Financial Statement Analysis: L'Oreal Company Performance Report

This report provides a comprehensive financial analysis of L'Oreal, utilizing financial ratios to assess the company's performance over a three-year period. The analysis includes calculations and evaluations of liquidity ratios, debt management ratios, profitability ratios, asset management ratios, and market value. The report compares L'Oreal's performance with that of Estee Lauder, serving as a benchmark, and employs both cross-sectional and time-series analysis to identify trends and insights. The findings reveal L'Oreal's strengths and areas for improvement, offering a detailed understanding of its financial health and market position. The report adheres to the assignment brief's requirements, ensuring a focused and informative analysis based on financial statement data.

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Business finance

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Table of Contents
Introduction................................................................................................................................3
Types of ratios............................................................................................................................3
Cross-sectional analysis.........................................................................................................3
Time series analysis...............................................................................................................3
Combination of cross-sectional and time series.....................................................................3
Ratios analysis............................................................................................................................3
Liquidity ratios.......................................................................................................................4
Debt management ratios.........................................................................................................4
Profitability ratios...................................................................................................................5
Asset management ratios........................................................................................................5
Market value...........................................................................................................................6
Conclusion..................................................................................................................................6
References..................................................................................................................................7
Appendix....................................................................................................................................8

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Introduction
The ratio is the technique that is used in the business by which the proper analysis is made for
the evaluation of the position of the company and performance which is maintained. This will
be performed with the help of the information which is available in the financial statements
and they will be required to be collected in an appropriate manner. There are various forms of
analysis which include cross-sectional and time series analysis and the discussion about them
will be provided in the report.
Types of ratios
The ratio analysis is performed in various ways and they are described below with the proper
calculations to create the proper understanding.
Cross-sectional analysis
This is the type of analysis in which there will be a comparison of ratios among various
entities (Innocent et al., 2013). In this, the performance of one company will be compared
with its competitor to analyze the position in the market.
Time series analysis
Under this method, the calculation is made for the single company for a time period and the
trend which is involved is identified to ascertain the changes in performance and position of
the business.
Combination of cross-sectional and time series
This approach is used when the different companies are compared with each other over a
time duration. In this, the changes across time are considered and used for decision-making
purposes.
Ratios analysis
The calculations which are made for both the companies which include L'Oreal and Estee
lauder in relation to the time period of three years are represented below.

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Liquidity ratios
Liquidity
ratio:
L’Oreal
company
Estee lauder
Particulars Formula 201
6
201
7
201
8
201
6
201
7
201
8
Current ratio Current assets/current liabilities 1.0
9
1.2
0
1.2
3
1.5
8
1.7
6
1.8
6
Quick ratio Current assets – Inventories / Current
liabilities
0.8
0
0.9
3
0.9
5
1.1
0
1.2
3
1.3
7
The current and quick ratio helps in determining the liquidity position of the company. There
are various liabilities that are required to be met in the coming period and that ability of the
business is analyzed in this section (Babalola & Abiola, 2013). It can be noted that both ratios
are increasing with time. The current ratio reached from 1.09 to 1.23 and the quick ratio
raised from 0.80 to 0.95 in the case of L'Oreal. This shows the company is performing well
and will be maintaining its liquidity. If L'Oreal and Estee lauder is compared then the
performance of Estee lauder is better as there are higher ratios in this company which makes
it stronger in the market and improvement is required to be made in L'Oreal (Estee lauder,
2017).
Debt management ratios
Debt management ratios L’Oreal company Estee lauder
Particulars Formula 2016 2017 2018 2016 2017 2018
Total debt to
assets
liabilities / assets 0.31 0.30 0.30 0.61 0.62 0.63
Time interest
earned
EBIT / interest 144.7
0
123.9
4
138.7
2
21.9
0
15.7
0
16.0
3
Cash coverage
ratio
EBIT + depreciation /
interest
152.2
0
128.7
2
144.3
4
27.7
5
20.2
0
19.4
0
In the business, there are various debts that are involved and they are required to be managed
in an adequate manner. There is a decline in debt to asset ratio from 0.31 to 0.30 and this is
beneficial as interest expense will be reduced. There is proper cash coverage and interest
earned ratio which is managed and it is good for the company. In comparison to L'Oreal the
other company is weak in managing its debts and is also having higher debts which will
create trouble for the company in the coming period (Estee lauder, 2018).

