INDIVIDUAL ASSIGNMENT

Multinational Company Report:

L’ORÉAL S.A.

Prepared by:
Adinda Thalia S. – 16111001

Facilitated by:
Prof. Ir. Roy Sembel, MBA, PH.D, CSA

Statement of Originality:
The contents of this report are of our my work and responsibility

AFE425 – INTERNATIONAL FINANCE

IPMI International Business School

Bachelor of Business Management 2016
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
1.1 L’Oréal S.A. 1
1.2 Operational Divisions 1
1.3 The Shareholders 1
1.4 Organisation Chart 2

2. THE BEAUTY MARKET

2.1 By Geographical Zone 3
2.2 By Product Category 3

3. STOCK PERFORMANCE 4

4. FUNDING & INVESTMENT STRATEGY

4.1 2017 5
4.2 2018 5

5. RISKS & INTERNAL RISK MANAGEMENT SYSTEM

5.1 Risks to Which the L’Oréal Group Believes it is Exposed 6
5.2 Internal Control and Risk Management System 8
5.3 Financial Risks and Risk Management 9

6. INDUSTRY ANALYSIS
6.1 Purpose of Industry Analysis 11
6.2 Factors that Affect Industry Sales 11
6.3 Worldwide Competitors 13
6.4 SWOT Analysis 14
6.5 Porter Five Forces 16

7. MACROECONOMIC ANALYSIS 17

8. COMPANY ANALYSIS
8.1 Income Statement 19
8.2 Balance Sheet 20
8.3 Evaluation of the Firm’s Financial Health 22

9. CONCLUSIONS 27

APPENDIX 28
1. EXECUTIVE SUMMARY
1.1 L’ORÉAL S.A.
Headquartered in Clichy, Hauts-de-
Seine, L’Oreal is one of the largest
companies in France and the second
world's largest manufacturer of high-
quality health and beauty products.
In 1907, a young chemist named
Eugène Schueller developed his first
hair dyes and sell them to hair salons
under the name Auréole which later
became L’Oreal.
Today, its brands can be found in over
150 countries and include recognizable
brands such as Lancôme, Garnier and
Maybelline. As a company that is
known to sell high-quality products,
they spend at least their 3 percent of
sales on research and development.
Vision: “Because I’m worth it”
To enhance performance and generate
more market share, the vision statement
is developed to create value of its
products to its targeted consumers.
The statement indicates how L’Oréal
sells its products to those who deserve
the products through their beauty and
attitude.
Mission: “At L’Oréal we believe that
everyone aspire beauty. Our mission is
to help men and women realize their
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 employee.”
Through L’Oréal’s mission statement, it
indicates how L’Oréal does not only
add value to its firm, but also improves
the livelihood of its employees by
providing the best cosmetics in terms
of quality and safety.
1.2 OPERATIONAL DIVISIONS
L'Oréal operates and work through the
accompanying sections: Professional
Products, Consumer Products, L'Oréal
Luxury, and Active Cosmetics.
The Consumer Products' Division goal
is to democratize access to the best
that the world of beauty brings to the
table.
L'Oréal Luxe makes extraordinary
encounters and products, for the most
requesting purchasers in particular
circulation.
The Professional Products Division
provides aptitude to beauty experts
The Active Cosmetics' Division goal is
to help everybody in their journey to
have solid and delightful skin.
A few authority corporate offices give
their ability and backing to the
Operational Divisions, to subsidiaries in
their market and to the next business
exercises include Research and
Development, Digital, Operations,
Human Resources, Administration and
Finance, Communication and Public
Affairs and Environmental and
Sustainability.
1.3 THE SHAREHOLDERS
AS OF DECEMBER 2018
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1.4 ORGANISATION CHART

The Group's global advancement has implied that L'Oréal has had to adjust its
association to the need to organize the foundation and improvement of its brands on
each continent.

Different geographical zones have been made for this reason, each with operational
obligation regarding the subsidiaries situated in the nations of its locale:

• Western Europe zone.

• Americas zone.

• Asia, Pacific zone.

• Eastern Europe zone.

• Africa, Middle East Zone.

