Comparison of the Long-term Debt Burden of Two Publicly Traded Companies.

The financial accounts of Coty Inc. and Revlon Inc., two publicly traded firms, will be analyzed and reviewed in this essay. These two beauty brands share an industry affiliation with home and personal products. The author will give a brief overview of the two publicly traded companies, evaluate their financial statements, note any similarities and differences, discuss data from the cash flow statements, name the accounting policies, group the auditors of the companies, and offer her opinion on whether or not to invest in them.

First, Revlon is one of the biggest cosmetics manufacturers in the beauty sector. Charles and Joseph Revson established the business in 1932 with the aid of CR Lachman. Chemist CR Lachman assisted the two brothers in creating their products. The first item produced by Revlon was a nail polish intended to be available in more hues than just red. In the 1950s, Revlon began producing lipstick and became well-known for its “Fire and Ice” shade (“Beauty,” n.d.); the company’s advertising effort attempted to portray American women as glamorous and alluring, even in regular situations. To promote the “American look” around the world, Revlon started using American models in their advertisements in the 1960s. The corporation sought to depart from foreign fashions and establish the “American look” as the dominant force in popular culture (“Beauty,” n.d.). Fresh feminism surged through the United States in the 1970s. Revlon created new goods to portray the advancement and achievement of women. During this time, the company produced face and eye makeup. “Charlie,” a fragrance created by Revlon in 1973, would become the most popular and sought-after item of its time. Revlon decided to leave department stores in the 1980s and rose to prominence as one of the leading mass-market cosmetic companies. In the 1990s, Revlon released its renowned “Colorstay” lipstick line after making numerous innovations. Halle Berry served as the face of the company, which rose to the top of the long-wear market. Revlon has continued to work with Gucci Westman and push itself to be a leader in fashion and trends. Revlon has gained the respect of female customers across all age groups due to various collaborations and projects with celebrities. Vanity tables, individual makeup bags, and beauty salons worldwide sell Revlon products.

Coty Inc. will be the next firm this essay analyzes. Francois Coty established Coty Inc. in New York City in 1922. A scent was created by Coty and served as the business’s initial offering. The business, which today makes cosmetics and other beauty or health goods, originally started as a manufacturer of fragrances. Despite having its headquarters in New York, Coty makes the majority of its sales in countries in Western Europe, such as France and Germany (Editorial, n.d.). By 1929, the company produced and sold 23 fragrances, including powders, bath salts, hair, hand lotions, vanishing cream, toilet soaps and waters, shaving soap, and powder and rouge compact portables. Coty founded the business after his fragrances became popular because American soldiers brought perfumes and face powder home after World War I. Net income for the business was $1.07 million in 1923 and $4.05 million in 1928. After Francois Coty passed away in 1934, Coty Inc. established a board of directors and went public.

Calvin Klein, Balenciaga, Marc Jacobs, Chloe, Miu Miu, Katy Perry, Guess, Roberto Cavalli, Beyonce, Bottega Veneta, and Davidoff are currently among the fragrance brands carried by Coty (Editorial, n.d.). The company creates lip, eye, nail, and facial color products to compete with rival brands like OPI, Sally Hansen, Rimmel, and Bourjois. The company distributes Philosophy, Playboy, and Adidas for skin and body care goods. Supermarkets, independent and chain pharmacy stores, pharmacies, upscale fragrance shops, nail salons, specialized shops, conventional food, drug, mass merchants, and upscale and mid-tier department stores carry all these products. Nevertheless, Coty still gets more than two-thirds of its income from outside the United States.

Financial analysis of Coty Inc.

Coty Inc. looks to be having trouble keeping up with its immediate needs despite making minimal revenues. The company’s total assets are $22.63 billion, and its $1.536 billion in receivables provide most of its financing. The corporation has a small quantity of cash on hand because, as of 2018, it only had $362 million (“COTY,” n.d.). Despite having a sizable total asset base, the company’s current assets must outpace its current obligations. The current liabilities of the corporation are greater than its current assets, with current liabilities at

Current assets are $3.651 billion, and total assets are $4.044 billion. According to these figures, Coty Inc. has a current ratio of 0.90, which indicates that it has trouble having enough liquid assets to satisfy its short-term commitments. Further indications indicate a high probability of default or financial difficulties for the company. Additionally, the company’s receivables turnover is far lower than payables, indicating financial difficulty. Compared to the days’ payable receivable, 136.03, the days’ receivable ratio is 6.25 (“COTY,” n.d.), showing that Coty Inc. is not paying its suppliers back soon enough.

