Comprehensive Financial Analysis: Colgate Palmolive Inc.

Introduction
Colgate Palmolive Inc is a publicly held company engaged in the manufacture and marketing of
consumer products worldwide. The company was founded in 1806 and has its registered office located
in New York, USA. It is a leading manufacturer of oral care products and toothpaste. The company
operates in two segments : Oral, Personal and Home Care, and Pet Nutrition. The Oral, Personal, and
Home Care segment offers toothpaste, toothbrushes, mouth rinses, dental floss, and pharmaceutical
products for dentists and other oral health professionals; shower gels, shampoos, conditioners,
deodorants, liquid hand soaps, dish washing liquids, household cleaners, oil soaps. The Pet Nutrition
segment produces pet nutrition products for dogs and cats. The company sells its products to wholesale
and retail distributors, and to veterinarians and specialty pet retailers. Its products are marketed under
the Palmolive and Colgate brands. It operates in more than 70 countries, and its stock is traded on the
New York Stock Exchange under the symbol CL.

No major part of Colgates business depends on a single customer.

During the year ended December 31, 2010, the revenues of Oral, Personal and Home Care products
accounted for 43%, 22% and 22%, respectively, of its total revenues. During 2010, the revenues of Pet
Nutrition products accounted for 13% of the Company's total revenues.

Sales Profile

13%
Oral
43% Personal Care
22%
Home Care
Others
22%

Fiscal year 11 has been successful for Colgate Palmolive, and the corporate goals concerning earnings,
returns and cash flows were met. The product portfolio gives it a strong position to continue its solid
financial performance. It gives Colgate an opportunity to look for introduction of new product lines,
while continuing to focus on its core strength of oral care.
Preliminary Analysis of Financial Statements
Growth rates for important financial measures, annually compounded are calculated for Colgate
Palmolive.

Colgate's Five-Year Growth Rates

Equity

Dividends

CAGR
Net Income

Sales

0.00% 5.00% 10.00% 15.00% 20.00%

The rates are computed for a five year period. As we can see the growth in Sales is only 6.43% compared
to an increase in Net Income of 11.35%. This suggests better management of operations by Colgate
resulting in an improvement of its bottom line. It could also suggest better management of its finances
and a higher interest income. The dividends grew at 11.48%, while the Net Income grew at 11.35%,
suggesting similar growth rates. This shows that Colgate has a fairly stable dividend payout ratio,
suggesting the Colgate Palmolive is a large, mature and stable company.

The cash flows from operating activities for Colgate show a healthy trend, with a constant increase from
2006 (1821500) to 2009 (3277000). The slight decrease in the operating cash flows in 2010 can be
attributed to the Payables/Accruals.
 Cash from Operating Activities
2006

2007

2008 Cash from Operating

Activities
2009

2010

1,000,000 2,000,000 3,000,000 4,000,000

To calculate the earnings quality of Colgate, its Cash flow from operations/Net Income ratio was
calculated.

Earnings Quality
1.6
1.4
1.2
1
0.8
0.6 Earnings Quality

0.4
0.2
0
2010 2009 2008 2007 2006

The trend suggests that Colgate has a high earnings quality ratio of greater than 1, over the previous 5
years. Apart from a decrease in earnings quality in 2008, it has remained fairly stable. This indicates
Colgates financial strength and operating performance.
Short Term Liquidity

2010 2009 2008 2007 2006

Current Ratio 1.000536 1.058627 1.256222 1.144117 0.951544
Quick Ratio 0.672747 0.722701 0.850879 0.773864 0.660863
Accounts Receivables
Turnover 9.667081 9.426199 9.630002 8.204915 8.034204
Inventory Turnover 12.7365 12.67742 12.80595 11.77626 12.13576
Days Sales in Receivables 37.757 38.72186 37.90238 44.48553 45.43076
Days Sales in Inventory 28.6578 28.79135 28.50238 30.99456 30.0764
Approximate Conversion
Period 66.4148 67.51321 66.40476 75.48009 75.50716
Cash to Current Assets 0.131367 0.15748 0.149569 0.118475 0.148288
Cash to Current Liabilities 0.131438 0.166713 0.187892 0.135549 0.141103

The Current Ratio for Colgate is fairly healthy at more than 1 for the past 4 years. This suggests high
liquidity of its assets. The Quick ratio however decreased from 0.72 (in 2009) to 0.67 (in 2010). This
suggests that a greater part of its current assets are locked up in its inventory in 2010.