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2. THE BEAUTY MARKET
2.1 BY GEOGRAPHIC ZONE
Geographically, Asia-Pacific and North
America dominated the beauty market,
representing more than 60 percent of
the beauty market combined. Asia had
an excellent year, fueled by the market
in China, with twice the growth, and
outside China.
Non-western beauty societies are
winding up increasingly compelling;
buyers beyond North America and
Europe are revamping the beauty
market in their own image and
resemblance. Because of this move to
new regions, beauty societies which
are very unique in relation to the mature
European and North American markets
will play a substantially more powerful
role.
2.2 BY PRODUCT CATEGORY
This statistic delineates the breakdown
of the beauty market worldwide by
product category. In 2018, skincare
items made up 37 percent of the
worldwide beauty market.
Products for the hair made up 22
percent of sales.
Make-up products made up about 19
percent of the beauty market. This
category includes products that remain
on the skin and change the color. It
includes products such as foundations,
lipsticks, blushes, eyeshadows, and
mascaras.
Perfumes are meant to change the
natural body odor. They made up 12
percent of the beauty market. This
category includes perfumes, colognes
and body splashes.
The last category of cosmetic product
are hygene products. This group made
up 10% of sales in the market. This
category includes oral care products
such as mouthwash as well as other
personal care products.
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3. STOCK PERFORMANCE (HISTORICAL DATA OF 5 YEARS)

According to the graph above, we can conclude that compared to the rest of the market,
L’Oréal’s share price seems to be relatively stable indicated by its low beta. However, the
current stock is currently overvalued by around 70%, trading at EUR223.40. In addition, it
is predicted that in a couple of years, the firm will increase in growth by over 13%, which
will result in a higher share valuation.

In 2015, L’Oréal posted high growth and no longer has net debt. This is due to the
international marketing communication efforts to promote the luxorious lines such as
Lancome, Kiehl’s and Yves Saint Laurent to North America as well as emerging markets
from Russia to Saudi Arabia. The sales of these 3 brands increased from 22.53 billion
euros in 2014 to 25.3 billion euros in 2015.

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4. FUNDING & INVESTMENT STRATEGY
4.1 2017
As of January 2017, L’Oréal signed an
a g re e m e n t w i t h B a u s c h H e a l t h
(formerly Valeant Pharmaceuticals) to
acquire the skincare brands AcneFree,
Ambi and CeraVe for a cash purchase
price of US $1.3 billion. AcneFree,
Ambi and CeraVe became a part of
L’Oreal’s Active Cosmetics segment,
which includes brands such as Vichy
and Sanoflore that are developed with
health professionals, dermatologist and
other professional physicians. In 2016,
these three brands generated
combined annual sales of US $168
million.
In the following month, L’Oreal’s
professional salon distribution operation
SalonCentric has agreed to acquire
assets from Four Star Salon Services.
This acquisition provides SalonCentric
with distribution coverage of salon
professional products within New York,
New Jersey and Connecticut. In the
transaction, 11 stores and its field
positions are included.
The cost of these new acquisitions
represents €1,245.3 million. The total
amount of goodwill and other intangible
assets has been estimated at €1,017.8
million and €198.4 million. In 2017,
these acquisitions represent around
€154.1 million in full-year net sales and
€31.0 million in full-year operating
profit.
4.2 2018
As of March 2018, L’Oréal has
announced a full acquisition of the
Canadian company ModiFace, a
Toronto-based firm that specializes in
a u g m e n t e d re a l i t y a n d a r t i fi c i a l
intelligence applied to the beauty
industry. This acquisition is aligned with
L’Oréal’s digital acceleration strategy,
which is to provide the consumers with
the latest and most innovative
technologies in terms of beauty
experiences.
On May 2018, L’Oréal fully acquired the
Korean lifestyle make-up and fashion
company, Nanda Co. Ltd. Founded in
Seoul in 2004, Stylenanda began as a
fashion business that expanded its
business to selling makeup under the
name 3CE, which today represents
more than 70% of the business. With a
turnover of €127 million in 2017, the
company has expanded its business
into overseas market.
In the same month, L’Oreal had also
finalize the acquisition of Pulp Riot, an
American hair color brand that has
been transforming the professional hair
color market by creating industry
leading content and utilize social media
to influence and engage with hair
stylists across the globe. In 2017, the
net sales of Pulp Riot were reported to
reach US $11 million
The cost of these acquisitions
represents €695.7 million and the total
amount of goodwill and other intangible
assets have been estimated at €618.2
million and €4.3 million.
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5. RISKS & INTERNAL RISK MANAGEMENT SYSTEM

