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L'oreal Ratio Analysis

Essay by   •  April 13, 2018  •  Case Study  •  6,558 Words (27 Pages)  •  363 Views

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Ratio Analysis

One of the strategic tools that is commonly used in many organisations to evaluate the company versus competitors’ performance is the ratio analysis. Financial ratio will be computed and used for comparison on the relationship between different pieces of financial information. However, one of the down sides of using financial ratio as a strategic analysis tool is that the computation may be different from the aspect of different people and different source. This might lead to confusion when it comes to the decision-making process.

For this tutorial, our group will be looking at the financial ratio of L’Oreal and compare it with the financial ratio from the other two competitors of L’Oreal which are Unilever and Procter & Gamble(P&G). The financial ratio used are in this tutorial are from year 2015 to 2017.

Liquidity Ratio

  1. Current ratio

Current ratio is mainly used t give an idea of a company’s ability to pay back its liabilities (debt and account payable) with its assets (cash, marketable securities, inventory, account receivable).

Current ratio = Current assets/ Current liabilities 

The table below is the current ratio computed for L’Oreal, Unilever and procter & Gamble for the year of 2015 to 2017. 

L’Oreal

Unilever

Procter & Gamble

2015

1.13

0.63

0.99

2016

1.09

0.67

1.09

2017

1.20

0.72

0.87


Explanation:

Based on table above, it showed that L’Oreal has the highest ratio to pay of their current liabilities followed by P&G and Unilever. For L’Oreal case, they has more than enough current assets to pay off 120 percent of their current liabilities. Meanwhile, Unilever has enough current assets to pay off 72 percent of their current liabilities. Banks would prefer a current ratio of at least 1 or 2, so that all the current liabilities would be covered by the current assets.

  1. Acid test ratio

Acid-test ratio also known as quick ratio or liquidity ratio. The acid-test ratio is a strong indicator of whether a firm has sufficient short-term assets to cover its immediate liabilities. Quick assets include those current assets that presumably can be quickly converted to cash within 90 days or in the short-term. This ratio is more robust than the current ratio since it ignores illiquid assets such as inventory.

Quick ratio = (Current assets - Inventory) / Current liabilities 

The table below is the quick ratio computed for L’Oreal, Unilever and procter & Gamble for the year of 2015 to 2017. 

L’Oreal

Unilever

Procter & Gamble

2015

0.833

0.626

0.808

2016

0.798

0.462

0.940

2017

0.929

0.555

0.720

Explanation:

        Based on table above, it showed that L’Oreal has the highest quick ratio among the others. Higher quick ratios are more favorable for companies because it shows there are more quick assets than current liabilities. However, all three companies have quick ratio less than 1 which means that their quick asset are not enough to cover their current liabilities. Even though  L’Oreal and P&G have quick ratio less than 1, but their ratio approaching to 1 if they can handle their quick assets properly. In case of Unilever, they need to manage their quick asset more efficiently.

  1. Cash ratio

Cash ratio is the ratio of a company’s total cash and cash equivalents to its current liabilities. The metric calculates a company’s ability to repay its short-term debt; this information is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party. The cash ratio is generally a more conservative look at a company’s ability to cover its liabilities than many other liquidity ratios because other assets, including accounts receivable, are left out of the equation.

Cash ratio = Cash / Current liabilities 

The table below is the cash ratio computed for L’Oreal, Unilever and procter & Gamble for the year of 2015 to 2017.

L’Oreal

Unilever

Procter & Gamble

2015

0.1835

-

0.3880

2016

0.1950

0.1773

0.4316

2017

0.3347

0.1574

0.4986

Explanation:

        Based on table above, it showed that P&G has the highest cash ratio among others. However all three companies have the cash ratio less than 1. It means that there are more current liabilities than cash and cash equivalents. In the simple word, there is insufficient cash on hand to pay off their short-term debt.  L’Oreal, Unilever and P&G should achieve cash ratio with value greater than 1 so that their company have the ability to cover all short-term debt and still have some cash remaining.


Financial Leverage Ratio     

  1. Debt ratio

Debt ratio is a solvency ratio that measures a firm’s total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company’s ability to pay off its liabilities with its assets. In other words, this shows how many asset the company must sell in order to pay off all of its liabilities. This helps investors and creditors analysis the overall debt burden on the company as well as the firm’s ability to pay off the debt in future, uncertain economic times.

Debt Ratio = Total liabilities / Total assets 

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