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I have choses two companies Dollar Tree and Dollar General 10K reports.
Create a report in Word that includes the following. Important, please format your report in the
following order:
A. Executive Summary of findings The paragraph includes, a) a
statement of which companies you chose, b) a couple of sentences introducing your companies …
i.e., what industry are they in, a bit about what their business is, and, c) A statement of which firm
you chose as the better investment and why. Refer to the highlights you found in your ratio analysis
that support your opinion.
B. A chart with the required financial ratios. Use the format provided below. I’ve provided a
hypothetical example in the first row of what kind of work I expect
Required:
Create a report in Word that includes the following. Important, please format your report in the
following order:
A. Executive Summary of findings (Approximately 1 page): The paragraph includes, a) a
statement of which companies your chose, b) a couple sentences introducing your companies …
i.e., what industry are they in, a bit about what their business is and, c) A statement of which firm
you chose as the better investment and why. Refer to highlights you found in your ratio analysis
that support your opinion.
B. A chart with the required financial ratios. Use the format provided below. I’ve provided a
hypothetical example in the first row of what kind of work I expect.
Ratio*
Your Firm #1 Name
Your Firm #2 Name
Current Ratio(chap 2)
Example 1.5
Example .85
Net profit margin
(Chap 3)
Total Asset Turnover
(Chap 4)
Gross Profit Percent
(Chap 5)
ROA (Chap 5)
Receivables Turnover
Ratio (Chap 6)
Inventory Turnover
(Chap 7)
Fixed Asset Turnover
(Chap 8)
Accounts Payable
Turnover (Chap 9)
Times Interest Earned
(Chap 10)
Debt to Equity (Chap
10)
Earnings per share
(Chap 11)
Dividend Yield (Chap
11)
Quality of Income
Ratio (Chap 12)
Capital Acquisition
Ratio (Chap 12)
Etc.
Etc.
Which firm do you feel has the stronger
showing in this ratio
For Example: I believe Firm #1 has the stronger
current ratio because they have $1.50 in current
assets for every dollar in current liabilities, while
Firm #2 only has $.85. In addition, a current ratio
under $1.00 often can be a danger singal showing
a firm lacks liquidity to pay off its bills coming
due during the year)
1
Free Cash Flow (Chap
12)
*It is possible that not all rations will apply to your firms. For example, if you have a service
firm, you many not have a “cost of goods sold”. You may have a “cost of sales” which you can
substitute, or you may choose to put NA inn place of the ratio, and in the explanation column
explain why you chose NA
2
Dollar Tree Vs Dollar General Finances
The first company I have chose to report on is Dollar Tree
Income Statement
Comprehensive Income Statement
Balance Sheet
Stockholders Equity Statement
Cash Flows
The next company I chose to compare is Dollar General
Income Statement
Comprehensive income statement
Balance Sheet
Stockholder Equity
Statement of Cashflows
Executive Summary
Approximately 1 page
In this section you summarize your findings.
A) Tell a bit about your companies, i.e., the business they are in, whether one is a leader, the other an
upstart, maybe why you picked these companies.
A) Tell which firm you think is the better investment based on your financials.
B) Provide the evidence upon which you came to that conclusion. So, for example, you might
highlight ratios that you believe support your conclusion.
Note: In a comparison of two companies, no company will “win” each ratio comparison. So you need
to explain why you believe the ratios where your firm “won” are more important than the ratios the
other firm “won”
* by “Won” I mean where one firm had a stronger showing than the other.
Current Ratio
Formula:
◦ Current Assets / Current Liabilities
Interpretation:
Does a firm have enough assets on hand that can be converted to cash within a year to pay off
the debts that are due within a year?
Where to find?
◦ Balance Sheet: Current Asset and Current Liability Sections
Current assets/ Current Liabilities
21,573/21,747 = $0.99
Interpretation:
For every $1 of liabilities due this year,
Target has $0.99 in current assets
Normal? 1.00 or larger.
Bad that it is less than 1?
Compare to similar firm.
In this case Walmart is $0.93
Both are very cash rich businesses, the ability
to pay liabilities out of current cash receipts
is high.
Net Profit Margin
Formula:
◦ Net income/Net Sales (or Operating Revenue)
Interpretation:
How much profit does a firm get for each $1 in sales?
The more profit per sale, generally better
Where to find?
Income statement
Net Income/Net Sales (Revenue)
$6,946/$104,611= $0.066 (rounded)
Interpretation:
For every $1 in Sales
Makes $0.066 in profit
Good or bad? Net Profit Margin differs by
industry. That is why I have you pick 2
firms in the same industry.
