Module 09 Course Project - Stock Performance and Equity Investments

Ratio Analysis for L’Oreal SA and Avon Products Inc.

Name: Rodney Wheeler

Instructor: Latricia Roundtree

Course: B230/FIN1000

Date: 08/28/15

Ratio Analysis

Ratio analysis is a tool that is used to determine the financial strength or the financial weakness of an organization (Drake & Fabozzi, 2010). Below is an analysis of 2014 financial statements for L’Oreal SA and Avon Products Inc. Computations are available in an excel work sheet attached.

Current Ratio: This ratio show the ability of the company to pay back its liabilities using its current assets and a ratio under 1 means the company is unable to pay its liabilities. The ratio of L’Oreal SA is 0.9456 meaning the company’s liabilities are slightly higher than the assets therefore it’s not in good financial condition. Avon's company assets can meet its liabilities as its ratio is more than one.

Quick Ratio: This ratio measures the company’s ability to meet its liabilities using its liquid assets. It excludes inventory as it cannot be quickly converted to cash. A higher quick ratio indicates that the company is in a good liquid position. L’Oreal has a low liquidity and its cash cannot pay all its liabilities. Avon has a high liquidity and its cash can pay its liabilities.

Inventory Turnover: A low turnover indicates poor sales. Both companies have a high turnover meaning they do not experience costs of unsold stock. Avon products have higher sales with a turnover of 10.48 while L'Oreal has 9.95

Fixed Asset Turnover: This ratio shows the ability of the company to generate sales using its fixed asset. L'Oreal has a high asset turnover of 21.43 meaning it is able to utilize few assets to generate more sales. Avon has a low turnover meaning a lot of its assets are not effectively utilized to generate sales or it could have overinvested in fixed assets.

Total Asset Turnover: This ratio also measures the efficiency of the company in utilizing its assets and the higher the ratio the better the company’s performance. Avon has a higher asset turnover of 0.4 than L’Oreal with 0.2.

Gross Profit Margin, Operating Profit Margin and Net Profit Margin

These ratios measure the ability of the company to generate profits from its sales. Both companies have very high gross profit margins of 71% and 62 % for L’Oreal and Avon respectively meaning their sales can generate profit. Operating Profit margin shows the efficiency of the company in generating profits before deducting tax while the net profit margin excludes interest and tax. L’Oreal has a high Operating profit margin and net profit margin of 14% and 21% meaning the company is operating efficiently. Avon has low margins of 4%

Return on Assets: This ratio measures the ability of the company to effectively use its assets to generate income. Avon Products has a low return on assets of 7% meaning its assets are not fully exploited while L’Oreal has a higher return on assets of 15% meaning it utilizes its assets to generate more income.

Return on Equity: It measures the ability of the firm to generate profits from shareholders investments. The firms have low return to equity meaning the shareholders investments are not generating adequate profits.

Debt/Net Worth: This ratio indicates the percentage of company financing that comes from creditors and investors. Avon has a high ratio meaning it has more creditors financing than equity. L’Oreal has more equity financing.

Debt Ratio: This ratio indicates the company's ability to pay off its liabilities with its asset. Avon is more leveraged and therefore considered as risky by lenders since it has a high ratio of 0.9

Times-Interest-Earned: Both companies have the ability to meet their debt obligations but L’Oreal has very high TIE meaning it has an undesirable lack of debt or it is paying down too much of its debt with earnings that could be used for other projects.

Reference

Drake, P. P., & Fabozzi, F. J. (2010). Financial ratio analysis. Handbook of Finance.

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