Colgate has a good and fairly stable accounts receivables turnover and the inventory turnover ratios.
These ratios suggest that Colgate is efficient at managing its operations, and has a good cash conversion.

The cash to current assets, and cash to current liabilities ratios measure the ability to pay its short term
obligations. The Cash to current asset ratio for Colgate is 13.13% which is very good compared to an
industry average of 5.6%.

Overall Colgate has good short term liquidity.

Capital Structure and Solvency

For Colgate, 43% of its assets are financed through long term debt. Shareholders equity consists of only
24% of its total financing. Its current liabilities of 33% consist mainly of the part of the long term debt
which is due for payment in the next year.
 Colgate's Financing Sources

24% Total Current Liabilities

33%

Non Current Liabilities

Total Shareholders
Equity
43%

Capital Structure and Solvency

Ratios 2010 2009 2008 2007 2006
Debt to Equity 3.176448598 2.573170732 4.191873 3.4230601 5.476717
Long term debt to Equity 1.782803738 1.418164313 2.655377 2.03967282 3.017932
Current Liabilities to Total Liabilities 0.438743086 0.448865054 0.366542 0.404137596 0.448952

The high debt equity ratio of 3.17, in 2010, shows that Colgate has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest expense. This
may also lead to the violation of certain debt covenants, making future debt financing, and borrowing
from creditors difficult.

Its long term debt to equity is smaller at 1.78 suggesting the presence of a high proportion of current
liabilities to total liabilities.

Overall Colgate is highly leveraged and it relies on debt much more than equity financing to raise capital.

Return on Invested Capital Advanced Dupont Analysis

ROIC Ratios
2010 2009 2008 2007 2006
RNOA 0.302612 0.320971 0.288552 0.278662 0.252421
ROCE 0.804331 0.750272 1.009972 0.824747 0.938904
Return on Long Term debt and
equity 0.454812 0.511654 0.377946 0.366494 0.311109
Equity growth rate 0.438131 0.448331 0.588939 0.432158 0.478843
Disaggregation of RNOA 2010 2009 2008 2007 2006
NOPAT margin 0.145502 0.153096 0.132374 0.127926 0.117325
NOA Turnover 2.092498 2.035729 2.161514 1.977585 2.151475
RNOA (margin x turnover) 0.304464 0.311662 0.286129 0.252985 0.252421

LEGEND

NOA Net Operating Assets

Total Assets - Operating Current Liabilities - 1/2 x Deferred Tax Liabilities considering
operating

Operating Current Liabilities = Total Current Liabilities - Other Short Term Debt

SE Stock Holders Equity

NFO Net Financial Obligations
NFO = NOA - SE

NOPAT Net Operating Profit After Tax

NOPAT = EBIT (1-tax)

NI Net Income
NFE Net Financial Expense
NFE = NOPAT - NI

RNOA Return on Net Operating Assets

RNOA = NOPAT/Average NOA

LEV Financial Leverage

LEV = NFO/SE

NBC Net Borrowing Costs

NBC = NFE/Average NFO

Spread RNOA - NBC

ROE Return on Equity

RNOA + (LEV x Spread)

Equity growth rate

(Net Income - Dividends paid)/Average common equity

The ROCE for Colgate decreased slightly to 0.75 in 2009 from 1.009 in 2008, but has now recovered to
0.804 in 2010.

The ROCE consists of two components: Operating Return (RNOA), and Non-Operating Return
(Leverage and Spread) and we will analyze them one by one.
 Disaggregation of ROCE 2010 2009 2008 2007 2006
RNOA 0.302612 0.320971 0.288552 0.278662 0.252421
LEV 1.780561 1.416239 2.689844 2.050105 3.031505
Spread 0.281775 0.303127 0.268201 0.266369 0.22645
ROE (RNOA + LEV x Spread) 0.804331 0.750272 1.009972 0.824747 0.938904

The high ROE is due to its high leverage which is greater than 1. The leverage was even higher in 2006
and 2007, but Colgate has reduced it slightly. Because of the positive spread this high leverage helps
Colgate maintain a high ROE. However it also poses risk of solvency to Colgate, as was seen earlier in its
capital structure.

