Accounting

Many people have interest in investing in the stock market and buying stock form those companies that will allow them the ability to make a little extra money or in some cases a fortune. Others will want to know about a company because they are in the business of making business deals that will lead to profits. No one wants to invest in a company blindfolded just to see their investments quickly spiral down the drain and disappear. Because of this, investors must learn to convert financial statements to a common size and perform trend analysis by conducting a horizontal analysis to evaluate working capital, current ratios and quick ratios.

Company Overview

One of the giants in the office supply retail stores is Staples, Inc. According to Company Overview (n.d.), Staples, Inc came into business in 1986 with the purpose of placing customers as their priority and “[helping] them make more happen, no matter what it is they want to accomplish” (Section, How it all began). Over the years, they have used three taglines that included “Yeah, we’ve got that”, “that was easy”, and most recently “MAKE more HAPPEN” (Section, Who we are).

Today, Staples is able to offer products to its customers through various means. Retail locations, online, and mobile devices allow customers the opportunity to shop virtually anywhere and at any time. Just in North America, Staples operates over 1,600 stores. Customers may choose from the thousands of items on the shelfs, they may use the copy and print services, or they may choose to use the technology center to have their computers serviced or upgraded. Not only are these services available in North America, but globally in over 20 countries such as China, Australia, Italy, Germany, and many more.

When large companies such as Staples go global, there very few borders that keep it from spreading further. And with borders being virtually eliminated, that allows for more completion as well. On the ground, Staples faces competition from Office Depot as their primary competitor at the retail level. Other competitors such as Target, Wal-Mart, and Best Buy also take a piece of the pie in office supply industry. Staples major competitor online is Amazon.com. As technology allows more customers to shop from anywhere, Staples must implement a plan to move more of its inventory directly from its warehouse directly to its customers. This only makes sense since the majority of its customers are businesses that what to grow their business and do not have the time to go shop at the local retail location.

Horizontal Analysis of Income Statement and Balance Sheet

To have a better understanding of where Staples, Inc. stands today, it is necessary to properly analyze its financial statements. Investors and creditors are able to make wise decisions because they take the time to analyze a company’s income statement and balance sheet. By conducting a proper analysis, those investors and creditors can view the profits and sales from one year to the next. They can also understand if the company has enough working capital to cover its expenses and liabilities.

One method of analyzing Staples income statement is to use the horizontal analysis. This method allows for comparison of data from “two or more periods, side-by-side”. The income statement in Table 1 shows that Staples has steadily lost profits from the base year ending on February 2014. When looking at the operating expenses it appears as if expenses are going in every direction and when you look at the bigger numbers it may even frighten investors and creditors. Then when net income is viewed, it leaves to wonder how it is that it has managed to almost triple its net income from the previous year.

A different view of the income statement is always available by simply doing some calculations. These calculations simply change the dollar amounts to percentages in order to allow comparisons from one period to the next. Table 2 offers the same income statement for Staples but with percentages. According to Wainwright (2012), “the horizontal analysis can be very helpful in looking for trends in a company’s income” (p. 200). A simple calculation is required by taking the current year’s amount and subtracting it from the base year’s amount and dividing it by the base year. For example, the percentage in net income is calculated by taking $379,000,000 – $620,000,000 divided by $620,000,000 resulting in a negative 38.87%.

When analyzing the income statement using the horizontal analysis, it is sometimes easy to quickly identify some of the trouble spots within a company. In this case, the item that “pops out” is the negative 400% in additional income/expense items where in the previous year it was reported at 580%. These would lead investors and creditors to investigate with the company as to why the huge difference between one period and the next exists. Again, here we see that net income has improved over the previous year but it may not be enough to convince investors that Staples is making a comeback to the levels of two periods prior.

The Balance sheet is also analyzed in the same way as the income statement by investors and creditors. Using the balance sheet, investors and creditors can horizontally analyze the assets, the liabilities, and stock holders’ equity. Table 3 offers a view of Staples balance sheet using the dollar figures. With this balance sheet, it is easy to see that current assets equals the current liabilities plus the total equity. The most noticeable figures here are the cash and cash equivalents that almost doubles from two periods ago to the most recent period ending on January 2016.

When viewing the same data but with percentages one is able to analyze that there are other notable areas worth taking a second look at. Table 4 presents the balance sheet in with percentages. Again, the cash and cash equivalents are worth taking note. Other figures to look into are the short-term debt/current portion of long-term where in the current period they were far less than two periods ago. Other liabilities also went down allowing total liabilities to be lower than previous periods. Finally, it is worth noting that Staples has relied on acquisitions for growth as noted by the large goodwill numbers. The horizontal analysis allows for large or drastic changes from one period to another.

