Financial Ratio Analysis

Industry analysis:

Over the past 5 years sales have increased as a whole for the entire industry. Every company has experienced significant growth except for Revlon. Revlon experienced a significant decline in sales and is slowly growing in sales again, but has not yet reached the level it was at in 2007. Avon does not capture quite the market share that its competitors does but that is because Avon is only sold in home parties, online and through their catalogs. The other companies in the industry are sold in stores which is a large reason why they are able to capture such a large share of the market. Of the past 5 years Avon has sold $30718.8 out of the total $183115.8 that the industry has sold. This gives Avon a market share of 16.78% in the past 5 years and is expected to remain at that level in the upcoming 10 years. The sales (in thousands) for Avon for the past 10 years were 11,112,000 in 2011, 10,731,300 in 2010, 10,284,700 in 2009, 10,588,900 in 2008, 9,845,200 in 2007, 8764,000 in 2006, 8150,000 in 2005,7748000 in 2004, 6876000 in 2003 and 6228000 in 2002. Avon has had an average growth over the past 5 years of 3.14% per year. This is projected to continue to grow at this same rate for the next 10 years, making estimated sales (in thousands of dollars) for the next 10 years consecutively; 11460917, 11820790, 12191962, 12574790, 12969638, 13376885, 14230143, 13796919, 14676969, and 15137826.

By taking the average percentage of sales that each company has had over the previous 5 years, one can assume that each company will maintain their average market share. Making the table below a prediction of the next 10 years of sales.

Average Market Share Per Company over past 5 years

-61.92% ELIZABETH ARDEN INC. (RDEN)
-61.70% L'OREAL SA ADR (LRLCY)
-58.35% ESTEE LAUDER COS INC CLASS A (EL)
-64.55% REVLON INC (REV)
-55.99% ULTA SALON COSMETICS & FRAGRANCES
16.78% Avon

Projected Sales ( Hundreds of thousands of dollars) next 10 years

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-3547.31 2196.45 -1360.01 842.10 -521.41 322.85 -199.91 123.78 -76.64 47.46 ELIZABETH ARDEN INC. (RDEN)
-56913.68 35113.11 -21741.53 13462.04 -8335.50 5161.22 -3195.75 1978.76 -1225.22 758.64 L'OREAL SA ADR (LRLCY)
-25730.26 15012.61 -9295.59 5755.70 -3563.84 2206.68 -1366.34 846.02 -523.84 324.36 ESTEE LAUDER COS INC CLASS A (EL)
-4176.41 2695.96 -1669.30 1033.61 -639.99 396.28 -245.37 151.93 -94.07 58.25 REVLON INC (REV) CashFlowFlag INCOME STATEMENT
-3994.37 2236.52 -1384.82 857.46 -530.93 328.74 -203.55 126.04 -78.04 48.32 ULTA SALON COSMETICS & FRAGRANCES

Due to Avon's continuous growth in sales and the other industries continuous decline in sales, by the end of the 10 years Avon will have a total of 40.45% of the market.

Avon Trends:

Every year Avon had to take out additional funds in debt except for in 2010. Avon Purchased Investments Each year. Avon's retained earnings are increasing each year.

Profitability Ratios

ROE is the return that Avon made divided by their investments in equity. Avon is ahead of the industry average in 2009 and 2010 but in 2011 the industry greatly improved their ROE while Avon slightly dropped causing them to fall just below the industry average. However, Avon's ROE is still comperable to the rest of the industry.
The ROA is the return a company made divided by their total amount of investments made. Avon consistantlly outpreforms the industry in this area from 2007 to 2011. This sjhows that Avon is able to make small profitable returns for every dollar they put into their assets.
Profit Margin is the measure of how profitable a company is.Each year from 2007 until 2011, Avon has a lesser profit margin than the industry. This is due to the fact that Avon pays their employees commission on each sale they make, where as the other companies in the industry do not participate in this practice.

2011 2010 2009 2008 2007
ROE 32.66% 36.43% 47.86% n/a n/a
Industry ROE 33.53% 11.63% 16.64% 4.44% 13.98%
ROA 6.69% 7.74% 9.19% 14.41% 9.28%
Industry ROA 5.53% 5.22% 6.90% 13.25% 8.97%
Profit Margin 4.66% 5.68% 6.11% 8.27% 5.39%
Industry PM 7.43% 5.93% 6.82% 8.76% 8.65%

