Financial Performance of Avon Products

71138781 Avon Products

Financial Ratios

These are the indicators of the financial performance of the company as well as its position. The ratios can also be used to calculate the trends and the performance of the company that can be used for comparison against competitors and industry trends.

Ratios provide different information and are thus classified according to the information they provide

            The most common classification is as follows;

             I.      Liquidity

          II.      Asset turnover ratios

       III.      Financial leverage ratios

       IV.      Profitability ratios

          V.      Divided policy ratios

Profitability ratios

Gross margin ratio – measures the gross profit on sales and it helps to show the level of sales that can cover the operating expenses of company

Gross profit margin =    sales- cost of sales

                                               Sales

2004                                                                                    2003

7656.2-2911.7                        6773.7-2611.8

   7656.2                                       6773.7

                                                                       =62%                                      =61%

The gross profit margin should be on an increasing trend

Operating profit margin- this ratio shows the profits generated from current operations before subtracting interest expenses and taxes

Operating profit margin= sales- operating expenses     or       operating income

                                                           Sales                               sales

2004                                                        2003

1229                                                        1042.8

7656.2           =16.1%           6773.7 =15.4%

Higher profit margin ratios are desired

Net profit margin- shows the level of net profits relative to every dollar of sales made

Net profit margin (net return on sales) = profit after taxes

                                                                       Sales

2004                                                        2003

856.9                                                                              674.6

7656.2           =11.25                       6773.7 =10%

The higher the net profit margin the better

Return on asset- it measures the effectiveness of the management in utilizing the company’s assets to generate profits

Return assets= net income     or      profit after + interest

                         Total assets                total assets

2004                                                        2003

846.1                                                      664.8

4148.1           =20.4%           3581.6 =18.6%

The higher the ROA the better the performance of the company

Return on equity- measures the amount / level of profit generated by every dollar invested into the company.

This ratio helps the stockholders gauge the performance of their investments.

Return on equity= profit after taxes  or   net income

                                   Total equity                equity

2004                                                                                2003

846.1                                                                              664.8

950.2 =89%                          331.3 = 179%

Financial leverage ratios

These ratios shows the ability of the company to pay off its debts i.e. indicates the long term solvency of the company. Financial leverage ratios measure the level of long term debt in the company’s books.

Debt-to-equity ratio- it determines the amount of debt that the company can borrow in the long run. It basically shows the level of indebtedness in the company’s financial statements.

            Debt-to-equity ratio varies from industry to industry but essentially, a company should not be leveraged so much because too much debt weakens the strength of the balance sheet.

            Debt-to-equity ratio= total debt    or    total liabilities

                                               Total equity        total equity

2004                                                        2003

3197.9                                                    3210.3

      950.2       =3.37             371.3      =8.65

Times interest earned- it shows the number of times the pretax profit can cover the amount of interest expense on the debt of the company. Times interest earned measures the ability of the company to pay of its debt obligations.

            Times interest earned (interest leverage) = operating income

                                                                                  Interest expenses

2004                                                                                2003

1229                                                                                1042.8

33.8    = 36.4                         33.3      = 31.3

Asset turnover ratios/ activity ratios

There ratios determines how efficiently the management of the company is using the assets. It basically evaluates the performance of the management i.e. their ability to efficiently utilize the assets.

Days of inventory- this ratio shows the number of days the company holds inventory. It shows the management efficiency in turning stock in to revenues. The shorter the days in inventory, the better.

Days in inventory= inventory (average)                    or                    365 days

                                   Cost of goods sold ÷ 365 days                     inventory turnover

2004                                                                                                        2003

740.5                                                                                                      653.4

2911.7/365 = 93 days                                   2611.8/365 = 91 days

Inventory turnover ratio- this ratio measures the number of times stock is sold in a year. The higher the number of times the better because it indicates that the stock is moving

Inventory turnover ratio = cost of goods sold

                                           Average inventory

2004                                                                                2003

2911.7                                                                          2611.4

740.5  = 4 times                     653.4 = 4 times

Average collection period- it indicates the number of days on average that the receivables take to be collected.

Average collection period = accounts receivable or 365

                                               Total sales/365            receivables turnover

2004                                                        2003

599.1                                                      553.2

7656.2/365                6773.7/365

=29 days                               =30days

Financial performance of the company

The financial performance of the company is evaluated by establishing the pattern of the calculated financial ratios. The company’s financial position will have improved if this year’s ratios are better than last year’s.

            The liquidity ratios of Avon Inc for 2004 indicate that there is an improvement from the 2003 performance. Generally the higher the liquidity ratios the better the performance of the company.

            The only profitability ratio that declined is the return on equity which fall from 179% to 89%

            The financial leverage ratios for the year 2004 shows an improved performance; the debt-to-equity ratio fell while the times interest earned increased. This indicates that the company is using less debt and therefore paying less interest expenses.

            The asset turn over ratios indicates that there is no significant change in the efficient utilization of the company’s assets. All the ratios (days in inventory turnover ratio and average collection period) have  not changed much.

            The company as improved on its profitability as well as its use of debt but the management should improve on the use of its assets as shown by the asset turnover ratios.

Reference:

NetMBA.com (2007) Financial Ratios. Retrieved on 11/2/2008 from http://www.netmba.com/finance/financial/ratios/