The RNOA is operating part and consists of the following components.

Disaggregation of RNOA 2010 2009 2008 2007 2006

NOPAT margin 0.145502 0.153096 0.132374 0.127926 0.117325
NOA Turnover 2.092498 2.035729 2.161514 1.977585 2.151475
RNOA (margin x turnover) 0.304464 0.311662 0.286129 0.252985 0.252421

The RNOA has been increasing steadily from 0.25 (in 2006) to 0.3 (in 2010), suggesting efficient
management of operations by Colgate. The RNOA is composed mainly of the NOPAT margin and the Net
Operating Asset Turnover.

The NOPAT margin has been increasing from 0.117 (in 2006) to 0.15 (in 2009). This indicates the high
profitability and operating management.

The NOA Turnover is effected by the activity ratios, and indicates the investment management. It is
fairly stable at around 2.

Analysis of Asset Utilization

Colgates asset utilization measures are reported in the table below.

Asset Utilization Ratios 2010 2009 2008 2007 2006

Sales to Cash and equivalents 31.76 25.55 27.63 32.17 25.00
Sales to receivables 9.67 9.43 9.63 8.20 8.03
Sales to inventories 12.74 12.68 12.81 11.78 12.14
Sales to fixed assets 2.09 2.09 2.45 2.12 2.10
Sales to total assets 1.39 1.38 1.54 1.36 1.34
Sales to short-term liabilities 4.17 4.26 5.19 4.36 3.53

The cash and equivalents turnover ratio indicates the firms efficiency in its use of cash for generation of
sales revenue.
Colgates cash and equivalent turnover is fairly volatile with an increase or decrease in each alternate
year.

There is an improvement in the receivables turnover from 8.03 (in 2006) to 9.67 (in 2010). The slight
decrease in 2009 to 9.43 can be attributed to the effect of recession in the economy. During this period
most firms give more flexibility to the debtors, so that their sales do not suffer.

The inventory turnover ratio has increased from 12.68 (in 2009) to 12.74 (in 2010). This can be
attributed to Colgates policy of increasing customer satisfaction by reducing stock-outs and keeping
larger inventory buffers and safety stocks. However Colgate can improve its profitability and also its
operating cycle by focusing on its operational efficiency at every stage of its manufacturing process.

Analysis of Profitability

18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
Sales
8,000,000
6,000,000 Cost of Sales
4,000,000
2,000,000

2010 2009 2008 2007 2006

Colgates Sales vs Cost of Sales growth comparison shows that Colgate has maintained fairly healthy
gross profit margins over the five year period. For the last 2 years, its sales have been fairly constant,
and the Cost of goods has decreased marginally from the 2008 levels. This can again be attributed to the
macroeconomic conditions of the economy post recession in 2008.

The various profitability ratios for Colgate are given below:

Profitability Ratios 2010 2009 2008 2007 2006

Profit margin (%) 22.04 23.08 19.6 18.59 16.36
Gross margin (%) 59.14 58.77 56.65 57.3 56.37
EBITDA margin (%) 22.56 23.8 20.49 19.81 18.18
The gross profit margin has been increasing steadily from 2006 to 2010, because of a decrease in the
cost of goods. This shows the growing bargaining power of Colgate and use of efficient procurement
procedures.

The profit margin also, has increased from 2006 (16.36) to 2010 (22.04). This shows that company has
good management of its other expenses apart from labor and raw materials like interest expense, selling
and administrative expense, and the depreciation or amortization charges.

The operating profit margin has also increased steadily from 2006, apart from the decline in 2010 (from
23.8 to 22.56). This shows the efficient operations management of Colgate Palmolive.

Forecasting and Valuation

The final step in the analysis process is forecasting future financial performance. This depends
to a large extent on the analysts perspective. For example, if the perspective is that of Colgate
Palmolives creditors, we are interested in forecasts of future cash flows, either short term or
long term depending on the length of the credit arrangement. As we saw from the analysis of
its solvency and capital structure, creditors will not give a positive view about debt lending to
Colgate Palmolive, or will charge very high interest rates.

If the perspective of analysis is that of an equity investor, then we are interested in the
companys ability to realize the benefits of its strategic plan. The focus is on whether the
company can generate positive residual profits in the future.