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Profitability ratios
Profitability
ratios
L’Oreal company Estee Lauder
Particulars Formula 2016 2017 2018 2016 2017 2018
Net profit margin net income/sales 12.38
%
14.70
%
14.48
%
9.90% 10.56
%
8.10%
Returns on assets net income /
assets
8.65% 10.83
%
10.14
%
12.09
%
10.80
%
8.82%
Returns on equity Net income /
Equity
12.58
%
15.41
%
14.48
%
31.08
%
28.37
%
23.52
%
The profitability of the business shall be managed adequately and for that profitability ratios
are determined (Delen et al., 2013). There is an increase in profitability over time in L'Oreal
as the net profit margin is increasing from 12.38% to 14.48% in a span of three years (L'Oreal
finance, 2018). The return which is made on equity and assets is also rising with time. Estee
Lauder is making the required earnings but is weak in comparison to L'Oreal as there are
lower margins which are maintained and moreover there is a declining trend which is
identified in the same.
Asset management ratios
Asset management ratios L’Oreal company Estee lauder
Particulars Formula 201
6
201
7
201
8
201
6
201
7
201
8
Inventory turnover sales / inventory 9.23 10.4
3
9.55 8.91 7.99 8.46
Days sales
outstanding
account receivable /
(Sales/365)
57.7
4
55.0
3
53.9
7
40.7
7
43.0
6
39.6
7
Fixed asset
turnover
assets/PPE 9.48 9.90 10.6
1
5.83 6.92 6.89
All of the assets which are involved in the company are required to be managed in an
efficient manner so that overall performance can be improved. For this asset management
ratios are identified. The inventory turnover is identified and there are various fluctuations
that are involved in the same. The day’s sale outstanding is declining from 57.74 days to
53.97 days and this shows the efficiency of management (L'Oreal finance, 2018). The fixed
asset turnover is also increasing which helps in creating better benefits for the company. The
calculations for Estee lauder are made and it can be noted that there is better sales collection
in the company and the duration of the collection is also declining which is good. In respect
of other ratios there is lesser management which is maintained and so is in a weaker position.

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Market value
Market value L’Oreal
company
Estee Lauder
Particulars Formula 201
6
201
7
201
8
201
6
201
7
201
8
Price to earnings
ratios (PE)
share price / Earnings per
share (EPS)
31.0
7
28.5
0
30.3
9
30.2
4
28.2
3
47.4
1
The market value analysis is also required to be made and for that, there is the ascertainment
of price to earnings ratio. In this, the price which is available in the market is compared with
the earnings made. It can be noted that the ratio declined from 31.07 in 2016 to 28.5 in 2017
and then increased to 30.39 in 2018 (Market watch, 2018). This shows that overall decline is
made but the situation has improved from last year. In the case of Estee lauder, the situation
has improved greatly and there is increase from 30.24 in 2016 to 47.41 in 2018. Due to this, it
can be said that L'Oreal is required to make the improvement and competitor is in a stronger
position in the market.
Conclusion
The report has been prepared and in that, all of the calculations in respect of ratios have been
made. The analysis is made for L'Oreal and also compared with other competitors. The
meaning of various forms of analysis has been understood and then the comparison is made
accordingly with the help of made calculations. The areas which are important in business
have been considered and are analyzed in the best manner. It is identified that L'Oreal is
maintaining its performance and is required to make some improvements to gain better
advantages in the market.

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References
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), 132-137.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Estee lauder. (2017). Annual report. Retrieved from:
https://media.elcompanies.com/files/e/estee-lauder-companies/universal/news-and-media/
media-resources/resources-and-reports/reports/elc-annual-report-2017.pdf
Estee lauder. (2018). Annual report. Retrieved from:
https://media.elcompanies.com/files/e/estee-lauder-companies/universal/news-and-media/
media-resources/resources-and-reports/reports/2018-elc-10k.pdf
Innocent, E. C., Mary, O. I., & Matthew, O. M. (2013). Financial ratio analysis as a
determinant of profitability in Nigerian pharmaceutical industry. International journal of
business and management, 8(8), 107.
L'Oreal finance. (2018). Annual report. Retrieved from:
https://www.loreal-finance.com/sites/default/files/2019-08/LOreal_2018_Registration_Docu
ment.pdf
L'Oreal finance. (2018). LIVE SHARE PRICE. Retrieved from: https://www.loreal-
finance.com/eng/share-price
Market watch. (2018). Historical quote for: EL. Retrieved from:
https://www.marketwatch.com/investing/stock/el/historical

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Appendix
L'Oreal finance:
Income statement:
Balance sheet:

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Estee lauder:
Income statement

10

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Balance sheet

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