Corporate Finance Project

Company overview:
LOreal USA based in New York. NY is a subsidiary of LOreal, and
their headquartered in Paris, France. LOreal develops and manufactures hair care, hair color,
skincare, color cosmetics and fragrances for the consumer and professional markets.
Established in 1909 by visionary scientist, Eugene Schueller, LOreal is committed to:
progressive research and development, state-of-the-art manufacturing, quality products, and
making beauty accessible to everyone around the world. Over the years, L'Oral has
experienced consistent growth with existing brands as well as strategic acquisitions. The
acquisitions like Maybelline in 1996, Soft Sheen in 1998, Matrix, Kiehl's since 1851 and Carson
in 2000, SkinCeuticals in 2005 and Essie Cosmetics in 2010.
That all allows them to penetrate new markets rapidly, and reposition the brand essence of these
products to gain new international audiences. Through a diverse brand portfolio and unparalleled
marketing expertise, growth is also achieved by expanding our portfolio to address the needs of
the new target audiences, from the very young, to more mature consumers, and everyone in
between.
L'Oral is the second leading beauty and personal care manufacturer in the world, following
Procter & Gamble at number one. Excluding shaving, L'Orals market ranking rises to number
one globally. The company has a comparatively narrow focus, exclusively in beauty and personal
care, as opposed to some of its key rivals Procter & Gamble and Unilever which are present in
home care and beauty and personal care.Breaking down the barriers to beauty by making our
products accessible around the world, L'Oral USA embraces the future with the same passion
and commitment that has characterized the group for over a center.

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Vision:

Our vision is to make beauty sustainable, and to make sustainability beautiful. Across our value
chain, we are committed to improving the way we do business, from research to operations, from
marketing to communication with the consumer. At the same time, we will share our growth with
our suppliers, our employees and communities around us.

Mission and Objectives:

At LORAL, we believe that everyone aspires to beauty. Our mission is to help men and
women around the world realize that aspiration, and express their individual personalities to the
full. This is what gives meaning and value to our business, and to the working lives of our
employees. We are proud of our work.

Corporate Governance:
Vigilance and balance inspire L'Oral's governance. The Board of
Directors constantly ensures that its organization is adapted to changes in the group.
The quality of governance is underpinned by the extremely strong commitment of the board
members of your company. The Board provides the General Management with invaluable
support for strategic decision-making. The balance of power is ensured by the clear definition of
each ones remit.

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L'Orals exclusive focus has enabled it to make more targeted investment in R&D and
advertising, growing to be a formidable force in the industry. In colour cosmetics, L'Oral is the
leading provider at over 19%, with Este Lauder a distant second at 8% market share. It has also
made strong strides in skin care through a number of launches based on cutting edge technology.
Despite its good market coverage, the companys market share dropped marginally. L'Oral has
been affected by lower hair care sales in Western Europe. In addition, market growth was partly
driven by commodities such as oral care and bath and shower in which L'Oral has limited
presence.

Strategic Evaluation: (Growth objectives on track)

Doubling consumer base:
L'Oral's key objective is to increase its consumer base from one billion to
two billion by 2020/2025. The company has been targeting emerging markets and is well on
track. It has done well in China where it is increasing penetration through both premium and
mass brands. In India, it targeted mens skin care and is increasingly expanding Garnier. It
recently announced the completion of a manufacturing site in Indonesia and acquired a
Colombian colour cosmetics brand.
Category expansion:
L'Orals goal is to drive sales growth through category expansion. It has
been aiming to grow in deodorants and body care. It entered a number of new markets such as
Ukraine with deodorants, but the pace seemed to have slowed down recently. It is expanding in
body care with Roger & Gallet but its most successful category expansion has come from adding
skin care device Clarisonic in the US.
Brand segmentation:
L'Oral brands are distinctly segmented across pricing tiers and target
audiences. While YSL and Lancme are premium, L'Oral Paris operates in the upper tier of the
mid-market and Garnier is a mass brand. The retail channels are strictly maintained for these
brands so as not to dilute brand image. For example, premium ranges are mainly available in
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department stores, while Garnier is used for penetrating in emerging countries lower-tier
markets.
Sustainable development:
L'Oral's sustainable development programme includes eco-responsible
strategies and is ranked among the top 100 most sustainable companies. In 2009, the company
announced three environmental goals: to cut by half its greenhouse gas emissions, water
consumption and waste generated in its factories and distribution centres. Its recent production
sites are built in a more environmentally-friendly manner.

Financial Ratios: (LOreal Paris (2013))

Activity Ratios:
Activity ratios tell us how effectively firm manages their assets, as well as efficiently
run of their operations.
Fixed assets turnover:
Revenue / Average Fixed Assets
=22,976.6/7649.6
=3.0036
It ratio indicate that fixed assets contributed 3 times in company sales. Comparatively past years
company going to perform well. It also indicated that company assets generated more revenue.
Total Assets Turnover:
Revenue / Average Total Assets
=22,976.6/30414.6
=0.755
It discuss about total assets turnover, 75% indicated that in overall company revenue total assets
hugely contributed. It means 75% revenue generated by contributed by their total fixed assets.
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That batter for company because they generated more revenue from total fixed assets.

