April 22, 2016

Coty May Not Be So Pretty, According To Adjusted Valuations


Summary

  • Using Adjusted Earnings, COTY’s Adjusted Return on Assets was 24% in 2015 – much higher than the traditional 5% ROA most financial databases report.
  • This difference is primarily caused by COTY’s $1.8B goodwill, which significantly distorts the firm’s economic reality.
  • Also of note is the difference between COTY’s Adjusted Value-to-Assets ratio of 7.0x versus the firm’s traditional forward P/B of 78.9x.

COTY - 2016 04 14

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of COTY do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of COTY’s profitability measures and valuation metrics are primarily driven by the inclusion of the firm’s goodwill ($1.5bn) and other intangibles ($1.9bn), which inflate the firm’s asset base.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates COTY’s Adjusted Return on Assets as 24% in 2015. In contrast, most financial databases show a traditional ROA of only 5%. Additionally, our analysis shows that COTY has an Adjusted Value-to-Assets ratio of 7.0x, compared to the firm’s traditional forward P/B at 78.9x. The profitability of COTY’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.


Click here to read the article in its entirety at Seeking Alpha.