Page 45 - Financial Statement Analysis

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22 Financial Statement Analysis

Exhibit 1.6 Colgate’s Consolidated Statements of Income

For the years ended December 31, 2006 2005 2004
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,237.7 $11,396.9 $10,584.2
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,536.1 5,191.9 4,747.2
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,701.6 6,205.0 5,837.0
Selling, general and administrative expenses . . . . . . . . 4,355.2 3,920.8 3,624.6
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . 185.9 69.2 90.3
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,160.5 2,215.0 2,122.1
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 158.7 136.0 119.7
Income before income taxes . . . . . . . . . . . . . . . . . . . . 2,001.8 2,079.0 2,002.4
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . 648.4 727.6 675.3
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,353.4 $ 1,351.4 $ 1,327.1
Earnings per common share, basic . . . . . . . . . . . . . . . . $ 2.57 $ 2.54 $ 2.45
Earnings per common share, diluted . . . . . . . . . . . . . . . $ 2.46 $ 2.43 $ 2.33

earnings have been stagnant during these three years despite a healthy increase in rev-
enues, suggesting that the company is still struggling to keep its costs under control.

Statement of Shareholders’ Equity
The statements of retained earnings, comprehensive income and changes in capital
accounts are often called the statements of changes in shareholders’ equity. (In this
section, we will use the title statement of changes in shareholders’ equity). This state-
ment is useful in identifying reasons for changes in equity holders’ claims on the assets
of a company. Colgate’s statement of changes in shareholders’ equity for the most re-
cent year is shown in Exhibit 1.7. During this period, shareholders’ equity changes were
due mainly to the issuing stock (mainly related to employee stock options), repurchas-
ing stock (treasury shares) and reinvesting earnings. Colgate details these changes under
five columns: Common Shares, Additional Paid-in Capital, Treasury Stock, Retained
Earnings, and Accumulated Other Comprehensive Income (Loss). Common Shares
and Additional Paid-In Capital together represent Contributed Capital and are often
collectively called share capital (many analysts also net Treasury Stock in the computa-
tion of share capital). The change in Colgate’s retained earnings is especially important
because this account links consecutive balance sheets through the income statement.
For example, consider Colgate’s collective retained earnings increase from $8.968 bil-
lion in 2005 to $9.643 billion in 2006. This increase of $0.675 billion is explained by net
earnings of $1.353 billion minus dividends of $0.678 billion. Because dividends almost
always are distributed from retained earnings, the retained earnings balance often rep-
resents an upper limit on the amount of potential dividend distributions.
Colgate includes a separate column for comprehensive income. Comprehensive in-
come is a measure of the ultimate “bottom line” income, that is, changes to shareholder’s
equity excluding transactions involving exchanges with shareholders. Colgate’s 2006
comprehensive income is $1.458 billion. In addition to net income, comprehensive in-
come includes certain adjustments classified as other comprehensive income. The two