5.1 RISKS TO WHICH THE L’ORÉAL GROUP BELIEVES IT IS EXPOSED

Modern society is often regarded as “risk society”, implying that the social creation of
wealth is joined by the social production of risk. Thus, organizations working in such
situations are compelled to oversee different kinds of risk in order to grow themselves as
well as increase their effectiveness.

There is a wide assortment of corporate risks and one of the imperative types of
corporate risk is financial risk. The financial risks that the L’Oréal group are facing are as
follows:

• Interest rate risk

• Currency risk

• Risk relating to the impairment of tangible assets

• Equity risk

• Risk with regard to assets financing employee benefit commitments

• Risk relating to changes in tax regulations

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It is important to remember that financial risk is just simply a part of the overall risk and
there are numerous different kinds of risk that ought to be thought of while setting up an
incorporated approach to the internal control and risk management system in the
company. Companies should be aware of the risk they are exposed to and should take
actions as advised from the risk management system in order to maintain a minimum
presence of damage. Other risks of the L’Oréal group are as listed:

Image and reputation

Product, quality and safety

Responsible communication

Seasonal nature of the business

Geographic presence and economic and political environment

Distribution network

Competition
Business risks
Innovation and customer expectation

External growth transactions

Risks related to human resource management

Safety and security

Employee health and safety

Information systems and data

Risks of an internal control failure

Intellectual property

Legal risks Industrial property

Regulatory changes

Production and supply chain

Industrial and
Supplier dependence
environmental risks
Environmental and safety

Counter party risk

Customer risk

Liquidity risk

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5.2 INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM

L'Oréal's risk management comprised of recognizing, overseeing and controlling risks

that may influence the growth of the organization. It additionally partakes in value creation
by promoting the great utilization of assets to limit the effect of negative occasions and
amplify the opportunities. To guarantee the sustainability of its improvement and the
accomplishment of its goals, the risk management system endeavors to foresee and deal
with the risks to which it is exposed in its diverse areas of activity. By contributing to
prevent the risks to which the company is exposed, the reason for the internal control
system is to empower the company’s industrial and monetary improvement to take place
in an enduring and manageable manner in a control environment suitable for the
organizations.

In L'Oréal, internal control is a framework that applies to the company and its subsidiaries
and goes for guaranteeing that:

• Economic and monetary targets are accomplished in consistence with the laws
and regulations in power
• The orientations set by general management are pursued
• The group's assets are valued and protected;
• The Group's financial and bookkeeping data is reliable and gives genuine and fair
statements.

The environment, good risk management and the utilization of techniques depends on
individuals, behavior and organizational structure. In L'Oréal, the risk management and
internal control are the affair of everyone, from all employees to the governance bodies.
The internal control system is the subject of continuous supervision to check whether it is
pertinent and meets the Group's goals as well as addresses its issues.

