Business & Finance Case Study: Comparing Companies Assignment
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Chapter6-EssentialsofFinancialStatementAnalaysis.pptxEssentials of Financial Statement Analysis
Revsine/Collins/Johnson/Mittelstaedt/Soffer: Chapter 6
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Learning Objectives 1 After studying this chapter, you will understand:
How cause-of-change analysis and common-size and trend statements illuminate complex financial statement patterns and shed light on business activities.
How competitive forces and business strategies affect a company’s profitability and financial position.
How return on assets (R O A) can be used to analyze a company’s profitability, and what insights are gained from disaggregating R O A into its profit margin and asset turnover components.
How return on common equity (R O C E) can be used to assess the effect of financial leverage on profitability.
How short-term liquidity risk differs from long-term solvency risk, and what financial ratios are helpful in assessing these two dimensions of credit risk.
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Learning Objectives 2 After studying this chapter, you will understand:
How to use the cash flow statement information when assessing credit risk.
How to interpret the results of an analysis of profitability and risk.
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Financial Analysis Tools and Approaches
Financial Analysis Tools
Cause-of-change analysis
Common-size statements
Trend statements
Financial ratios
Basic Approaches
Time-series analysis Helps identify trends for a single company or business unit.
Cross-sectional analysis Helps identify similarities and differences across companies or business units at a single point in time.
Benchmark comparison Uses industry norms or predetermined standards.
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Financial Statement Analysis and Accounting Quality
Analysts use financial statement information to see more clearly the economic activities and condition of a company and its prospects.
However, financial statements do not always provide a complete and faithful picture of a company’s activities and condition.
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Examples of How the Financial Accounting “Filter” Works
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Another Potential Threat to Quality: Conflicts of Interest
Conflicts of interest pose another potential threat to the quality of financial reports.
Conflicts of interest arise when what is good for one party (for example, management) isn’t necessarily good for another party (say, lenders or outside investors).
Companies have an obligation to disclose business transactions that involve potential conflicts of interest.
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A Case in Point: Getting Behind the Numbers at Kroger
EXHIBIT 6.1 The Kroger Co.
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Cause-of-Change Analysis 1
One way to quantify the components of change is with a “cause-of-change analysis,” which shows the effects of individual changes on the change in some performance metric of interest, in this case net earnings including noncontrolling interests.
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Cause-of-Change Analysis 2
EXHIBIT 6.2 The Kroger Co.
Simple Financial Model Representation of Net Earnings Including Noncontrolling Interests
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 | |
| ($ in millions) | Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Weekly sales | $ 2,358.88 | $ 2,176.17 | $ 2,112.12 | $ 2,085.87 | |
| × Number of weeks in year | 52 | 53 | 52 | 52 | |
| Sales | 122,662 | 115,337 | 109,830 | 108,465 | |
| × Operating margin % | 1.6998% | 2.9791% | 3.2559% | 2.8922% | |
| Operating profit | 2,085 | 3,436 | 3,576 | 3,137 | |
| Interest expense | (601) | (522) | (482) | (488) | |
| Income before income taxes | 1,484 | 2,914 | 3,094 | 2,649 | |
| × One minus adjusted* effective income tax rate | 0.66509 | 0.67159 | 0.66225 | 0.65949 | |
| Net earnings before effect of new tax law | 987 | 1,957 | 2,049 | 1,747 | |
| Effect of new tax law | 902 | . | . | . | |
| Net earnings including noncontrolling interests | $ 1,889 | $ 1,957 | $ 2,049 | $ 1,747 |
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The Kroger Co: Cause-of-Change Analysis 2014 versus 2015 1
EXHIBIT 6.3 The Kroger Co.
