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BA 303

Financial Statements and Ratios for Footlocker

Strategic analysis involves the use of business techniques to determine an organization current position and plan for the future growth and direction. Financial ratio analysis involves mathematical techniques which are designed to help in evaluation of an organization financial statements. An organization financial statements displays its current performance and helps the management in making future predictions and improving the company strategy to gain leverage over its competitors in the same industry. The financial ratio analysis statistically relates items in the financial statements and helps in comparison of organizations and also evaluates trends of the organization financial position over a period of time. This analysis helps the management to make better decisions and have strategies to improve the organization performance. Also investors tend to be interested in the financial ratio analysis to help them predict the future possible performance of the organization before they make the decision of investing.

Liquidity

Liquidity ratios determines the ability of the organization to meet its financial obligations or to pay off its debts which are maturing within a short period of time. (Goel, S. (2016).  Liquidity of an organization involves the solvency of its financial position. For Footlocker to continue its operation securely it has to have reasonable liquidity ratios. A high liquidity ratio signifies that the organization is in a position to meet its short term financial obligations and it has a low possibility of insolvency. Low liquidity ratio is a dangerous signal to the organization and it would lead to insolvency and eventually bankruptcy. Organization creditors and investors are very keen on the liquidity ratio since it is a major determinants of the future financial position of an organization.

Current ratio = Current assets

Current liabilities

Quick ratio = Current Assets-Inventories

Current liabilities

Cash Conversion cycle = Days of Sales Outstanding + Days of Inventory Outstanding - Days of Payables Outstanding.

According to the trend in the liquidity ratios from year 2014 to the year 2015, the trend shows that the overall performance of the organization has been improving. In the year 2014 the current ratio has increased consistently from 2 to 3.8 in the year 2016.This shows that the ability of the organization to meet its financial obligation and pay debts within a short period increased which is a positive direction and attractive to investors and creditors. Also we can see that the quick ratio which shows the ability of the organization to meet its financial obligations after the deduction of all the inventories is increasing as well. This is a good indication that the probability of the organization being insolvent and bankrupt is very low. Finally, the cash conversion cycle too has been reducing within the period of the analyses which means that the organization rate of converting their assets to a liquidity form has improved. The general liquidity ratios shows that the organization financial position is quite positive and healthy to attract investors.

Asset Management Ratios

Asset management ratios determines the effectiveness of the management in utilization of the organization assets. It includes the inventory turnover ratio, day’s inventory outstanding, and day’s sales outstanding, and total asset turnover.

Inventory turnover ratio measures the liquidity of an organization inventory. A decrease inventory turnover rate is a warning sign to an organization since it means that the size of the inventory relative to the sales is increasing. The higher the inventory as compared with sales volume indicates an investment with low or zero returns. The inventory turnover ratio also indicates the ability of an organization to liquidate the inventory when necessary. (Langdon, K. (2014).  When the turnover is low it indicates that he rate of converting the inventory to cash would be low and when the turnover is increasing it indicates that the inventor is in a position to provide short-term cash within the period. Day’s inventory outstanding ratio measures how effective an organization uses its inventory. Total assets turnover measures the utilization of the organization assets in relation to its turnover. The higher the total asset turnover the more effective and efficient the utilization of its assets. Day’s sales outstanding measures the period an organization must wait to get payments after making sales. This helps in evaluation of credit.

Ratio data illustrated in Table 2 – Asset Management was collected from the year 2014 to year 2016.According to the data inventory turnover ratio decreased from 4.24 in year 2014 to 3.15 in the year 2015 which indicates increase in the returns of the investments. However in the year 2016 the ratio increased rapidly hence a warning sign that the investments had low returns. Days inventory outstanding ratio shows an increase from year 2014 to 2015 which indicates that the organization utilization of the inventory over the period was effective but decreased in the year 2016 indicating a reduction in efficiency. Day’s sales outstanding has been increasing consistently from year 2014 to year 2016 indicating danger in payments and the debt collection. Finally, total asset turnover show a positive trend from 2014 to 2015 and a little decrease in year 2016. This indicates that the organization utilizes its assets effectively to bring returns.

Data debt management

Data debt management assists in the financial management of an organization due to the debt financing. The higher the debt an organization has the more the risk involved. Debt ratio refers to the ratio of debt to total assets. The higher the de bt ratio the higher the risk involved. Debt equity ratio measures the ratio of total liability to total equity.

Ratio data illustrated in Table 3 – Data debt management was collected from the year 2014 to year 2016. In the table above the debt ratio has been increasing consistently from year 2014 to ear 2016.However the debt to equity has been indicating a decline which is a positive indication to the productivity of the organization. Day’s payable outstanding also has been reducing showing a reduction in the risk of debts. The interest coverage decreased from the year 2014 to 2015 but increased in the year 2016 which should be warning to the future predictions of the organization.

Profitability

Profitability ratios shows he outcome of the combined effects of the liquidity, debt and asset management in an organization operation. (Fraser, L. M. (2016), et al. Profit margin on sales shows the percentage of returns after sales. The higher the profit margin on sales the better. Basic earning power in organization presents the returns earned on the outstanding ordinary shares. Return on assets indicates the organization profitability in relation to the assets employed. The higher the returns on the assets the better the financial position of the organization. Return on equity refers the net profit realized after axes and interests to ordinary equity.

Ratio data illustrated in Table 4 – profitability was collected from the year 2014 to year 2016. The table illustrates that profit ratios and returns on the assets and equity involving the organization investments during the period. The analysis of the table shows that profits have been increasing over the period hence a positive indication that the organization assets have been effectively utilized to the best productivity. Also I shows that the management has been productive with its strategic plans imp0lementation to increase the organization overall performance.

Finally, the financial statements discussed shows a healthy trend in all the financial ratio computed. This indicates that the Footlocker financial position is quite good and the management strategy on its operation is effective. The profits have been increasing over the period analyzed and also the liquidity ratio as an indication theta the organization is stable and performing quite well in the industry.

References

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Goel, S. (2016). Financial ratios.

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Langdon, K. (2014). Easy business finance: From bookkeeping to financial reports and ratios. Oxford: Infinite Ideas.

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Fraser, L. M., & Ormiston, A. (2016). Understanding financial statements.