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5.3 FINANCIAL RISKS AND RISK MANAGEMENT
INTEREST RATE RISK
Risk Identification
For the necessities of its development,
improvement and its capital expenditure
policy, L’Oréal utilizes borrowings and
short-term attractive instruments.
CURRENCY RISK
Risk Identification
Because of L’Oréal’s global presence, the
company is naturally exposed to currency
fluctuations. Changes between the main
currencies may affect the outcomes when
deciphering foreign currency financial
statements of subsidiaries into euros.
RISK RELATING TO THE IMPAIRMENT OF INTANGIBLE ASSETS
Risk Identification
L’Oréal’s brands are a vital resource for the Brands with an uncertain helpful life and
Group and might be liable to impairment.
EQUITY RISK
Risk Identification
L’Oréal does not invest its cash in shares.
The primary equity risk for L’Oréal is the
9.43% stake it held in Sanofi at 31
December 2017.
Risk Management
To restrict and minimalize the negative
effect of interest rate fluctuations, L’Oréal
has a non-speculative interest rate
management policy using derivatives as
appropriate.
Risk Management
To limit its exposure to currency risk, the
group adopts a conservative approach
whereby it supports a huge part of its
annual requirements for the next year
through forward contracts or through
alternatives.
Risk Management
goodwill are not amortized but rather are
tested for impairment in any event once
per year. Where the recoverable amount of
a brand is lower than its net book value, an
impedance deficit is perceived.
Risk Management
If the Sanofi share price endured a huge or
delayed decrease in an incentive under its
offer value, this would conceivably lead
L’Oréal to record its assets through the
income statement.
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RISK WITH REGARD TO ASSETS FINANCING EMPLOYEE BENEFIT
COMMITMENTS
Risk Identification
Commonly, resources used to finance
worker benefit commitments are presented
to changes on the business sectors in
which such resources are contributed. A
sharp, delayed downturn in the financial
markets may affect the value of the
portfolios made.
RISK RELATING TO CHANGES IN TAX REGULATIONS
Risk Identification
L’Oréal is presented to risks emerging from
changes in tax regulations. An expansion
in existing taxes and charges, the
introduction of new taxes, or double tax
collection worried specifically in corporate
income tax, custom obligations, import
taxes, the repatriation of profits, could
affect the Company's outcomes.
Risk Management
The allocation by classification of assets is
liable to limits pointed specifically at
connection risks between these diverse
asset classifications. A supervisory
committee for the annuity and worker
advantage plans offered to the group's
employees guarantees that these
standards are executed and observed.
Risk Management
The tax department and the operational
finance depar tment, helped where
appropriate by external advisors, screen
these progressions to guarantee that the
Group consents to these guidelines. In
case of a dispute or a distinction in
translation with the authorities, L’Oréal may
protect its situation by making legal moves.
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6. INDUSTRY ANALYSIS

6.1 PURPOSE OF INDUSTRY ANALYSIS

Industry analysis is used as a tool to help many businesses predict the changes in the
business environment as well as to strategically react to those changes. In this case, this
tool is used to analyze L’Oréal’s performance in an in-depth understanding of the industry
and its competitors. This is conducted by assesing their position in the market through
analyzing the firm’s SWOT Analysis, Porter’s Five Forcel Model and other influences that
will support whether an investment in L’Oréal would produce a beneficial output or not.

6.2 FACTORS THAT AFFECT INDUSTRY SALES

INTERNAL INFLUENCES

Every decision making process produces a final choice.

Decision Making L’Oréal has made fast and risky decisions that led the firm to
jump into many new opportunities in the market.
With more than 60,000 employees, human resource has been
a major influence within the company and developing trust
Employees
and transparency within the organization is the key to better
working relations.
L’Oreal has invested at least 3% of their sales to research and
Research and
development to promote constant innovation and safer use
Development for its consumers.
The firm’s culture cover all elements of beauty for consumers.
Culture This customer-oriented culture has allowed L’Oreal to
differentiate itself from competitors like P&G.

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EXTERNAL INFLUENCES

The behavior of beauty consumers is that they tend to test

out products after products until they find the one which they
Tastes and
prefer over the others and eventually become a royal buyer.
Preferences
Concerning these situations, L’Oreal reacted by designing
products that fits every specific group needs.
Competition brings out the best in organizations and L’Oreal
has successfully distingushed itself from its competitors
Competition (Procter & Gamble, Estee Lauder and Unilever) by being
customer-oriented and constantly coming up with new and
innovative products.
Beauty products are not considered as a commodity, but
rather a luxurious item which not everyone is willing to spare
Economy
their last income on. As a result, L’Oreal could face the
problem of lack of consumer demand.
In 1970, the French government was eager to control the top
companies in France and it has affected L’Oréal and other
Political Situation
firms in France. As a reaction to that matter, L’Oréal adopted
to governmental rules for it to be favourable for the firm.