Conversely, the days’ receivable ratio shows the business can easily collect from customers. According to Coty Inc.’s financial statement, most of its funds come from inventory and accounts receivable, and the assets could be more effectively utilized to pay down the liabilities. The corporation must better manage its assets to pay off its debts and increase its worth.

The stock price of Coty Inc. is at $7.31, which is the lowest it has been during the past three years due to the company’s current financial predicament. The stock price reveals that investors believe the company needs to be more valuable to command a high price and that its earnings are insufficient to support a high stock price. Earnings are important in establishing a company’s stock price, but Coty Inc. needs help to make enough money to pay its debts. The company’s supply may also affect the stock price. Coty Inc. might not be as interesting to investors as other companies because of the new market shifts and the constant addition of new competitors. According to the price-to-earnings ratio, the company is losing money to its shareholders, which stands at -31.78. The company needs to make more money, and the high current liabilities can signify that a significant one-time expense is required. The cost can have been incurred by collaborating with or investing in bigger businesses or buying expensive raw materials for product creation.

Financial Information Review for Revlon, Inc.

Revlon Inc. seems to be a financially sound corporation based on the 2017 financial statement. Revlon’s total current assets and liabilities are $1.143 billion and $932 million, respectively. These sums result in the company’s current ratio being 1.23, which is very good financially. The company has enough cash, accounts receivable, inventories, and other assets to cover all short-term liabilities. The majority of the company’s funds appear to originate from its inventories ($498 million) and accounts receivable ($445 million) (“REV,” n.d.). Since it is a cosmetics company, its inventories should be its main source of assets. The business produces a wide range of goods that are subsequently sold all over the world in a variety of colors and styles. Revlon’s products can be found in any pharmacy, department store, or salon in the US and other nations, proving their accessibility to customers everywhere. With such a large customer base, Revlon must produce sufficient items to satisfy consumer demand. Revlon is quickly collecting consumer profits, as seen by its 6.20 receivables turnover. On the other hand, the payables turnover is $247, meaning that Revlon needs help reimbursing its suppliers. A business that produces and sells a product of this size must help pay all its suppliers for the necessary materials.

Secondly, Revlon Inc.’s stock currently trades for $24.95. The stock price rose steadily throughout 2018 from a low of $22.60 in January to a high of $28.09 in November (“REV,” n.d.). Additionally, the price-earnings ratio for this stock is -7.17. The bad number indicates that the business could have been more lucrative and is losing money. The company’s accounts payable and other current obligations are a good example of this effect because they are quite substantial, and the current assets barely cover them. There is almost as much debt and obligation as current assets due to the $337 million in accounts payable and the $364 million in other current liabilities. The company’s negative price-earnings ratio, which implies that investors do not place a high value on the business, indicates low earnings for Revlon.

The price-earnings ratio is still low right now. So, there is still time for the corporation to change its course and work toward a positive EPS. This can be done by increasing sales and profitability, reducing expenditures elsewhere, or starting a new initiative to increase sales considerably. In the cosmetics industry, fads and trends are short-lived. As a result, a business needs to be able to develop projects that will bring in the most money during the brief period when the products are in demand. To increase the company’s earnings and stock price, the profits must exceed the costs and debts.

Comparative and Disparate Features of the Two Companies

Because Coty Inc. and Revlon Inc. operate in the same sector of the personal care and beauty products market, their financial statements reflect comparable operational and financial management practices. Both must have a sizable amount of inventory because they are both retailers. A company’s inventory ought to be one of its most valuable assets because the products will bring in money for the business. As mentioned, Coty Inc.’s inventory is worth $1.149 billion, whereas Revlon Inc.’s is worth $498 million. Coty Inc. is a sizable business that produces and distributes goods under numerous names, as seen by its vast inventory.

Additionally, Coty Inc. creates a wider range of goods than Revlon Inc. since the latter only makes cosmetics, while Coty also makes skincare items and bathroom needs. With such a long list of goods to produce and sell, inventory assets are undoubtedly considerable. The inventory of Coty Inc. shows that the company has a variety of resources and commodities to function, with completed items accounting for $849 million and raw materials for $279 million. The company also needs sufficient machinery and equipment to finish the products because it must produce a wide range of goods. Even with $866 million in machinery and equipment, the company’s assets can only cover some of its immediate obligations.