Panel (a): Cause-of-Change Analysis Fiscal 2014 versus 2015
| ($ in millions) | Fiscal 2014 FYE 1/31/2015 | Growth in Weekly Sales | Change in Number of Weeks in Year | Change in Operating Margin | Change in Interest Expense | Change in Tax Rate |
| Weekly sales | $2,085.87 | $2,112.12 | $ 2,112.12 | $ 2,112.12 | $ 2,112.12 | $ 2,112.12 |
| × Number of weeks in year | 52 | 52 | 52 | 52 | 52 | 52 |
| Sales | 108,465 | 109,830 | 109,830 | 109,830 | 109,830 | 109,830 |
| × Operating margin % | 2.8922% | 2.8922% | 2.8922% | 3.2559% | 3.2559% | 3.2559% |
| Operating profit | 3,137 | 3,176 | 3,176 | 3,576 | 3,576 | 3,576 |
| Interest expense | (488) | (488) | (488) | (488) | (488) | (488) |
| Income before income taxes | 2,649 | 2,688 | 2,688 | 3,088 | 3,094 | 3,094 |
| × One minus effective income tax rate | 0.65949 | 0.65949 | 0.65949 | 0.65949 | 0.65949 | 0.66225 |
| Net earnings including noncontrolling interests | $ 1,747 | $ 1,773 | $ 1,773 | $ 2,037 | $ 2,040 | $ 2,049 |
| Effect of change | $ 26 | $ 0 | $ 264 | $ 3 | $ 9 |
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The Kroger Co: Cause-of-Change Analysis 2014 versus 2015 2
EXHIBIT 6.3 The Kroger Co.
Panel (a): Cause-of-Change Analysis Fiscal 2014 versus 2015
| Cause-of-Change Analysis Summary Fiscal 2014 versus 2015 | |
| Net earnings for fiscal 2014 | $1,747 |
| Earnings effect of increase in weekly sales | 26 |
| Earnings effect of change in number of weeks in year | 0 |
| Earnings effect of change in operating margin | 264 |
| Earnings effect of change in interest expense | 3 |
| Earnings effect of change in income tax rate | 9 |
| Change in net income | 302 |
| Net earnings for fiscal 2015 | $2,049 |
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The Kroger Co: Cause-of-Change Analysis 2015 versus 2016 1
We can use cause-of-change analysis to compare any two years.
Panel (a): Cause-of-Change Analysis Fiscal 2015 versus 2016
| ($ in millions) | Fiscal 2015 FYE 1/30/2016 | Growth in Weekly Sales | Change in Number of Weeks in Year | Change in Operating Margin | Change in Interest Expense | Change in Tax Rate |
| Weekly sales | $ 2,112.12 | $ 2,176.17 | $ 2,176.17 | $ 2,176.17 | $ 2,176.17 | $ 2,176.17 |
| × Number of weeks in year | 52 | 52 | 53 | 53 | 53 | 53 |
| Sales | 109,830 | 113,161 | 115,337 | 115,337 | 115,337 | 115,337 |
| × Operating margin % | 3.2559% | 3.2559% | 3.2559% | 2.9791% | 2.9791% | 2.9791% |
| Operating profit | 3,576 | 3,684 | 3,755 | 3,436 | 3,436 | 3,436 |
| Interest expense | (482) | (482) | (482) | (482) | (522) | (522) |
| Income before income taxes | 3,094 | 3,202 | 3,273 | 2,954 | 2,914 | 2,914 |
| × One minus effective income tax rate | 0.66225 | 0.66225 | 0.66225 | 0.66225 | 0.66225 | 0.67159 |
| Net earnings including noncontrolling interests | $ 2,049 | $ 2,121 | $ 2,168 | $ 1,956 | $ 1,930 | $ 1,957 |
| Effect of change | $ 72 | $ 47 | $ (212) | $ (26) | $ 27 |
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The Kroger Co: Cause-of-Change Analysis 2015 versus 2016 2
We can use cause-of-change analysis to compare any two years.
Panel (a): Cause-of-Change Analysis Fiscal 2015 versus 2016
| Cause-of-Change Analysis Summary Fiscal 2015 versus 2016 | |
| Net earnings for fiscal 2015 | $2,049 |
| Earnings effect of increase in weekly sales | 72 |
| Earnings effect of change in number of weeks in year | 47 |
| Earnings effect of change in operating margin | (212) |
| Earnings effect of change in interest expense | (26) |
| Earnings effect of change in income tax rate | 27 |
| Change in net income | (92) |
| Net earnings for fiscal 2016 | $1,957 |
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Common-Size Statements
Financial analysts use common-size and trend statements of net income to help spot changes in a company’s cost structure and profit performance.
Common-size income statements recast each statement item as a percentage of sales.
Common-size income statements show how much of each sales dollar the company spent on operating expenses and other business costs and how much of each sales dollar hit the bottom line as profit.