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6.3 WORLDWIDE COMPETITORS
2016 revenue in billions of US $

Headquartered in downtown Cincinnati, Ohio, the Procter &

Gamble company is an American consumer-goods
corporation that focuses on producing a range of consumer
Procter & Gamble health, hygene products and personal care. For the fiscal
year 2018, Procter & Gamble reported earnings of US$9.750
billion, with an annual revenue of US$66.832 billion, an
increase of 2.7% over the previous fiscal cycle.
Headquarted in New York, Estee Lauder is a manufacturer
and marketer of prestigious beauty and skincare products.
The firm’s outstanding brands are as follows: MAC, Jo
Malone, Estee Lauder and Clinique. For fiscal year 2016, the
Estee Lauder Estée Lauder Companies achieved net sales of $11.26
billion, a 4% increase compared with $10.78 billion in the
prior year.As of 2018, Estée Lauder Companies ranked 258
on the Fortune 500 list of the largest United States
corporations by revenue.
Headquartered in London and Rotterdam, Unilever is a
consumer goods company. Although the firm itself focuses
more on producing commodity products, it has been
improving its quality for beauty products and considered as
L’Oreal’s competition. For the fiscal year 2017, Unilever
Unilever
reported earnings of US$6.842 billion, with an annual
revenue of US$60.714 billion, an increase of 4.3% over the
previous fiscal cycle. Unilever's shares traded at over $51
per share, and its market capitalization was valued at over
US$92.6 billion in September 2018.

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6.4 SWOT ANALYSIS

STRENGTHS

Concerning personal health, research and development

plays a major role to the success of the product line. As a
Continuous Research company based on personal health products, L’Oréal
and Development constantly improves its products by hiring various
dermatologists and cosmetologists to ensure the safety of its
users and to develop new products.
The brand is available in 150 countries worldwide and
Worldwide Distribution worldwide distribution leads to economies of scale and the
sharing of fixed assets.
Owning more than 40 brands worldwide, L’Oreal has
dedicated to solely focus on beauty products. Maybelline,
Garnier and L’Oréal Paris are the three brands that contribute
Brand Portfolio
the largest in L’Oréal Sales. With the revenue from these
brands, the firm is able to invest and get further growth in its
other products and brands.
Since 1987, L’Oréal has completely stopped testing on
Natural Products animals. In addition, the firm has also started to switch to
natural and organic ingredients.
Each brand in the portfolio of L’oreal is known for its
integrated marketing communications. Not only are these
Strong Marketing brands famous for their above the line marketing campaigns,
but they are very good in their point of purchase marketing as
well.

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WEAKNESSES

As the company becomes bigger, so does the need of hiring

new employees. As of today, L’Oreal has close to 60,000
Large Sub Divisions employees. Other than high human capital expenditure,
L’Oréal has also been dealing with its slow employee
management due to the various sub divions it has.
Hair care is a declining segment and one of L’Oréal’s brands
Declining Trends
that has been affected by it is Garnier.
The high investments in Research and Development, organic
Lower Profit Margines proccesses and marketing communications has resulted in a
lower profit margin compared to the firm’s competitors.

OPPORTUNITIES

The demand for personal care and beauty items is proven

toincrease overtime. As underdeveloped economies
Market Potential
aredeveloping, it gave L’Oréal an opportunity to explore and
expand to these newer markets.
Growing the product lines as well as innovating new products
Product Mix Expansion in the product mix will result in the complete product mix
expansion.
As the demand for organic products starts to increase, so
Going Organic does the opportunity for the firm to develop more ways to
intergrate sustainable materials with its products.

THREATS

The cosmetics industry is growing significantly and this has

resulted the customers into demanding new innovations and
Cosmetics Industry
failed products can cause the customers to switch to the
firm’s competitors.
A brand like L’oreal which has so many sub brands has to
Cash Crunch divide the cash it earns into many different segments. As a
result, if the economy slumps then it faces a huge problem.

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6.5 PORTER FIVE FORCES

As a manufacturer of beauty products,

L’Oréal relies heavily on its supllier to accuire
Bargaining Power of
raw materials, equipment and packaging,
Suppliers meaning that the firm has a low bargaining
power.
Internal
Firms are able to increase their prices on
their products when the buyers are less
Bargaining Power of
sensitive to the prices due to the high quality
Customers
of the products provided. Inelastic demand
positively affects L’Oreal Paris.