Ratios Analysis

Liquidity ratios allow analyst the ability to see if a company is able to deal with its short-term financial obligations. Vendors are particularly interested in these ratios because it allows them to understand if Staples will be able meet its financial obligations with short-term credit. Staples vendors will prefer to see a high current ratio in order to reduce their risk. In looking at Staples balance sheet, the current ratio can be calculated by taking the current assets and dividing them by the current liabilities. In this case, a current ratio of 1.6:1 is calculated for the most recent period ending on Jan 2016. In the previous year, the ratio is calculated at 1.5:1. According to Wainwright (2012), a “2:1 or greater” ratio is preferred. Could it be that Staples office furniture is the cause for not having a greater ratio? The office furniture carries with it a larger price tag and could be less frequently sold when compared to the office supplies such as staplers, file folders, or copy paper.

Since the quick ratio is calculated by taking the current assets minus the inventory and dividing it by the current liabilities it might provide an inside if furniture is getting in the way of a greater liquidity. Looking at the balance statement once again, add up the cash, accounts receivable and notes receivable. For the period ending on Jan 2016, the quick ratio is .92:1 and for Jan 2015 it calculates at .85:1 where investors would prefer to see a ratio of “1.25:1 or greater” (Wainwright, 2012, p. 212). Looking at this ratio allows investors the opportunity to understand how quickly Staples can settle its short-term obligations without having to worry about that furniture that may be difficult to convert into cash.

When creditors begin to worry about Staples ability to meet its short-term obligations and its ability to liquidate its assets it takes into consideration the cash to current liabilities. The cash and those assets that can be liquidated immediately divided by the current liabilities compose the cash ratio. For the period ending on Jan 2016, the cash ratio is .25:1 and for the Jan 2015 period it calculates to .19:1. When creditors want to part ways with Staples, they will want a ratio that allows Staples to take its most liquid assets and immediately pay its obligations on demand.

Recommendation

Based on the analysis conducted, I would recommend an individual to invest in Staples. The company has been around for 25 years now and it seems like it is moving into a new country every year. The balance statement indicates that Staples has been busy growing as indicated by the numbers associated with goodwill. Recently, Staples when negating with the Securities and Exchange Commission to allow it to merge with Office Depot allowing it to better secure its place with retail locations. The ratio analysis indicates that it is not extremely strong in its ability to settle short-term obligations, but on the other hand it is not weak either. When push comes to shove, Staples can liquidate its assets and settle its obligations.

References

Company Overview. (n.d.). Retrieved March 21, 2016, from http://www.staples.com/sbd/cre/marketing/about_us/company-overview.html

SPLS Balance Sheet. (2016). Retrieved March 21, 2016, from http://www.nasdaq.com/symbol/spls/financials?query=balance-sheet

SPLS Income Statement. (2016). Retrieved March 21, 2016, from http://www.nasdaq.com/symbol/spls/financials?query=income-statement

Wainwright, S. (Ed.). (2012). Principles of Accounting: Volume I . San Diego, CA: Bridgepoint Education, Inc.

Period Ending:1/30/20161/31/20152/1/2014

Total Revenue$21,059,000 $22,492,000 $23,114,000

Cost of Revenue$15,545,000 $16,691,000 $17,082,000

Gross Profit$5,514,000 $5,801,000 $6,032,000

Research and Development$0 $0 $0

Sales, General and Admin.$4,600,000 $4,816,000 $4,735,000

Non-Recurring Items$201,000 $641,000 $64,000

Other Operating Items$67,000 $62,000 $55,000

Operating Income$641,000 $310,000 $1,177,000

Add'l income/expense items($15,000)$34,000 $5,000

Earnings Before Interest and Tax$631,000 $317,000 $1,182,000

Interest Expense$139,000 $49,000 $119,000

Earnings Before Tax$492,000 $268,000 $1,063,000

Income Tax$113,000 $133,000 $356,000

Minority Interest$0 $0 $0

Equity Earnings/Loss Unconsolidated Subsidiary$0 $0 $0

Net Income-Cont. Operations$379,000 $135,000 $707,000

Net Income$379,000 $135,000 $620,000

Net Income Applicable to Common Shareholders$379,000 $135,000 $620,000

Table 1

Annual Income Statement (values in 000's)

Operating Expenses

Staples, Inc.