Despite having substantially less inventory than Coty Inc., Revlon Inc. seems more adept at using its assets to pay short-term debt and commitments. Because Revlon does not allow itself to borrow more than it can afford, the company reaps more rewards. As a result, the price-earnings ratio is significantly higher than Coty’s, which would attract more shareholders and investors for the business. Revlon practices fiscal restraint and ensures that profits are sufficient to cover all expenditures and expenses. Coty Inc. appears to be a business that takes on more debt and risks than it can handle, which could benefit them in the short run if it can make enough money to boost its way back up. They could be able to cut costs if their financial managers were able to locate suppliers and materials that were less expensive.

The aggregate amount invested in inventory by these two cosmetics companies is relatively similar, but their spending capacity is very different. Coty Inc. looks to spend far more than it can afford, placing the business at risk of financial trouble or bankruptcy. Although the turnover of receivables might be favorable, it might need to be sufficiently high to provide profits for the company to emerge from its dangerous situation. Revlon Inc., on the other hand, seems to be managing its spending prudently, but it is only turning a small profit to remain competitive with other businesses in the market. Both businesses have sizable current assets, and because they are retailers, they rely on their inventory to lessen their financial responsibilities.

Payables Statement

The cash flow statement adds unfavorable information to Coty Inc.’s financial statement about the company’s financial status. The company’s net operating cash flow in 2018 was $413 million compared to $757 million in 2017, a significant decline. This change in operating cash flow or growth of -45.39% produces nearly half of the drop. This action indicates that the business is having trouble making a profit and needs more money from sales. Despite the high manufacturing and selling costs, the corporation must make more money from operations.

Additionally, the corporation needs to invest its supplies and equipment effectively, as seen by the fact that depreciation has climbed to $737 million. Regarding investing operations, net assets from acquisitions also fell to a more favorable level of -$278 million from -$752 million in 2017. Coty Inc.’s assets and liabilities were negotiated since it sold more of its assets in 2018 than it did shares. The company’s assets have drawn additional interest from other investment firms, allowing those funds to be allocated to their immediate responsibilities. Coty Inc. increased its net investment cash flow by having other businesses invest in their assets. Due to financing actions, Coty Inc. decreased its debt by $482 million in 2018. This shows that most of Coty Inc.’s assets and profits were used to pay off debt for the current year. Aside from the debt reduction, the money used for other financing activities was similar to 2017.

In 2017, Revlon Inc.’s net income underwent a considerable change. Compared to 2016, the net income dropped to -$183 million from -$21.9 million. This steep decline can indicate that the company’s earnings and sales could have kept up with the wear and tear on its machinery, equipment, and goods. The corporation might need to spend in the correct areas for its operating activities if depreciation in 2017 amounted to $100 million. Additionally, working capital dramatically declined, falling to -$143 million from -$53 million in 2016. This decline suggests that there needed to be more sales and revenues from the products to cover the costs of the supplies and services utilized to market the products.

However, compared to -$59.5 million, the receivables grew favorably to -$9.9 million. The company was still spending more on its products than it was earning back, even though customers may have made more purchases, increasing the number of receivables for the business. For its investing activities, the corporation had no net assets from purchases. The company made no asset purchases in 2017, so it did not needlessly spend money that might have endangered the business. By cutting back on unnecessary spending, Revlon Inc. raised its net investment cash flow growth to 90.04%.

Last but not least, Revlon Inc. may be seen to manage debt effectively in its financial activities. It only took on $155 million in long-term debt in 2017 and paid down $141 million of that debt. The corporation had $838 million in debt still owed as of 2016. The fact that the year has changed suggests that the business has discovered a way to prevent adding to its debt. The corporation had a more positive cash flow due to limiting its borrowed amount and not spending extra money. However, in 2017, Revlon Inc. significantly declined free cash flow, totaling -$247 million. This demonstrates the company’s failure to produce enough cash to sustain the operation. Most of the company’s assets were in inventory and cash receivables, but the cash on hand was small.

Unusual Behavior

Coty Inc. seemed to be having much trouble in 2018, as its working capital dropped from $866 million to -$218 million. This is a drastic adjustment, and the company probably had trouble selling its goods due to its inability to profit. The accounts receivables shifted from -$279 million in 2017 to -$79 million in 2018. This change of $200 million is a sizable amount, suggesting that although consumers were buying the products, more was needed to profit. Additionally, the company’s stockpiles fluctuated significantly throughout the year, going from $162 million to -$60 million in both number and quality. The company suffered due to the huge drop in inventory since it had fewer assets overall and could not pay off its debt.