Government policies and regulations can

dictate the level of competition within the
Intensity of Existing
industry and will have a long term negative
Rivalry impact on this entity, which subtracts from
the entity value.
Threat for substitute products refers to
cosmetics goods provided by other firms. It
exists when a product demand is affected by
the price or value change of a substitute
product. As an example, two brands offer the
External Threat of Substitutes same product at the same price point, but
the other has an advantage of not testing on
animals while the other one does. This
difference in value can cause the customers
to convert to the other firm that alligns more
with their value.
New firms are easy to enter the cosmetics
industry due to high-quality products, lower
Threat of New
price and substantial marketing resources.
Competitors
L’Oreal’s main competitors are Procter &
Gamble, Estee Lauder and Unilever.

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7. MACROECONOMIC ANALYSIS
GDP GROWTH RATE
GDP GROWTH RATE INDONESIA
Identification
Gross domestic product (GDP) is the
monetary measure of a nation’s overall
economic activity. From 2005 until 2018 ,
The GDP Growth Rate in Indonesia
averaged 1.38 percent
INFLATION RATE
INFLATION RATE INDONESIA
Identification
Annual inflation rate in Indonesia slowed to
2.48 percent in March 2019 from 2.57
percent in the previous month and below
market expectations of 2.5 percent.
UNEMPLOYMENT RATE
UNEMPLOYMENT RATE INDONESIA
Identification
Unemployment rate is defined as the
percentage of people who do not have
jobs in one nation. Unemployment Rate in
Indonesia increased to 5.34 percent in the
third quarter of 2018 from 5.13 percent in
the first quarter of 2018.
Effect
As Indonesia’s GDP increases, so does the
purchasing power of its citizens to buy
more products. An increase in the GDP will
increase the consumers ability to purchase
L’Oréal’s products.
Effect
The decrease in inflation would attract
competitors of exported goods as it has
become cheaper to do so. In addition, as a
result of the decreasing inflation rate, the
citizens’ income will increase, causing an
increase in their purchasing power.
Effect
The increase of unemployment rate in
Indonesia could result to the population
having a lack of income. An insufficient
income will affect the sales of L’Oréal as
there would be less people that could
afford L’Oréal’s products.
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INTEREST RATE
INTEREST RATE
Identification
An interest rate is the amount of a loan that
is charged as interest to the borrower.
From 2005 until 2019, interest rate in
Indonesia averaged 7.07.
EXCHANGE RATE
EXCHANGE RATE
Identification
Exchange rate measures the value of one
currency against others. According to the
World Bank collection of development
indicators, Real Effective Exchange Rate in
Indonesia was reported at 88.3 in 2018.
Moreover, the Nominal Effective Exchange
Rate in Indonesia was reported at 71.3 in
2018.
CONSUMER CONFIDENCE
CONSUMER CONFIDENCE
Identification
Consumer confidence is the confidence of
consumers in terms of spending and
saving. From 2000 until 2019, the
Consumer Confidence in Indonesia
averaged 98.67 Index Points.
Effect
Higher interest rates mean that customers
lack of disposable income and less likely to
make a purchase. Conversely, the lower
the interest rate, the more willing
customers are to borrow more and make
purchases and because interest rate is
increasing, this will lead L’Oréal to
decrease in sales.
Effect
If the rupiah value is higher than the other
currencies, customers will be able to
spend more. Since the value of the
currency is increasing compared to other
countries, L’Oréal’s sales will increase.
Effect
If the consumer confidence is high, then
L’Oréal will have an increase in sales.
Conversely, if the consumer confidence is
low, then L’Oréal will experience a
decrease in sales.
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8. COMPANY ANALYSIS
8.1 INCOME STATEMENT

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8.2 BALANCE SHEET

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Page 21 of 28
8.3 EVALUATION OF THE FIRM’S FINANCIAL HEALTH

FIRM’S LIQUIDITY

1. Current Ratio (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Assets

Total Current Assets 8.77 9.25 10.05 11.02 12.47

Liabilities

Total Current Liabilities 9.27 8.17 9.21 9.17 10.11

Current Ratio: Current Assets/Current Liabilities 0.95 1.13 1.09 1.20 1.23

Current ratio refers to the measurement of whether the company has enough funds to
cover their daily operations. In 2014, L’Oreal barely covered their daily operations as the
current ratio is less than 1. However, in the following years, L’Oreal is realitively
considered as sufficiently liquid since the current ratios are greater than 1.

