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L’OREAL CASE STUDY – SUGGESTED ANSWERS
1. Provide a brief financial analysis of L’Oréal. State your views.
The L’Oréal group has been experiencing strong growth, mainly in terms of volumes, which
picked up pace in 2000 as a result of an acquisition. This growth is well controlled and has
resulted in a relative improvement in margins (breakeven point).
Unsurprisingly, total capital expenditure exceeds depreciation, as the production plant will
have to be expanded in order to keep up with growing sa les.
The fact that working capital requirement is increasing at a slower pace than the activity, and
accordingly is decreasing as a % of sales, is further evidence that L’Oréal’s growth is well-
controlled.
Working capital requirement is covered by cash flows generated by the activity and there is
no need for a capital increase or for taking on new debts. On the contrary, net debts, already
very low (0.5 x Ebitda), continue to fall.
As a result, ROE is excellent without the leverage effect coming into play, thanks to the
growing contribution of the stake in Sanofi-Synthelabo – 17% of L’Oréal’s earnings in 1999,
and 29% expected in 2003.
At 17% in 2003, ROE is well above the cost of equity. Accordingly, L’Oréal is creating a lot
of value for its shar eholders.
From a financial point of view, L’Oréal is in excellent shape, with good growth and returns
that make its shareholders very happy.
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