Accounting Procedures

The two companies’ business combination accounting policies looked to differ. For Revlon Inc., discounted expected future cash flows were used to calculate the fair value of its goodwill and intangible assets. To account for extreme changes that the market was unaware of, Coty Inc. used the probability-adjusted discounted cash flow method to determine fair prices. Earnings are used to define any adjustments to the fair value brought on by the passage of time or by things that happen after the purchase date.

Methods for Inventory Valuation

Revlon Inc.’s financial statements used the first-in, first-out technique of inventory valuation. “Direct materials, direct labor, direct overhead, and inbound freight” were among the cost factors, according to REV (n.d.). Revlon Inc. calculates the inventory value based on its intentions to sell its inventories and anticipated discontinuations. While determining the inventory’s worth, factors like age and the quality of the stocks’ physical state were also considered. The modifications were estimates made in the event of any changes to the economy, product discontinuations, client inventory levels, unanticipated sales return levels, or market conditions.

The first-in, first-out technique of inventory valuation was used in Coty Inc.’s financial statements. The inventories could be used in subsequent accounting periods and were valued at a lower cost or net realizable value (“COTY,” n.d.). The cost included “direct materials, direct labor and overhead, and inbound freight costs” (COTY). The inventories in the financial statements were divided into different categories depending on where they were in the product life cycle, how they were disposed of, and future marketing and sales objectives.

Auditors

Deloitte & Touche LLP served as Coty Inc.’s auditor, and according to the opinion letter, the company’s financial statements were fairly presented in all material respects as of June 30, 2018, and 2017. The operations’ results and cash flows were per US GAAP standards.

KPMG LLP served as Revlon Inc.’s auditor and reported that the company’s consolidated financial statements were prepared following US GAAP. The opinion letter stated that the company’s accounts and information were included in the consolidated statements after significant intercompany transactions and balances were eliminated. In addition, certain figures from prior years have been revised and organized per the standards for the current year. Intangible and long-lived assets purchased, the recoverability of goodwill, income taxes, and the computation of net periodic income expenses all underwent significant estimations.

Conclusion

I would have felt considerably more at ease investing my funds in Revlon Inc. after comparing it to Coty Inc. Coty Inc.’s financial accounts from the beginning showed that they were having trouble making ends meet because they did not generate enough revenue and profit to cover their immediate costs and obligations. The corporation had been overspending on product manufacturing and sales, but more than the revenues were needed to cover the production demands. However, compared to Coty Inc., Revlon Inc. had a significantly stronger financial standing. It is clear that Revlon Inc. refrains from making excessive purchases and limits the amount of long-term debt it takes on. I deduced from the cash flow statement that Revlon Inc. battled with its working capital but managed its overall debt well. The debt was carefully managed and controlled because adding more would have put the business at risk of financial trouble. Coty Inc. appeared careless, and some unanticipated costs increased the size of its 2018 short-term commitments. Coty Inc. possessed a sizable inventory but needed more assets to cover its current liabilities despite its best efforts. Both businesses seemed to have trouble covering immediate expenses, but Revlon Inc. was better at converting its inventory and assets into cash. Comparing the company to Coty Inc., it had more impressive ratios overall and a higher liquidity rate.

References

Beauty Products: Makeup, Fragrances, Hair Color, Nails, Beauty Tools. (n.d.). Retrieved from http://www.revlon.com/behind-the-color/legacy

COTY Financial Statements – Coty Inc. Cl A – Wall Street Journal. (n.d.). Retrieved from https://quotes.wsj.com/COTY/financials

Editorial, R. (n.d.). Company Profile | Reuters.com. Retrieved from https://www.reuters.com/finance/stocks/company-profile/COTY

REV Financial Statements – Revlon Inc. Cl A – Wall Street Journal. (n.d.). Retrieved from https://quotes.wsj.com/REV/financials

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Leverage can impose a financial burden on companies.

It can also create opportunity costs for the future. For this week’s discussion, compare the long-term debt burden of two publicly traded companies. Select two publicly traded companies from the same industry. Review the long-term liabilities section of the latest annual report for each company and write a 1-3 paragraph analysis of your findings as your main post. Include a copy of the companies’ balance sheets with your analysis.

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