Assets management ratio:

Assets management ratios are the key to analyzing how effectively and
efficiency your business is managing its assets to produce sales. Asset management ratios are
also called turnover ratios or efficiency ratios.
Inventory turnover:
Revenue / Average Inventory
=6601.8/2096.2
=3.153
Company converted their inventory in to sales by 3 times. That ratio varies from company to
company because it depend company size and its standards. It indicates that our company is
meeting their contract by three times annually.
Evaluating receivables turnover:
Revenue / Average Accounts Receivables

=22,976.6/3728.9
=6.16
The receivables turnover ratio is a measure used to quantify a firm's effectiveness in extending
credit as well as collecting debts. So Company within 6 days recovers their creditors. That shows
company is efficiently perform their works.
Days of sales outstanding:
365 / Receivables Turnover
=365/6.16
=59.253

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It measure of the average number of days that a company takes to collect revenue after a sale has
been made. 59.253 indicated that company takes almost 60 days to convert cash in to
receivables. From past years company position in sales outstanding improves. It shows that
gradually Company improves.

Liquidity Ratio:
Liquidity ratio tells us how much firm has ability to meet their short term
obligations.
Current Ratio:
Current Assets / Current Liabilities
=9354.1/6594.6
=1.41
Current ratio predicts that company converts their assets in to cash. It shows that company has
ability to meet their obligations one time annually. It also shows that company relatively is in not
better position to meet their short term obligations.
Quick (Acid Test) Ratio:
(Cash + Marketable Securities + Net Receivables) / Current Liabilities
= (2607.3+3775.0)/6594.6
=0.96
According to data we say that normally those company who has ratio 1, than they normally in a
good position to meet their short term obligations. So, in our case company has 0.96% ratio it
indicate that company not efficiently meet their short term obligations.

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Solvency Ratio:
A key metric used to measure an enterprises ability to meet its debt and other
obligations. The solvency ratio indicates whether a companys cash flow is sufficient to meet its
short-term and long-term liabilities. It tells us how well firm ability to meet their long term
obligations.
Debt to Assets:
Total liability/Total Assets
=364.6/31298.3
=0.011
Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. So 1.1%
is indicated that lower the ratio, the lower the degree of leverage, and consequently, lower financial
risk. It might good for investors because that ratio shows that company financing less than with debt.
Debt to Equity
Total liability / Total shareholders Equity
=364.6/22642.8
=0.016
In this they show that company ratio is 1.6%. This indicated that company debt portion financing is 1.6%.

Coverage Ratios:
It helps company to determine its ability to pay down its debt.

Interest Coverage:
EBIT= (operating revenue-operating expenses +Non-operating income)
=22976.6-12501.6+ (-47.1)
=10427.9

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Time interest earn ratio:

EBIT/interest payment
=10427.9/-29.1
=-358.34
Company has ability to pay their debts by 3.5% before EBIT. According to standards we say that
company is not paying frequently their debts. For this either they increase their assets and reduce the
expenses.

Fixed Charges:
EBIT+ lease/interest payment +lease
=10427.9/-29.1
=-358.34
Before paying expenses company have ability to pay their debts by 3.5%.

Profitability Ratios:
It is a measure of profitability, which is a way to measure a company's
performance. Profitability is simply the capacity to make a profit, and a profit is what is left over
from income earned after you have deducted all costs and expenses related to earning the
income. It tells us how much and how firm achieving returns on its investment.
Net Profit Margin:
Net Profit/Revenue
=2958.2/22976.6
=0.128
Company net profit margin is 1.2%. It indicated that company has inefficient operations as well
as they have more expenses relative to others.

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Operating Profit Margin:

Operating profit/Revenue
=3873.2/22976.6
=0.16
The operating profit margin identifies how a company is performing with respect to its
operations before the impact of interest expenses is considered. That ratio indicated that
company generating only 1.6% from their operations.

Return on Equity:
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested.
ROE:
Net Income/Average Equity
=2958.2/21784.15
=0.13
That ratio indicated that 1.3% company generated from its equity.
ROA:
Net Income/Average Assets
=2958.2/30414.6
=0.09
That ratio predicts that our assets are capable to generate 9% income.

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DuPont Analysis:
DuPont analysis is the method of performance measurement.
ROE:
= (Net Income/EBT) (EBT/EBIT) (EBIT/Revenue) (Revenue/Average Assets) (Average
Assets/Average Equity)
= (2958.2/4158) (4158/3873.2) (3873.2/22976.6) (22976.6/30414.6) (30414.6/21784.15)
=0.13
Du Pont model are valuable, and the model that used for this purpose is just quick and dirty
estimates of the impact that operating changes have on returns. It show 1.3% company get return
on their equity.

