 which is significantly lowercompared to Procter & Gamble. Revenue GrowthRateThe revenuegrowth of 5.5% in 2012 to 13.
7% in 2015 whichis a significant increase of 8.2% increase in just 3 years which might be -7.97%decrease in 3 years starting from 2012 to 2015 which shows that procter andGamble is at a much better position compared to its competetors in terms ofrevenue growth rate.COGS (Landed cost) COGS (Landed cost) 2013 2014 2015 2016 2017 Procter and Gamble Co. 41.04B 40.
61B 36.44B 32.19B 31.94B Colgate-Palmolive Co. 7.17B 7.2B 7.17B 6.
66B 6.06B The following table shows that there is 22.17% reduction in COGS (Landed cost) within 5 years for Procterand Gamble and is also continuously decreasing whereas of its biggest competitorit is 15.48 % in five years which means that Procter is able to manage itssupply chain better than its competitors which is a good sign. This decrease inCOGS may be because of its supply chain finance program which helped inbuilding good relationship with its suppliers and hence reduce the overallcost.
Gross Profit MarginAlso the gross profit margin has increased from 15.2% in 2012to 31% in 2015. The current net profit marginfor Procter & Gamble as of 2017 is 50.59%.whereas Colgate-Palmolive has gross profitmargin of 59.96%.
But we can see from the past data that it’s in increasingtrend so it will easily go ahead of its competitors in terms of gross margins. Reference:Lecture videoshttps://www.gurufocus.com/term/CCC/PG/Cash-Conversion-Cycle/Procter–Gamble-Cohttps://www.marketwatch.com/investing/stock/cl/financials https://www.reuters.com/article/us-procter-suppliers/pg-taking-longer-to-pay-suppliers-offers-financing-idUSBRE93G14Z20130417 https://www.gurufocus.com/term/CCC/CL/Cash-Conversion-Cycle/Colgate-Palmolive-Cohttp://www.hbs.edu/faculty/Pages/item.aspx?num=51013http://marketrealist.com/2015/09/pgs-fabric-care-businessa-global-leader/