Financial analysis of the company

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FINANCIAL ANALYSIS OF THE COMPANY

1. Some words about the company profile

• Type of entity: Corporation
• Legal form: Public limited company
• The sector of the form is Chemicals, Petroleum, Rubber & Plastic
• Products & services it offers: Cosmetics and skin-care products
• Contacts: +33147567000; 14, Rue Royale, 75008 PARIS, France
• Date of incorporation: 1907

          (Here you can see the contacts and the date of incorporation, which is 1907)

1. Now let us move to the balance sheet analysis

 Since L´Oreál is not a manufacturing company, it has no raw materials or WIP in the balance sheet. Nor does it have such assets as land and transportation.

ASSETS & LIABILITIES:

• Total assets (as measured by the percentage of 2011 base year) have a growth tendency. This increase in the assets, obviously, means that the company is expanding. Let us consider the balance sheet of the last available year (2020) and try to figure out the strategy and the market position of the company.
• Fixed Assets (FA) comprise 67% of the total assets, which is more than a half, so the amount of investment is sufficient.
• Working capital = 3,430,000, so a firm is able to fund day-to-day expenses without compromising on asset investment. In other words, no problems in the short term.
• Long-Term Capital (Shareholders funds + non-Current Liabilities) is higher than the Fixed Assets. It is a safe strategy for a company, as it does not need too much current liabilities to finance its fixed assets. Analysing the balance sheet over last 9 years, we can conclude that L´Oreál tries to maintain a 1:1 (one-to-one) ratio between LTC and FA.

 CREDIT & COLLECTION PERIODS (AR&AP):

• There is 1.53 months of sales in the account receivable ⬄ collection period is 46. This is close to the industry average number (48). However, to judge a company´s performance, we should also take into account the credit period:
• There are 2 months´ sales in the account payable ⬄ credit period is 61 day. As 46<61, we understand that the company collects money earlier than it comes time to pay, so it has enough liquidity to cover the expenses.

 In regards of INVENTORY management,

• Inventory turnover of a firm is 2.3, lower than the industry ‘standard’ (3.1). Inventory remains with firm before being sold for 101 day, opposed to the average of 120. Hence, we see that L´Oreál has much liquidity tied to the inventory and sells it faster than competitors. This means that the company should avoid a shortage of inventory, as otherwise it would determine lost sales.

Those ratios bring us to the Income statement of a firm.

1. Profit&Loss statement analysis

 Taking a quick look at the end of a P&L account, it may be concluded that a firm is doing good (as we see a great profit of 3.653.400 th EUR and not a loss). Nevertheless, in order to understand how L´Oreal has been improving, it is relevant to see the evolution over years.

The sales of the company had been growing continuously until the 2020, but that is well explained by the CoVid19 crisis. L´Oreal was not the only company whose sales fell in the last year, the pandemic affected the whole sector. To compare let us consider the graphs of the closest competitors – Colgate Palmolive and Beiersdorf AG. Evidently, both firms suffered decreased sales in 2020.

Then we would like to investigate the relative performance of the firm.

1. Peer comparison

The following figure represents some important indicators of L´Oreál (Shareholder’s capital, TA, Operating revenue and Net income) comparing to the closest competitors of the market. Here are the tables we elaborated to then visualise a relative performance of the company.

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