Liquidity Ratios

When one looks at a company's quick ratio, current ratio and cash ratio it will give one an insight into the financial health of the company. Below is a chart with some of Avon's financial health ratios compared to those of the industry. A company's current ratio measures how easily the company is able to pay off their short term debt. Avon's current ratio constantly hovers around the industry's current ratio. Some years Avon is smaller and some years it is larger than the industry's. This shows that Avon only takes out short term debt when needed and is consistent with the industry in the pay back period.
Quick ratios measure how easily the company is able to pay off their short term debt, however it only take into account things that can easily be turned into cash. Avon's quick ratio increases every year where as the industry's decreases each year. This shows that as Avon is allowing itself to more easily pay off their debt each year the industry on average is finding it more difficult to turn items into cash quickly if they were in need of paying off their short term debt in a timely manor.
The cash ratio measures a company's liquidity based solely on the amount of cash they have on hand at any given time.
Operating Cash Flow:cash flow that is provided by operating activities. From 2009-2011 Avon has shown their cash ratio to be smaller than that of the industry. This shows that although Avon is able to convert items to cash quickly to pay off debt, the amount of actual cash they have on average as a company is less than that of other companies in their industry.

2011 2010 2009 2008 2007
Current 1.418 1.415 1.842 1.221 1.151
Industry Current 1.559 1.654 1.755 1.919 1.891
Quick 1.016 1.025 1.372 0.875 0.81
Industry Quick .684 .729 .849 1.014 1.042
Cash .431 .399 .577 .379 .316
Industry Cash 0.18 0.24 0.30 0.42 0.54

Leverage Ratios

The debt to equity ratio explains the amount of money a company has in debt divided by the equity a company has. Avon is consistently lower than the industry average. This emphasizes what a great job Avon does at keeping their debt low and their equity high, especially compared to their competitors in their industry.
Interest Coverage is used to determine the ease that a company can pay its interest on its outstanding debt. Avon's interest coverage is above the industry average in the last three years calculated. This shows financial health of Avon, being able to pay back the interest on the debt they borrow far above that of their competitors . Avon's debt ratio illustrates the amount of debt a company has. Avon is inconstantly above the industry average, showing that they require a great deal of debt issuing in order to runt their business compared to the other business in their industry.

2011 2010 2009 2008 2007
Debt/Equity 0.155 0.131 0.146 n/a n/a
Industry 0.37655851 0.447013071 0.260 -0.015663902 -0.03722704
Interest Coverage 8.816 11.693 9.648 12.964 7.719
Industry Interest Coverage 7.354 7.145 7.815 17.952 18.66189805
Debt 0.795 0.788 0.808 0.889 0.876
Industry Debt 0.5612005 0.571011014 0.529113762 0.516501024 0.507184265

Efficiency Ratios

The total asset turnover is the amount of sales for every dollar of assets the company has. Avon constantly has a TAT that exceeds that of the industry. This shows that in comparison to like firms in the industry Avon is able to generate more profits for every dollar they invest in their assets.

2011 2010 2009 2008 2007
Total Asset Turnover 1.437 1.363 1.505 1.743 1.722
Industry TAT 1.062 1.058 1.149 1.139 1.06569593

Market Value Ratios

The earnings per share ( EPS) is an indicator of the company’s profitability. This shows Avon's revenue divided by all of their outstanding common stocks.
The price to equity ratio (P/E) compares the stock’s current price to the earnings it is making. The P/E ratio for Avon fluctuates slightly but is consistent with a healthy company.
The dividend payout ratio is the ratio of earnings shareholders receive compared to how much money the company is holding. Avon typically pays over half of their earnings as dividends and reinvests the remaining in the company to encourage growth and additional funds for future investments.
The Price-to-Book ratio is used to compare the company’s value in its books to the current value in the stock market.Since Avon's Price-to-Book ratio is rather small this may indicate that the book value and market value of Avon are not aligning.
The dividend yield shows the amount of dividends a company pays out. Avon has a consistent payout of about 5%.

2011 2010 2009 2008 2007
EPS 1.224 2.053 1.472 1.421 1.203
P/E 13.0278 7.769 10.839 11.224 13.261
Dividend Payout 0.6044 0.39 0.571 0.619 0.765
Price-to-Book 0.0000224 0.0000236 0.0000125 0.00000963 0.0000102
Dividend Yield 0.0464 0.0501 0.052664577 0.055172414 0.057680251

Excel Sheet containing Ratios and Financial Statements:

https://docs.google.com/spreadsheet/ccc?key=0AsZwTWXXIL5FdGg2SFplbmhZYVVZZzFpX2g5ckJ3V0E

Sources for financial statements: Mergent Online, Morningstar

Grades
1.15/2

NO discussion of the calculated ratios. Need to discuss the values, what they mean and how they compare to the industry averages. Projection of Avon sales is done, however need a projection of the competitors sales to be able to get the forecasted market share

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