Wsj Assignment

In: Business and Management

Submitted By hcshah
Words 1872
Pages 8
Topics: Strategy, Changing Markets, Cash Flow
_______________________________________________

Avon’s Investments Fall Short by Hannah Karp, Wall Street Journal, December 8, 2011

QUESTIONS:

1: Briefly describe the main points of the article.
The article highlights Avon Products Inc.’s financial and regulatory woes.
Avon’s wide and persistent gap between net income and free cash flows have been highlighted as the main reason for the company’s problems. The gap indicates that the company's investments aren't paying off very well and that its net income doesn't fully reflect depreciation and other costs of those investments.
Other problems like computerized supply-management system in Latin America, Avon's direct-selling model in China and not being able to understand the American consumer have all led to a shortage of free cash flow.
The article also talks about Avon being under the scrutiny of Securities and Exchange Commission for allegations of bribing foreign officials and improperly disclosing information to Wall Street analysts.
2: How are Net Income and Free Cash Flows calculated differently? What does it mean when the article states “free cash flow and net incomes tend to balance out over the long run”? * Net income amounts to revenue minus costs and the depreciation of a company's assets * FCF = NOPAT (Net Operating Profit after Taxes ) - Net investment in operating capital
When the article states “free cash flow and net incomes tend to balance out over the long run” it means that as a start-up company, free cash flow often falls short of net income because the young businesses are investing heavily in their future. But it typically starts exceeding net income as companies mature and their initial capital investments start generating returns.
3: What do the analysts and accounting experts say are the problems and the resulting…...

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