Common-size balance sheets recast each statement item as a percentage of total assets.
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The Kroger Co: Common-Size Income Statements
EXHIBIT 6.4 The Kroger Co.
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The Kroger Co: Trend Income Statements
Each item is recast in percentage terms using a base year number.
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The Kroger Co: Common-Size Balance Sheets – Assets
Each item is recast as percentage of total assets.
EXHIBIT 6.7 The Kroger Co.
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The Kroger Co: Trend Balance Sheets – Assets
Each item is recast in percentage terms using a base year number.
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The Kroger Co: Common-Size Balance Sheets – Liabilities and Stockholders’ Equity
EXHIBIT 6.8 The Kroger Co.
Highlights changes in financial structure
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The Kroger Co: Common-Size and Trend Analysis of Cash Flow Statements 1
Common-size cash flow statements are constructed by dividing each cash flow item by sales for the year.
EXHIBIT 6.13 The Kroger Co.
Common-Size and Trend Analysis of Selected Cash Flow Items
| Common-Size Statements | ||||
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 |
| (% of sales) Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Selected Items | ||||
| Net cash provided by operating activities | 2.8% | 3.7% | 4.5% | 3.9% |
| Payments for property and equipment, including payment for lease buyouts | (2.3) | (3.2) | (3.0) | (2.6) |
| Trend Statements (2014 = 100%) |
A major use of operating cash flows was for development property and equipment.
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The Kroger Co: Common-Size and Trend Analysis of Cash Flow Statements 2
Common-size cash flow statements are constructed by dividing each cash flow item by sales for the year.
EXHIBIT 6.13 The Kroger Co.
Common-Size and Trend Analysis of Selected Cash Flow Items
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 |
| Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Selected Items | ||||
| Net cash provided by operating activities | 81.0% | 101.4% | 116.7% | 100.0% |
| Payments for property and equipment, including payment for lease buyouts | 99.2 | 130.7 | 118.3 | 100.0 |
A major use of operating cash flows was for development property and equipment.
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Financial Ratios and Profitability Analysis
Before computing R O A, analysts may adjust the company’s reported earnings and asset figures. The adjustments fall into three broad categories:
Adjustments aimed at isolating a company’s sustainable profits by removing nonrecurring items from reported income.
An adjustment that eliminates after-tax interest expense from the profit calculation so that profitability comparisons over time or across companies are not affected by differences in financial structure.
Adjustments for distortions related to accounting quality concerns.
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The Kroger Co: Return on Assets
Before R O A is computed, adjustments are made to reported earnings each year to eliminate interest expense, net of its related tax savings. In addition, there is an adjustment to exclude the $902 million arising due to the enactment of the new tax law because it is a one-time nonrecurring item.
EXHIBIT 6.14 The Kroger Co.
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Change in R O A
A company can increase or decrease R O A in just two ways:
Increase or decrease in the profit margin.
Increase or decrease the intensity of asset utilization (turnover rate).
Operating profit margin
Asset turnover
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The Kroger Co: R O A Decomposition
EXHIBIT 6.16 The Kroger Co.
Asset Turnover Decomposition
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 |
| ($ in millions) Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Sales | $ 122,662 | $ 115,337 | $ 109,830 | $ 108.465 |
| Average current assets | $10,728.5 | $10,116.0 | $ 9,401.5 | $ 8,870.5 |
| Current asset turnover | 11.43 | 11.40 | 11.68 | 12.23 |
| Average long-term assets | $26,122.5 | $25,085.0 | $22,795.5 | $21,018.5 |
| Long-term asset turnover | 4.70 | 4.60 | 4.82 | 5.16 |
| Reciprocal of current asset turnover | 0.0875 | 0.0877 | 0.0856 | 0.0818 |
| Reciprocal of long-term asset turnover | 0.2130 | 0.2175 | 0.2076 | 0.1938 |
| Sum of reciprocals | 0.3004 | 0.3052 | 0.2932 | 0.2756 |
| Reciprocal of sum = Asset turnover | 3.33 | 3.28 | 3.41 | 3.63 |
Kroger’s asset turnover deterioration is due to reductions in both current asset turnover and long-term asset turnover.
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R O A and Competitive Advantage: Grocery Industry 1
Competition works to drive down R O A toward the competitive floor—that is, the rate of return that would be earned in the economist’s “perfectly competitive” industry.
