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Debt/equity ratio of perfumery and cosmetics producers in the Russian Federation
Credinform Information Agency prepared a ranking “Debt/equity ratio of perfumery and cosmetics producers in the Russian Federation”. For this ranking, the Russian producers of perfumery and cosmetics with highest revenues were selected. Then, these companies were rated by debt/equity ratio.
Debt/equity ratio is the index that characterizes the proportion between borrowed funds and equity, which are used for funding the company’s activities, i.e. how much borrowed funds was attracted by company for 1 ruble of equity. This index is calculated as a ratio of liabilities of the company to equity. Its target value, according to the order of the Ministry of Economy of Russia, shall be not less than 0.7. The economic literature provides the recommended value of ≤ 1. The excess of this indicator means dependence of the enterprise on external funding sources (credits and loans) and, consequently, the loss of financial stability. At the same time, the debt and equity ratio should not be negative.
The investors use debt/equity ratio first of all for determination of risks related to purchase of shares or bonds. The higher is the ratio, the higher are the risks related to investment of funds in this company. Therefore, the companies with high debt/equity ratio will have to offer the investors with a higher interest rate on bonds and to suffer problems with sale of its shares.
| N | Name | INN | Turnover in 2011, ml rub. | D/Eratio | GLOBAS-i® SolvencyIndex |
|---|---|---|---|---|---|
| 1 | NevskycosmeticsOJSC | 7811038047 | 6,871.91 | 0.21 | 148 (highest) |
| 2 | Unicosmetics LLC | 7826704356 | 2,441.45 | 0.23 | 170 (highest) |
| 3 | L’Oreal CJSC | 7726059896 | 29,224.68 | 0.78 | 187 (highest) |
| 4 | Arnest OJSC | 2631006752 | 5,155.38 | 0.83 | 201 (high) |
| 5 | SvobodaCosmeticCompany OJSC | 7714078157 | 2,547.69 | 1.02 | 187 (highest) |
| 6 | Faberlic OJSC | 5001026970 | 4,857.79 | 1.14 | 192 (highest) |
| 7 | Kalina Concern LLC | 6685018127 | 12,519.74 | 1.87 | 173 (highest) |
| 8 | Vesna Perfumery and Cosmetics Company OJSC | 6311064600 | 2,091.86 | 2.91 | 262 (high) |
| 9 | Mezoplast CJSC | 7721025967 | 2,601.13 | 3.10 | 232 (high) |
| 10 | Oriflame Cosmetics LLC | 7704270172 | 19,114.80 | 9.55 | 306 (satisfactory) |
Analysis of the table shows that only four companies among ten biggest perfumery and cosmetics producers - Nevsky cosmetics OJSC, Unicosmetics LLC, L’Oreal CJSC and Arnest OJSC – have the debt/equity ratio not exceeding the target indicator. Svoboda Cosmetic Company OJSC and Faberlic OJSC have slight ratio deviation.
High value of short term liabilities and accounts payable resulted in excess of target debt/equity ratio of Svoboda Cosmetic Company OJSC, Faberlic OJSC, Kalina Concern LLC, Vesna Perfumery and Cosmetics Company OJSC and Mezoplast CJSC.
Presence of uncovered loss, according to the results of 2011, prevented Oriflame Cosmetics LLC from retaining of the ratio within the target index value, therefore, it achieved the rate of 9.55. Negative result of this coefficient along with uncovered loss in the structure of financial indicators of the company affected the evaluation of financial situation of the company; thereby, Credinform Agency assigned this enterprise with satisfactory solvency index.
Therefore, when having high ratio value, the organization looses its financial independence and its financial position becomes extremely unsustainable. Fore these organizations, it appears more difficult to attract additional loans. Accordingly, the companies should pay higher attention to their debt burden.