Income Statement

For the years 2013-2015

Period Ending:1/30/20161/31/2015

Total Revenue-8.89%-2.69%

Cost of Revenue-9.00%-2.29%

Gross Profit-8.59%-3.83%

Research and Development

Sales, General and Admin.-2.85%1.71%

Non-Recurring Items214.06%901.56%

Other Operating Items21.82%12.73%

Operating Income-45.54%-73.66%

Add'l income/expense items-400.00%580.00%

Earnings Before Interest and Tax-46.62%-73.18%

Interest Expense16.81%-58.82%

Earnings Before Tax-53.72%-74.79%

Income Tax-68.26%-62.64%

Minority Interest

Equity Earnings/Loss Unconsolidated Subsidiary

Net Income-Cont. Operations-46.39%-80.91%

Net Income-38.87%-78.23%

Net Income Applicable to Common Shareholders-38.87%-78.23%

Table 2

Staples, Inc.

Horizontal Analysis Income Statement

For the years 2013-2015

Operating Expenses

Period Ending:1/30/20161/31/20152/1/2014

Cash and Cash Equivalents$825,000 $627,000 $492,532

Short-Term Investments$0 $0 $0

Net Receivables$1,899,000 $1,928,000 $2,018,280

Inventory$2,078,000 $2,144,000 $2,328,299

Other Current Assets$310,000 $252,000 $400,447

Total Current Assets$5,112,000 $4,951,000 $5,239,558

Long-Term Investments$0 $0 $0

Fixed Assets$1,586,000 $1,706,000 $1,870,719

Goodwill$2,653,000 $2,680,000 $3,233,597

Intangible Assets$274,000 $335,000 $382,700

Other Assets$547,000 $636,000 $448,302

Deferred Asset Charges$0 $0 $0

Total Assets$10,172,000 $10,308,000 $11,174,876

Accounts Payable$3,247,000 $3,197,000 $3,264,468

Short-Term Debt / Current Portion of Long-Term Debt$17,000 $92,000 $103,982

Other Current Liabilities$0 $0 $0

Total Current Liabilities$3,264,000 $3,289,000 $3,368,450

Long-Term Debt$1,018,000 $1,018,000 $1,000,205

Other Liabilities$506,000 $688,000 $665,386

Deferred Liability Charges$0 $0 $0

Misc. Stocks$0 $0 $0

Minority Interest$8,000 $8,000 $8,572

Total Liabilities$4,796,000 $5,003,000 $5,042,613

Common Stocks$1,000 $1,000 $563

Capital Surplus$5,010,000 $4,935,000 $4,866,467

Retained Earnings$6,900,000 $6,829,000 $7,001,755

Treasury Stock($5,419,000)($5,419,000)($5,229,368)

Other Equity($1,116,000)($1,041,000)($507,154)

Total Equity$5,376,000 $5,305,000 $6,132,263

Total Liabilities & Equity$10,172,000 $10,308,000 $11,174,876

Table 3

Annual Income Statement (values in 000's)

For the years 2013-2015

Long-Term Assets

Current Liabilities

Stock Holders Equity

Staples, Inc.

Balance Sheets

Current Assets

Period Ending:1/30/20161/31/2015

Cash and Cash Equivalents67.50%27.30%

Short-Term Investments

Net Receivables-5.91%-4.47%

Inventory-10.75%-7.92%

Other Current Assets-22.59%-37.07%

Total Current Assets-2.43%-5.51%

Long-Term Investments

Fixed Assets-15.22%-8.81%

Goodwill-17.96%-17.12%

Intangible Assets-28.40%-12.46%

Other Assets22.02%41.87%

Deferred Asset Charges

Total Assets-8.97%-7.76%

Accounts Payable-0.54%-2.07%

Short-Term Debt / Current Portion of Long-Term Debt-83.65%-11.52%

Other Current Liabilities

Total Current Liabilities-3.10%-2.36%

Long-Term Debt1.78%1.78%

Other Liabilities-23.95%3.40%

Deferred Liability Charges

Misc. Stocks

Minority Interest-6.67%-6.67%

Total Liabilities-4.89%-0.79%

Common Stocks77.62%77.62%

Capital Surplus2.95%1.41%

Retained Earnings-1.45%-2.47%

Treasury Stock3.63%3.63%

Other Equity120.05%105.26%

Total Equity-12.33%-13.49%

Total Liabilities & Equity-8.97%-7.76%

Current Liabilities

Stock Holders Equity

Table 4

Staples, Inc.

Horizontal Analysis Balance Sheets

For the years 2013-2015

Current Assets

Long-Term Assets