Companies that consistently earn an R O A above the floor are said to have a competitive advantage.
However, a high R O A stimulates more competition which can lead to an eventual erosion of profitability and advantage.
Figure 6.2
ILLUSTRATION OF HOW MARGIN AND TURNOVER AFFECT RETURN ON ASSETS (R O A)
Different points on the curve achieve the 5.9% return with different combinations of margin and turnover
Average R O A is 5.9%
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R O A and Competitive Advantage: Grocery Industry 2
Figure 6.2 ILLUSTRATION OF HOW MARGIN AND TURNOVER AFFECT RETURN ON ASSETS (R O A)
Companies that consistently earn rates of return above the floor have a competitive advantage.
Both Publix (P U S H) and Sprouts (S F M) are above the curve, indicating R O A above the industry average.
Publix achieved its higher R O A through high margins albeit with low turnover.
Sprouts had an above average margin and an above average turnover.
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Key Strategies for Achieving Superior Performance
Two key strategies for achieving superior performance in any business:
Product and service differentiation
Focuses on “unique” products or services to gain brand loyalty and attractive margins.
People are willing to pay premium prices for things they value and can’t get elsewhere.
Differentiation can take several forms.
Low-cost leadership
Focuses on operating efficiencies, which permit the company to underprice the competition, achieve high sales volumes, and still make a profit on each sale.
Companies can attain a low-cost position in various ways.
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Return on Common Equity
Return on common equity (R O C E) measures a company’s performance in using capital provided by common shareholders to generate earnings.
R O C E explicitly considers how the company finances its assets.
Interest charged on loans, dividends declared on preferred stock, and net earnings attributable to noncontrolling interests are all subtracted to arrive at net income available to common shareholders.
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Return on Common Equity and Financial Leverage
R O C E is affected by both R O A and the degree of financial leverage employed by the company.
For firms with more financial leverage, the ups and downs in R O A are exaggerated:
When R O A is low at a highly levered firm, R O C E will be very low, perhaps even negative.
When R O A is high at a highly levered firm, R O C E will be very high.
In contrast, R O C E is not much more volatile than R O A for firms that do not employ much financial leverage.
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Components of R O C E
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Profitability and Financial Leverage: Good Earnings Year
Consider two companies with $2 million in assets:
NoDebt raised all its capital from common shareholders
HiDebt borrowed $1 million at 5% interest.
The two companies have identical operations, so their earnings before interest and taxes (E B I T) are identical, as are their assets employed.
EXHIBIT 6.18 NoDebt and HiDebt
Good Earnings Year
Both companies earn a R O A of 11.25% and NoDebt Company also earns a R O C E of 11.25%.
HiDebt’s R O C E is 18.75% because $187,500 of earnings is available to common shareholders; leverage increased the return to HiDebt’s shareholders.
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Profitability and Financial Leverage: Low Earnings Year
Consider two companies with $2 million in assets:
NoDebt raised all its capital from common shareholders
HiDebt borrowed $1 million at 5% interest.
The two companies have identical operations, so their earnings before interest and taxes (E B I T) are identical, as are their assets employed.
EXHIBIT 6.18 NoDebt and HiDebt
Low Earnings Year
Both companies earn a R O A of −3.75% and NoDebt earns a R O C E of −3.75% because all of the earnings are available to common shareholders.
HiDebt’s R O C E becomes −11.25% because after-tax interest charges widen the loss.
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Profitability and Financial Leverage: Neutral Earnings Year
EXHIBIT 6.18 NoDebt and HiDebt
Neutral Earnings Year
Leverage neither increases nor decreases R O C E because the 3.75% return earned on each asset dollar just equals the 3.75% after-tax cost of borrowing.
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Liquidity, Solvency, and Credit Analysis: Credit Risk
Credit risk refers to the risk of nonpayment by the borrower.
The lender risks losing interest payments and loan principal.
A borrower’s ability to repay debt is driven by its capacity to generate cash from operations, asset sales, or external financial markets.
Numerous and interrelated risks influence a company’s ability to generate cash.
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Liquidity, Solvency, and Credit Analysis: Balancing Cash Sources and Needs
Figure 6.4 BALANCING CASH SOURCES AND NEEDS
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Short-Term Liquidity Ratios
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Operating and Cash Conversion Cycles
Figure 6.5 TIMELINE OF EVENTS
A company’s operating cycle measures how long it takes to sell inventory plus collect cash from customers (163 days above).