2. Acid Test Ratio (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Assets

Total Current Assets 8.77 9.25 10.05 11.02 12.47

Inventories (2.26) (2.44) (2.7) (2.49) (2.82)

6.51 6.81 7.35 8.53 9.65

Liabilities

Total Current Liabilities 9.27 8.17 9.21 9.17 10.11

Acid Test Ratio: Current Assets - Inventories/

0.70 0.83 0.79 0.93 0.95
Current Liabilities

Acid test ratio refers to the measurement of whether the company has enough assets or
cash to immediately cover its current liabilities. The acid test ratio in each year is less
than 1, this means that L’Oreal is not liquid enough to be able to pay their current
liabilities.

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3. Average Collection Period (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Account Receivables 3.75 4.47 4.73 4.63 4.14

Credit Sales 22.53 25.26 24.92 26.02 26.95

Average Collection Period: Account

60.75 64.59 69.28 64.48 56.07
Receivables/(Credit Sales/365 days)

The average collection period refers to the average number of days between the dates
the credit sales were made and the dates that the money was collected. The average
collection of L’Oreal ranges from 56-70 days.

4. Accounts Receivable Turnover (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Credit Sales 22.53 25.26 24.92 26.02 26.95

Account Receivable 3.75 4.47 4.73 4.63 4.14

Account Receivable Turnover: Credit Sales/

6.01 5.65 5.27 5.62 6.51
Account Receivable

Accounts receivable turnover refers to the number of times per year the company collects
its average accounts receivable. L’Oreal collects its accounts receivable at least 5 times a
year.

5. Inventory Turnover (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Cost of Goods Sold 6.5 7.28 7.07 7.36 7.33

Inventory 2.26 2.44 2.7 2.49 2.82

Inventory Turnover 2.88 2.98 2.61 2.96 2.59

Inventory turnover shows how fast the company sells its inventory. The greater the
inventory turnover, the better. Each year, L’Oreal has a ratio grater than 1, indicating the
present of strong sales.
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OPERATING PROFITABILITY

1. Total Asset Turnover (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Credit Sales 22.53 25.26 24.92 26.02 26.95

Total Asset 32.06 33.71 35.63 35.34 38.46

Total Asset Turnover (Sales/Total Asset) 0.7 0.75 0.69 0.74 0.7

Total asset turnover refers to the measurement that shows the company’s capability of
generating sales from its total asset. For example in 2018, for every dollar of assets
L’Oreal has, it will generate 0.70 cents of sales.

2. Fixed Asset Turnover (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Credit Sales 22.53 25.26 24.92 26.02 26.95

Net Fixed Asset 3.14 3.4 3.76 3.57 3.52

Fixed Asset Turnover (Sales/Total Asset) 7.18 7.43 6.63 7.29 7.66

Fixed asset turnover refers to the measurement of sales to the value of fixed assets. In
other words, fixed asset turnover shows how well the firm is at utilizing its fixed assets to
generate sales. The higher the number of ratio, the better and L’Oreal has a fixed asset
turnover of 6-7, which implies that the firm has maximised the use of its fixed assets.

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FINANCING DECISION

1. Debt to Equity Ratio (VALUES IN EUR BILLION)

Liabilities 2014 2015 2016 2017 2018

Total Debt 11.03 9.54 10.59 9.99 10.95

Shareholders’ Equity

Total Equity 20.19 23.61 24.5 24.82 26.93

Debt to Equity Ratio: Total Debt/Total Equity 0.55 0.4 0.43 0.4 0.41

Throughout the year, the debt to equity ratio of L’Oreal is less than 1 which indicates a
positive impact since their equity is more than their debt. Each year, L’Oreal has enough
funds to deal with its downturns.

