Proctor and Gamble - Historical Performance Summary

ROIC

(1-T)*(EBITA/Revenue)*(Revenue/Invested Capital)

By disaggregating the formula, we can break it down to show ability to maximize profit (EBITA/Revenue), and ability to optimize capital turnover (Revenue/Invested Capital). In 2006 we see a sharp decline in ROIC, based on the big increase in Goodwill & Other Intangibles from 05'-06. Through 2010, ROIC remains relatively constant. For example, the Operating Margin stays within the range of .194-.202. Capital Turnover, from 07'-10' is also relatively constant, staying within a range of .722-.789.

Historical Performance Summary

P&G generated an economic profit in each of the most recent 5 years. We see that investor funds have increased each year from 05'-08'. It has decreased from 08'-10'. NOPLAT follows a similar pattern except from 09'-10', where we see a few hundred dollar increase. There was a decrease in net working capital of about 60% from 09-10' and would help explain why investor funds was less in this year. This change in net working capital also explains the roughly 50% increase in free cash flows for 2010.

P&G earns well above its' required return of 8% over each of the five years. This is generating value for the company. In 2009, ROIC declined, but was still above the required 8%, thus value was still created. Gross cash flow (cash flow from operations) increased every year except 2009. The increase in working capital and capital expenditures would help explain this.

We used the constant growth formula and NOPLAT as a proxy for FCF. The growth rate was calculated by taking the average percentage revenue growth over the past five years. That number was 7.11%. We then discounted each FCF at WACC, with year 2013 including the cash flow and previously calculated Continuing Value. This allowed us to calculate Enterprise Value. The current ST debt was then added to current LT debt, and subtracted from Enterprise Value to get Economic Value.

We came up with an Equity Value of 1,396,335 (in millions). This number is obviously quite large, and driven by the use of the 7.11% constant growth rate. We know that no company can grow at this rate in perpetuity, and that larger companies' growth rates have the propensity to become somewhat stagnant. To match with the 2010 Actual Value of roughly $170 billion (as of 6/30/2010 Market Cap on Balance Sheet), we would need to use a growth rate of around .10%. Again, this would be using the constant growth formula. Calculations are shown on the same tab as the previous calculations. This would seem more realistic for a company the size of P&G.