A company typically pays its suppliers before it collects from customers.
Its cash conversion cycle is the difference between collection of cash from customers and the payment of cash to suppliers (163 days − 103 days = 60 days above).
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Liquidity Analysis: Different Business Models 1
EXHIBIT 6.19 Amazon.com, Walmart, and Nordstrom
Comparison of Operating and Cash Conversion Cycles
| Amazon.com | Walmart | Nordstrom | |
| Working capital and activity ratios: | |||
| 1. Days inventory held | 44.8 | 42.4 | 72.4 |
| 2. Days accounts receivable outstanding | 33.1 | 4.2 | 4.1 |
| 3. Days accounts payable outstanding | 93.9 | 42.7 | 50.1 |
| Operating cycle (1 + 2) | 77.9 | 46.6 | 76.5 |
| Cash conversion cycle (1 + 2 − 3) | (16.0) | 3.9 | 26.4 |
Source: Amounts derived from information in Form 10-Ks of the companies presented.
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Liquidity Analysis: Different Business Models 2
Amazon pays its suppliers after it collects from customers.
It takes Nordstrom longer to sell inventory and to collect cash from customers.
Walmart pays its suppliers more quickly.
Amazon.com is an e-commerce retailer; only its distribution centers stock inventory.
Walmart carries a broad line of merchandise and emphasizes low prices. Its customers pay cash or use a credit card.
Nordstrom emphasizes product quality and customer service and promotes its instore credit card.
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Liquidity Analysis: Credit Risk Analysis: Short-Term Liquidity 1
EXHIBIT 6.21 The Kroger Co.
Credit Risk Analysis: Short-Term Liquidity
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 |
| Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Current ratio | 0.78 | 0.80 | 0.76 | 0.78 |
| Quick ratio | 0.14 | 0.15 | 0.16 | 0.13 |
| Working capital activity ratios: | ||||
| 1. Days inventory held | 25.0 | 26.0 | 25.3 | 24.2 |
| 2. Days accounts receivable outstanding | 4.9 | 5.4 | 5.0 | 4.0 |
| 3. Days accounts payable outstanding | 22.3 | 23.4 | 22.9 | 21.2 |
| Operating cycle (1 + 2) | 29.9 | 31.4 | 30.3 | 28.2 |
| Cash conversion cycle (1 + 2 − 3) | 7.6 | 8.0 | 7.4 | 7.0 |
Source: Amounts derived from information in The Kroger Company Form 10-Ks for the years presented.
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Liquidity Analysis: Credit Risk Analysis: Short-Term Liquidity 2
The current and quick ratio have been stable over the four years, but both are below 1. Short-term creditors have to rely on other sources of cash for repayment.
Working capital activity ratios were relatively flat.
Payments to suppliers occurred about 22 days after inventory was purchased but it took about 30 days to generate a sale and collect cash from credit customers; this misalignment of operating cash flows is unlikely to cause concerns.
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Long-Term Solvency Ratios
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Long-Term Solvency: The Kroger Co.
EXHIBIT 6.22 The Kroger Co.
| Fiscal Year: | 2017 | 2016 | 2015 | 2014 |
| ($ in millions) Year Ended: | February 3, 2018 | January 28, 2017 | January 30, 2016 | January 31, 2015 |
| Long-term debt to assets ratio | 0.419 | 0.386 | 0.356 | 0.380 |
| Long-term debt to tangible assets ratio | 0.470 | 0.436 | 0.401 | 0.423 |
| Interest coverage ratio | 3.5 | 6.6 | 7.4 | 6.4 |
| Cash flow coverage ratio | 5.7 | 8.2 | 10.2 | 8.6 |
| Operating cash flow to average total liabilities | 0.114 | 0.150 | 0.189 | 0.172 |
Note: Current installments are included in long-term debt for purposes of these ratios.
Source: Amounts derived from information in The Kroger Company Form 10-Ks for the years presented.
Kroger’s interest coverage ratio fell as did operating cash flow to total liabilities.
Kroger will need to improve its earnings and cash flow or reduce its debt in order to reduce the uncertainty associated with repayment of its obligations.
