The Clorox Company (CLX), Colgate-Palmolive Company (CL): Is The Procter & Gamble Company (PG) a Cash King?

All these companies have solid brands for products consumers rely on, such as toothpaste, laundry soap, and cleaning supplies. Because consumers have a limited ability to cut out these expenses, these companies tend to fare better than others during economic downturns. However, the fact that investors are drawn to these types of stocks during tough times has resulted in valuations that are not as attractive as they used to be. Also, the consumer goods industry doesn’t tend to offer the same massive growth you might see in other areas.

The Procter & Gamble Company (NYSE:PG) has managed to improve productivity and cut costs, which has allowed it to improve its gross margins. Also, in response to pressure from investor Bill Ackman, the company is looking to improve its pipeline of new products. Colgate has taken advantage of its expansion into emerging markets — particularly Latin America — and while its growth there has slowed due to global economic pressures, its wide margins have allowed it to bear the brunt of increased raw materials costs better than some of its competitors. Church & Dwight’s ability to offer both solid growth and growing dividends makes it stand out comparatively. It has also been able to return money to shareholders through stock buybacks. However, Church & Dwight has faced pricing pressure related to its laundry products price war with The Procter & Gamble Company (NYSE:PG), which puts Church & Dwight in a precarious position due to its much smaller size.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash — but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The article Is Procter & Gamble a Cash King? originally appeared on Fool.com and is written by James Royal.

Jim Royal has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble.

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