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SOGEN FUNDS'
JEAN-MARIE EVEILLARD ET AL.
(continued from preceding
page)
The peak year for Emin Leydier's earnings this cycle was 1995. And it looks like 1996 will be the trough year - at least for their paper segment - because paper prices are already up about 5% from 1996 levels. But they're in both paper and corrugated board. And corrugated board prices have not yet turned.
So if you take their return on equity of 22% in 1995 and a little over 2% in 1996 - in effect, factoring in a good year and a bad year - you see that they reported an average return on equity of about 12% for that period.
OID: Which is a good country mile - in France or anywhere else - from your estimate of 18-20%.
Eveillard: Yes. But Emin Leydier's depreciation is far above what it would be were it an American company.
OID: What would their earnings and returns look like were Emin Leydier to use American-style depreciation?
Tobin: American paper companies - excluding their forest products and other non-paper segments - probably average depreciation of something like 6% of sales per year. By contrast, depreciation at Emin Leydier has averaged well over 10% of sales since 1993. So we can calculate the impact of American levels of depreciation on Emin Leydier's earnings easily enough.
However, if your objective is to assess the impact of depreciation on their returns, you should also consider that lower depreciation levels would also have the effect of increasing their net worth. So it's not that simple.
OID: No problem. We're happy to spare no effort in the analysis - so long as the effort's yours.
Tobin: I've noticed. As you see, their depreciation jumped dramatically in 1993. That was because they began their big spending spree on equipment that year.
So when I reduce their depreciation to 6% of sales in 1993, 1994, 1995 and 1996 and adjust their net worth accordingly, their return on average equity for those years would be about 15%, 17%, 26% and 11%, respectively.
EMIN LEYDIER
AS ADJUSTED*
FF (millions)
|
|
Income |
Earnings |
Equity |
on Equity |
Tobin: Obviously, these are very rough figures that
I've done on the fly.
OID: What we call back-of-the-envelope.
Tobin: Not quite that rough. But with those
Page 16 of 20
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