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Cash Flow Analysis
Although a company’s earnings are important, an analysis of its cash flows is central to credit evaluations and lending decisions.
Cash Flow from Operating Activities
Generating cash from operations is essential to any company’s long-term economic viability.
Cash Flow from Investing Activities
Changes in a company’s capital expenditures or fixed asset sales over time must be analyzed carefully because they have implications for the company’s future operating cash flows.
Cash Flow from Financing Activities
Determining the optimal debt level involves a trade-off between two competing economic forces—taxes and costs of financial distress.
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Financial Ratios and Default Risk
A firm defaults when it fails to make principal or interest payments.
Lenders can then:
Adjust the loan payment schedule.
Increase the interest rate and require loan collateral.
Seek to have the firm declared insolvent.
Financial ratios play two roles in credit analysis:
They help quantify the borrower’s credit risk before the loan is granted.
Once granted, they serve as an early warning device for increased credit risk.
Figure 6.6 DEFAULT RATES AMONG PUBLIC COMPANIES BY S&P CREDIT RATING: 19 81 to 2014
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Default Frequency
Figure 6.7 PROBABILITY OF DEFAULT WITHIN FIVE YEARS AMONG PUBLIC COMPANIES: 19 80 to 19 99
SOURCE: Moody’s Investors Service, RiskCalc for Private Companies: Moody’s Default Model Rating Methodology (May 2000).
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Summary 1
Financial ratios, common-size statements and trend statements are powerful tools for:
Tracking a company’s performance over time.
Making comparisons among different companies.
Assessing compliance with contractual benchmarks.
There is no single “correct” way to compute many financial ratios.
Not every analyst calculates these ratios in exactly the same way. Sometimes it’s a matter of personal taste or industry practice.
At other times, it’s because the analyst is attempting to make the numbers more comparable across companies or over time.
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Summary 2
Financial ratios don’t always provide the answers, but they can help you ask the right questions.
It’s useful to know that a company’s profitability or credit risk has improved (or declined), but it’s even more important to know why the change occurred.
Use the financial ratios and the other tools in this chapter to guide your analysis. They can help you to ask the right questions and tell you where to look for answers.
Is it the economics of the business or is it the accounting?
Watch out for accounting distortions that can complicate your interpretation of financial ratios and other comparisons.
Remember that the analyst’s task is to “get behind the numbers”—that is, to develop a solid understanding of the company’s economic activities and how industry fundamentals have shaped where the company is today and where it will be tomorrow.
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Accessibility Content: Text Alternatives for Images
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Financial Statement Analysis and Accounting Quality – Text Alternative
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In the figure, the business fundamentals, including economic activities and conditions, appear on the left. From them, the raw financial data flows to the center box, which contains G A A P accounting rules and management discretion, including accounting methods, accounting estimates, and transaction structure and timing. The G A A P financial data that are created are presented in the financial reports. The analyst’s task, as indicated by an arrow that begins in financial reports and points back to the business fundamentals, is to see what’s behind the numbers.
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Examples of How the Financial Accounting “Filter” Works – Text Alternative
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Under the G A A P accounting rules and management discretion heading are three bullet points. First is accounting methods, signified by G A A P allowing managers to choose between methods (for example, L I F O versus F I F O); the balance sheet and income statement and financial ratios and comparisons are affected. Second bullet is accounting estimates, over which managers have discretion, such as estimated bad debt expense, which can result in “earnings management.” Last bullet is transaction structure and timing. A corresponding note reads: Managers have some discretion over the timing of business transactions such as discretionary expenditures for advertising.
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A Case in Point: Getting Behind the Numbers at Kroger – Text Alternative
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Dollars in millions are shown for four time periods. Line items include sales; merchandise costs; operating, general and administrative expenses; rent; depreciation and amortization; operating profit; interest expense; net earnings before income tax (benefit) expense; provision for income taxes; net earnings including noncontrolling interests; net earnings (loss) attributable to noncontrolling interests; and net earnings attributable to The Kroger Co.
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The Kroger Co: Common-Size Income Statements – Text Alternative
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The sales line is 100.0% for all four time periods. A note is made next to the 100.0% for year ended January 31, 2015, that each item is recast as percentage of sales.
