Avon financial analysis
Profitability analysis
Avon’s return on assets was -7.07 for the year ended December 31st, 2014 indicating that it suffered a net loss of $0.0707 for every dollar of total assets used during the period. The negative sign shows that the company’s operations were not profitable (Berry, 2011). ROA was -0.5757% in 2012 and -0.8687% in 2014. This trend shows that the firm’s return on assets declined in both 2013 and 2014 implying a decline in Avon’s profitability.
Its return on equity was -134.1% in the year 2014 meaning that it earned a loss of $1.34 per dollar of equity (Gibson, 2013). The ratio was -5.08% and -3.492% in 2013 and 2012 respectively. The negatives imply that the firm was not profitable and that its shareholders had a negative return on their investments in the company (Gibson, 2013). The trend also indicates that Avon’s return on equity decreased in 2013 as well in 2014. This suggests that the profitability of Avon deteriorated in the years 2013 and 2014. In 2014, there was a massive decline in the profitability as shown by the enormous fall in the return on equity.
Avon’s gross profit margin for 2014 was 6.05% indicating that only 6.05% of the total revenue was available to cover the firm’s operating expenses. It increased from 6.115% in 2012 to 6.21% in 2013 then fell to 6.05% in 2014. This means that the availability of revenues to meet operating expenses increased slightly in 2013 but decreased in 2014. The decline in 2014 further suggests a fall in the profitability of Avon.
Avon’s earnings per share were -$0.88 showing that shareholders lost $0.88 for each stock held in the company. This shows that shareholders earned a negative return on their investment in Avon. Earnings per share were -$0.13 in 2013 and -$0.10 in 2012. The trend shows that earnings per share declined in both 2013 and 2014. The decline was greater in 2014 than in 2013. This further suggests the profitability of Avon decreased in 2013 and 2014.
The price to earnings ratio for Avon in 2014 was -10.67 implying that investors were willing to pay $10.67 for every dollar of loss the company made during the year. In 2012, P/E ratio was -132.5 meaning that investors paid $132.4 for every dollar of the company’s loss during the year. In 2012, P/E ratio was -143.6 suggesting that investors were willing to pay more for one dollar the company’s loss in 2012 than in 2013 and 2014. This decline indicates a fall in investor’s confidence in the future performance of the firm. If investors anticipate a strong future performance, they will pay more for the company’s stock even if it making losses (Gibson, 2013). It further indicates that the profitability of Avon has declined, and investors expect the decline to continue. This is also shown by the steep decline in the company’s stock market price. The closing price of Avon’s stock as on December 31st, 2013 was $17.22 but this dropped to $9.39 on 31st December 2014 (Finance.yahoo.com, 2016).
Cash flow per share was -$0.451 in 2014 indicating that the company did not have adequate funds to finance activities above its level of costs. It further shows that it did not generate sufficient income to meet other activities other than current costs. The ratio was $0.392 in 2013 and $0.394 in 2012. The decline in cash flow per share in 2013 and 2014 indicates a fall in the company’s profitability.
Liquidity analysis
Avon’s current ratio as at the ended of the year 2014 was 1.448 indicating that if sold, its current assets could repay 144.8% of the total current liabilities. Thus, it had sufficient current assets to settle its short-term obligations. However, the ratio was less than recommended figure of between 2 and 3. The current ratio was 1.453 in 2012 and increased to 1.536 in 2013. The increase shows that the liquidity of Avon improved in 2013. However, the firm’s current ratio decreased from 1.536 in 2013 to 1.448 in 2014. The decline suggests a fall in the liquidity of the firm.
The quick ratio for Avon at the end of 2014 was 1.046 indicating that its quick assets if sold, were sufficient to repay all its short-term liabilities. Quick assets exclude inventories since there are not readily convertible into cash that is required to repay debts (Stickney & Stickney, 2010). Avon’s quick ratio increased from 1.046 in 2013 to 1.104 in 2014 then decreased to 1.046 in 2014. This shows that the liquidity of Avon increased in 2013 but declined in 2014.
Leverage analysis
Avon’s debt to assets ratio as at 31st December 2014 was 0.947 implying that 94.7% of its operations were financed through borrowing (Stickney & Stickney, 2010). This figure is very high and shows that the firm’s solvency is low. In 2012, the debt to assets ratio was 0.835, but this fell to 0.829. The fall indicates that the solvency of Avon improved in 2013. However, the ratio increased by over 10% in 2014 showing a decline in the solvency of Avon.
The firm’s debt to equity ratio was 17.97 as at 31st December 2014. The ratio is more than one indicating that its total debt was 17.97 times the value of its total equity. It further shows that the solvency of the company is low. The debt ratio decreased from 5.066 in 2012 to 4.848 in 2013 showing a fall in leverage and an improvement in the solvency of the company. However, it increased in 2014 meaning that Avon’s solvency decreased.
Times interest earned ratio was 5.11 times in 2012, but this fell to 2.348 in 2013 then increased to 2.478 in 2014. This indicates that the interest cover by the company’s earnings fell in 2013 but slightly improved in 2014.
Conclusion
The analysis shows that the performance of the company deteriorated in both 2013 and 2014. Profitability analysis indicates that the profitability of Avon declined. All profitability ratios declined in 2014 and 2013. Furthermore, the liquidity analysis indicates a decrease in the liquidity of Avon. Leverage analysis also shows a decrease in the solvency of the company and that the firm’s leverage is high. The high leverage further reduces Avon’s return on equity since its return on assets is negative. As suggested by DuPont analysis, an increase in leverage would increase the return on equity if the return on assets (total assets turnover and net profit margin) is positive. In this case, Avon’s return on assets is negative hence it does not benefit from increased leverage.
Areas the top management of Avon needs to act on include the falling revenues and total shareholders’ equity. The company’s total revenue fell in both 2013 and 2014. The company may not sustain its operations in future periods if its revenues continue to fall. Also, the increase in leverage and the decline in total equity increases its financial risk. With the falling profitability, the company may be unable to meet its obligations to pay interest on debt if this trend is not reversed. Failure to meet interest obligations may prompt creditors to petition for Avon’s liquidation.
References
Berry, L. (2011). Financial accounting demystified. New York, NY: McGraw-Hill.
Finance.yahoo.com,. (2016). AVP Historical Prices | Avon Products, Inc. Common Stoc Stock - Yahoo! Finance. Retrieved 22 February 2016, from http://finance.yahoo.com/q/hp?s=AVP&a=11&b=31&c=2012&d=11&e=31&f=2014&g=d
Gibson, C. (2013). Financial reporting & analysis. Mason, Ohio: South-Western.
Stickney, C., & Stickney, C. (2010). Financial accounting. Mason, OH, USA: South-Western Cengage Learning.
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