Valuation Ratio:
It tells us how firm financial position relates to its market value.
P/E Ratio:
Price per share/Earning per share
=115.20/5.13
=22.45
22.45% shows that investors are willing to pay 22% relative by its price per share. It shows that
company is in best position and they able to get more gain on per share.
P/CF Ratio:
Price per share/cash flow per share
=115.20/6.15
=18.7317

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It use for compare company market value to its cash flows.18.73% indicted that company grow.
If we see company past data on the bases of that data we say that company is gradually
improving relatively its past condition.
P/BV Ratio:
Price per share/Book value per share
=115.20/38.1
=3.023
By comparing company market value on its book value per share we say that company is
generating better that is 3.02%.which show company worth at present so we say that company
worth is relatively batter to past indicated.

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Common size analysis:

Income statement
millions
Net sales
Cost of sales
Gross profit
Research and development
Advertising and promotion
Selling, general and administrative expenses
Operating profit
Other income and expenses
Operational profit
Finance costs on gross debt
Finance income on cash and cash equivalents
Finance costs, net
Other financial income (expenses)
Sanofi dividends
Profit before tax and non-controlling interests
Income tax
Net profit

2013
22,976.6
-6,601.8
16,374.8
-857.0
-6,886.2
-4,756.8
3,874.8
-135.2
3,739.6
-29.1
33.5
4.4
-47.1
327.5
4,024.4
-1,063.0
2,961.4

percentage
1.0
-0.287
0.7126
-0.0372
-0.299
-0.207
0.1686
-0.00588
0.1627
-0.00126
0.00145
0.00019
-0.0020
0.0142
0.175
-0.0462
0.1288

Balance sheet
ASSETS
millions

2013

Non-current assets
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21,944.2
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Goodwill

6,457.6

0.20

Other intangible assets

2,547.7

0.08

Property, plant and equipment

3,054.1

0.09

Non-current financial assets

9,208.3

0.29

676.5

0.02

Current assets

9,354.1

0.29

Inventories

2,158.6

0.06

Trade accounts receivable

3,253.5

0.10

Other current assets

1,167.9

0.03

166.8

0.005

2,607.3

0.083

31,298.3

1.0

Deferred tax assets

Current tax assets

Cash and cash equivalents
Total

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EQUITY & LIABILITIES

Equity
Share capital
Additional paid-in capital
Other reserves
Other comprehensive income
Cumulative translation adjustments

22,642.8
121.2
2,101.2
14,220.8
4,370.1
-566.4

0.72
0.0038
0.067
0.45
0.13
-0.018

Treasury stock
Net profit attributable to owners of the company
Non-controlling interests
Non-current liabilities
Provisions for employee retirement obligations and related

-568.1
2,958.2
5.8
2,060.9
980.5

-0.018
0.094
0.00018
0.065
0.031

182.7
804.0
93.7
6,594.6
3,346.0
557.8
2,189.8
202.1
298.9
31,298.3

0.0058
0.0256
0.0029
0.210
0.106
0.017
0.069
0.0064
0.0095
1.0

benefits
Provisions for liabilities and charges
Deferred tax liabilities
Non-current borrowings and debt
Current liabilities
Trade accounts payable
Provisions for liabilities and charges
Other current liabilities
Income tax
Current borrowings and debt
Total

AFN Equation:
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Additional funds needed (AFN) is the amount of money a company must

raise from external sources to finance the increase in assets required to support increased level of
sales.
AFN = (Ao*/S0) S (L*/S0) S (S1*M) (1-POR)
= (29530.9/22462.7)513.9 (3318/22462.7)513.9 (22976.6*0.143) (1-0.4338)
= 675.60 75.90 1860.99
= 1261.29
We found a negative value for AFN, which means that action would generate extra income that
could be invested elsewhere.

FCF: (Free cash flow):

Free cash flow (FCF) is a measure of how much cash a business
generates after accounting for capital expenditures such as buildings or equipment. This cash can
be used for expansion, dividends, reducing debt, or other purposes.
Calculation (FCF):
2013

2012

Net Operating Working capital 8,019.43,346 = 4,673.4

7,065.83,318 = 3,747.8

Net operating capital

3,747.8+ 2,962.8 = 6,710.6

4,673.4 + 3,054.1 = 7,727.5

Investment in operating capital = 7,727.5 -- 6,710.6 = 1,016.9

NOPAT = EBIT (1T)
= 4,024.4 (10.4)
= 2,414.64
FCF = NOPAT - Investment in operating capital
= 2,414.64 - 1,016.9
= 1,397.74

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The Free cash flow (FCF) represents the cash that a company is able to generate after laying out
the money required to maintain or expand its asset. After paying their debt as well as capital
expenditure remaining amount is FCF. That ratio indicated that company generating only
1397.74 from their investment after paying their capital expenditure.

Performance over 5 years:

Consolidated sales:

Operating profit:

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Pre-tax profit excluding non-recurrent items:

Net profit excluding non-recurrent items after minority interests:

Non-recurring items include mainly capital gains and losses on long-term asset disposals,
impairment of long-term assets, restructuring costs and elements relating to identified operational
incomes and expenses, non-recurring and significant regarding the consolidated performance.

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