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The Kroger Co: Trend Income Statements – Text Alternative
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A note is made that sales increased modestly. The sales line is 100.0% for 2014, 101.3% for 2015, 106.3% for 2016, and 113.1% for 2017. A note is made next to the 100.0% for year ended January 31, 2015, that each item is recast in percentage terms using a base year number.
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© McGraw Hill
Financial Ratios and Profitability Analysis – Text Alternative
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R O A equals E B I, or a company's earnings before interest for a particular period, divided by average assets. Operating profit margin is E B I divided by sales. Asset turnover is sales divided by average assets. Average assets represents the average book value of total assets over that same time period.
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© McGraw Hill
The Kroger Co: Return on Assets – Text Alternative
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The year ended February 3, 2018, reflects a line item of Less: Increase in earnings due to enactment of new tax law of the $902 million. Return on assets for this year is 3.7%, whereas it's 6.5% for 2016, 7.3% for 2015, and 6.9% for 2014.
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© McGraw Hill
R O A and Competitive Advantage: Grocery Industry 1 – Text Alternative
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In the line graph, turnover 0 through 4.0 is marked on the horizontal axis, and margin percentage negative 4 through positive 8 is indicated on the vertical axis. A downward-sloping curve begins at (1, 7.5), slopes sharply downward through (3.0, 2) and then slopes less sharply through (4, 1.5). Seven industry member data points are presented on the graph: PUSH, 11.6% at (2, 6); I M K T A, 5.0% at (2.4, 2); W M K, 3.5% at (2.5, 1.0); S F S, −7.7% at (2.4, −7.7); S F M, 10.2% at (3.1, 2.0); KR, 3.7% at (3.3, 1.0); and, VLGEA, 5.7% at (3.6, 1.9).
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© McGraw Hill
R O A and Competitive Advantage: Grocery Industry 2 – Text Alternative
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In the line graph, turnover 0 through 4.0 is marked on the horizontal axis, and margin percentage negative 4 through positive 8 is indicated on the vertical axis. A downward-sloping curve begins at (1, 7.5), slopes sharply downward through (3.0, 2) and then slopes less sharply through (4, 1.5). Seven industry member data points are presented on the graph: PUSH, 11.6% at (2, 6); I M K T A, 5.0% at (2.4, 2); W M K, 3.5% at (2.5, 1.0); S F S, −7.7% at (2.4, −7.7); S F M, 10.2% at (3.1, 2.0); KR, 3.7% at (3.3, 1.0); and, VLGEA, 5.7% at (3.6, 1.9).
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© McGraw Hill
Components of R O C E – Text Alternative
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R O C E, or return on common equity, is Net income available to common shareholders divided by Average common shareholders’ equity. This branches to the other three equations. Return on assets (R O A)is found by dividing E B I by Average assets. Then, Common earnings leverage is Net income available to common shareholders divided by E B I. Lastly, Financial structure leverage is Average assets divided by Average common shareholders’ equity.
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© McGraw Hill
Liquidity, Solvency, and Credit Analysis: Balancing Cash Sources and Needs – Text Alternative
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The diagram lists the following sources of cash:
Operating: Cash from operations.
Investing: Cash from asset sales.
Financing: Cash from external financial markets (debt or equity).
These sources flow into a pool of cash that can be used for the company’s cash needs:
Operating: Sustain existing operations (working capital and plant capacity).
Investing: Growth from new products and services or plant and market expansion.
Financing: Buy back stock or pay dividends, debt principal, or interest.
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© McGraw Hill
Short-Term Liquidity Ratios – Text Alternative
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Short-term liquidity branches to Liquidity ratios, which include current ratio and quick ratio, and then Activity ratios, which includes accounts receivable turnover, inventory turnover, and accounts payable turnover.
Current ratio is Current assets divided by Current liabilities. Quick ratio is Cash plus Marketable securities plus Receivables all divided by Current liabilities. Accounts receivable turnover is Net credit sales divided by Average accounts receivable. Inventory turnover is Cost of goods sold divided by Average inventory. Accounts payable turnover equals Inventory purchases divided by Average accounts payable.
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© McGraw Hill
Operating and Cash Conversion Cycles – Text Alternative
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Day 0: purchase inventory.
Day 60: pay for inventory.
Day 72: sell inventory.
Day 163: collect receivable.
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© McGraw Hill
Long-Term Solvency Ratios – Text Alternative
