Estee Lauder Financial Ratio Analysis

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LIntroduction
The purpose of this report is to highlight and assess the financial strength of Estee Lauder. This report will cover Estee Lauder’s Profitability, Liquidity, Leverage and Activity Ratios, which will be 19 key ratios. Secondly, these ratios will be interpreted to evaluate the current performance of the company with its historic figures of prior three years. Lastly, all these ratios will be compared with Cosmetics and Beauty Industry average and its competitor L’Oreal in 2012.

Table # 1 Summary of Key Financial Ratios of Estee Lauder
Estee Lauder Financial Ratios|
RATIOS | (MRQ)2012| FY 2011| FY 2010| Industry| L’Oreal SA.| Profitability Ratios %| | | | |  |
Gross Profit Margin| 80.40%| 78.01%| 76.53%| 49.16%| 71.24%| Operating Profit Margin| 13.50%| 12.37%| 10.13%| 13.76%| 15.71%| Net Profit Margin| 8.82%| 7.95%| 6.14%| 10.75%| 11.99%| Return on Total Assets| 13.32%| 12.07%| 9.10%| 1.83%| 9.58%| Return on Equity| 31.96%| 30.62%| 26.66%| 3.14%| 16.72%| Return on Invested Capital| 21.78%| 19.95%| 15.33%| 2.58%| 14.61%| Liquidity Ratios| | | | |  |

Current Ratio| 1.81| 1.90| 1.99| 0.50| 1.08|
Quick Ratio| 1.35| 1.13| 1.19| 0.39| 0.67|
Inventory to Net Working Capital| 3.47| 4.35| 2.66| 8.02| 6.34| Leverage Ratios| | | | |  |
Long-term Debt to Equity| 0.38| 0.40| 0.61| 5.67| 0.32| Total Debt to Equity| 47.13| 46.02| 62.50| 7.14| 6.61| Financial Leverage| 0.39| 0.41| 0.62| | 1.52|
Equity to Total Asset| 0.41| 0.42| 0.36| 0.58| 0.65|
Activity (Efficiency) Ratios| | | | |  |
Days Sales Outstanding| 37.69| 35.05| 37.44| 31.22| 50.97| Receivables Turnover| 9.69| 10.41| 9.75| 11.53| 7.16| Days in Inventory| 180.98| 171.69| 161.77| 133.12| 120.46| Inventory Turnover| 1.70| 2.26| 2.11| 1.17| 3.10|

Fixed Assets Turnover| 8.18| 8.13| 7.60| 5.21| 7.32|
Assets Turnover| 1.51| 1.52| 1.48| 0.27| 0.80|
(Morningstar, 2012; Reuters, 2012)

Table # 2 Profitability Ratios
Profitability Ratios %| 2012| 2011| 2010| Industry| L’Oreal| Gross Profit Margin| 80.40%| 78.01%| 76.53%| 49.16%| 71.24%| Operating Profit Margin| 13.50%| 12.37%| 10.13%| 13.76%| 15.71%| Net Profit Margin| 8.82%| 7.95%| 6.14%| 10.75%| 11.99%| Return on Total Assets| 13.32%| 12.07%| 9.10%| 1.83%| 9.58%| Return on Equity| 31.96%| 30.62%| 26.66%| 3.14%| 16.72%| Return on Invested Capital| 21.78%| 19.95%| 15.33%| 2.58%| 14.61%| Every firm is most concerned with its profitability. Therefore, profitability ratios are frequently used in financial ratio analysis to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs (Investopedia, 2012a).

According to the table, gross margin of Estee Lauder has been growing steadily in the past three years from 76.53% to 80.40%. The gross profit margin shows how efficiently management uses labor and supplies in the production process. Compared to industry average, Estee Lauder is almost double of industry average, which is 49.16%. Basically, a gross profit margin of 80.40% means that for every dollar generated through sales, Estee Lauder has $0.80 left over after deducting the cost of goods sold. The date also indicates that Estee Lauder have more money left over to spend on other business operations, such as research and development or marketing.

Estee Lauder’s operating profit margin has increased by 13.5% since 2010. It means that for every dollar generate in income from operations, the company has $0.13 left over to cover basic sales costs. The company’s management has been at generating income from the operation of the business. However, the operating profit margin is below the industry average, which is 13.76%. The operating profit of L’Oreal is higher than Estee Lauder and industry average. It means L’Oreal has the most effective control...
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