RETURN ON EQUITY

1. Return on Equity (VALUES IN EUR BILLION)

Net Income 2014 2015 2016 2017 2018

Net Income 2.77 3.3 3.08 3.83 3.9

Liabilities & SHareholders’ Equity

Common Equity 20.19 23.61 24.5 24.82 26.93

Return on Common Equity: Net Income/

13.7% 13.98% 12.57% 15.43% 14.48%
Common Equity (%)

Return on equity refers to the measure of the management’s ability to generate income
from the equity available. Investors want to see a high return on equity and generally,
ROEs of 15-20% are considered as good. From the company ROE in 5 years, L’Oreal has
only reached a value above 15% in 2017.

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OTHER RATIOS

1. Earnings per Share

2014 2015 2016 2017 2018

EPS Basic 8.51 5.92 5.55 6.81 6.96

EPS Diluted 8.39 5.84 5.50 6.76 6.92

2. Return on Asset (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Net Income 2.77 3.3 3.08 3.83 3.9

Total Asset 32.06 33.71 35.63 35.34 38.46

Return on Asset: (Net Income/Total Assets) 8.64% 9.79% 8.64% 10.81% 10.14%

Return on assets (ROA) is a financial ratio that shows the percentage of how profitable a
company’s assets are in generating revenue. ROAs over 5% are generally considered as
good. Thorughout the year, L’Oréal has a ROA above 5%.

3. Net Profit Margin (VALUES IN EUR BILLION)

2014 2015 2016 2017 2018

Net Income 2.77 3.3 3.08 3.83 3.9

Total Revenue 22.53 25.26 24.92 26.02 26.95

Net Profit Margin (Net Profit/Total Revenue) 12.29% 13.06% 12.36% 14.68% 13.03%

The Net Profit Margin indicates how successful a company is in marking a profit on each
euro sales. The higher the net profit margin the more efficient the company is at turning
sales into the profit. The highest percentage of L’Oréal’s NPM is in 2017 which is 14.68%.
Meaning that for every $1 of their sales contributes 14.68 cents towards their profit.

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9. CONCLUSIONS

To close, L'Oréal has been performing very well as far as their budget summaries and
they have been cautious with overseeing money related risks through their internal control
and risk management system that guarantees economic and monetary targets are
accomplished in consistence with the laws and regulations in power. In addition, the
organization has an outstandingly high quality and stable business attributable to the idea
of the beauty industry, which is itself extremely versatile. L'Oréal has pursued all the
legitimate commitments that are required from every nation, regardless of whether it is the
tax collection laws, marketing and sales, sanitation methodology, and so on. If you're
searching for a stable long haul income development and capital appreciation, L'Oréal is
a great option.

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 APPENDIX

[1] L’oréal Finance. (2018). 2018 Registration Document - Annual Financial

Report, Integrated Report - L’Oréal. [online]
Available at: https://www.loreal-finance.com/eng/registration-document

[2] Tradingeconomics.com. (2019). Indonesia GDP Growth Rate | 2019 | Data |

Chart | Calendar | Forecast. [online]
Available at: https://tradingeconomics.com/indonesia/gdp-growth

[3] Tradingeconomics.com. (2019). Indonesia Inflation Rate | 2019 | Data |

Chart | Calendar | Forecast. [online]
Available at: https://tradingeconomics.com/indonesia/inflation-cpi

[4] Tradingeconomics.com. (2019). Indonesia Unemployment Rate | 2019 | Data |

Chart | Calendar | Forecast. [online]
Available at: https://tradingeconomics.com/indonesia/unemployment-rate

[5] Tradingeconomics.com. (2019). Indonesia Interest Rate | 2019 | Data |

Chart | Calendar | Forecast. [online]
Available at: https://tradingeconomics.com/indonesia/interest-rate

[6] Tradingeconomics.com. (2019). Indonesia Consumer Confidence | 2019 | Data |

Chart | Calendar | Forecast. [online]
Available at: https://tradingeconomics.com/indonesia/consumer-confidence

[7] Marketwatch.com. (2019). L'Oreal S.A. Annual Balance Sheet. [online]

Available at:
https://www.marketwatch.com/investing/stock/lrlcy/financials/balance-sheet

[8] Marketwatch.com. (2019). L'Oreal S.A. Annual Financials. [online]

Available at: https://www.marketwatch.com/investing/stock/lrlcy/financials

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