Walmart: $.024
Total Asset Turnover Ratio
Formula:
Net Sales/Average Total Assets
Interpretation:
Tells how efficiently a firm’s management is using its assets to generate sales.
Where to find?
Income Statement and Balance Sheet
Why average? Because Sales (I/S) are a flow over time, Assets (B/S) shown as of a point in time,
to make them comparable, look at beginning assets, ending assets and the average over the
same period of time as Net Sales.
Balance Sheet:
Net Sales/Average Total Assets
104,611/((53800+51248)/2)=$1.99
Interpretation: Every dollar of
assets produces $1.99 in Sales
Good or bad? Depends on whether a
similar firm produces more $ sales per
$1 assets.
Walmart: $2.38
Gross Profit percentage
Formula:
◦ (Sales – Cost of Sales)/Sales
Interpretation:
How much gross profit does your firm make on each sale
Includes Sales minus the cost of sales only, not all the other operating expenses. (Gives you an
idea of what percent of the sales price is available to cover all other costs)
Where to find?
◦ Income Statement
◦ NOTE: It is possible, if you have a service company, they do not list cost of sales, instead they will list
cost of revenues. If your firm doesn’t have either, put N/A in this spot on your chart.
Sales-Cost of sales)/Sales
($104611-74963)/$104611 = .28
Interpretation:
Target has $0.28 gross profit from every $1 of
goods sold
Good or bad?
Walmart: $0.25
Return on Assets (aka Return on Investment)
Formula:
◦ Net income/Average total Assets
Interpretation:
How productive are a firm’s assets in producing profit?
Where to find?
Balance Sheet: Average total assets is assets from the prior year and current year added
together then divided by 2. Use average because net income is accumulated over a year, so
want to look at the average assets over a year, not at one point in time.
Income Statement: Net Income
Net income/Average total Assets
6949/((53811+51248)/2) = $0.13
Interpretation:
Every $1 Target has in assets produces $0.13
in profit.
Balance Sheet
Once again, comparison with another similar
firm is needed.
Walmart: $0.03
(Differs from Total Asset Turnover where we
had Sales in the numerator)
Accounts Receivable Turnover
Formula:
Sales/Average AR
Interpretation:
How effective are credit granting and collections? Specifically how many times
receivables have turned (been collected) during the period.
Higher numbers indicate that receivables are being collected quickly.
Where to find?
(neSales: Income statement;
◦ Accounts Receivable, B/S under cash, Inventory (Avg beginning and yr end)
Target has no accounts
receivable.
Formula: Sales/Average AR
567762/((8280+6516)/2)= 76.7
Interpretation:
Walmart collects their receivables about
76.7 times per year.
365/76.7 = 4.75
It generally takes Walmart
only 4.75 days to collect on
a receivable.
Facebook AR Turnover
Year Ended December 31,
December 31,
2020
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowances of $114 million and $92 million as of
December 31, 2020 and 2019, respectively
Prepaid expenses and other current assets
Total current assets
2019
2020
Revenue
$
2019
85,965
$
2018
70,697
$
55,838
Costs and expenses:
$
17,576
44,378
11,335
2,381
75,670
$
19,079
35,776
Cost of revenue
16,692
12,770
9,355
Research and development
18,447
13,600
10,273
Marketing and sales
11,591
9,876
7,846
9,518
1,852
66,225
General and administrative
6,564
10,465
3,451
53,294
46,711
30,925
32,671
23,986
24,913
Facebook AR Turnover: 85,965 / [(11,335+9,518)]/2)= 8.2x
Facebook collects its Accounts Receivable 8.2 times per year.
By comparison, Google collects its receivables 4.9 times per year
Total costs and expenses
Income from operations
Inventory Turnover
Formula:
COGS/Average Inventory
Interpretation:
Measures how many times average inventory was purchased and sold over a period. The higher
the number:
◦ the more quickly inventory processed,
◦ the less likely to incur large storage costs
◦ The less likely to become obsolete
◦ The less money tied up in inventory, so can be used in productive purposes
Where to find?
◦ COGS, on Income Statement, Inventory on B/S
COGS/Average Inventory
75963/((13902+10653)/2) =6.19
Interpretation:
Target turns over their
inventory 6.19 times per
year
Comparison:
Walmart: turns over their
inventory 8.45 times a year
Fixed Asset Turnover (PPE)
Formula:
Net Sales/Average net fixed Assets
Interpretation:
How many dollars in sales does each dollar invested in fixed assets produce?
Where to find?
Income Statement (Net Sales)
Balance Sheet (average fixed assets)
Net Sales/Average net fixed Assets
=104611/((18181+16879)/2) = 5.97
Interpretation:
For every $1 of fixed assets
(PPE), Target Generates
$5.97 in sales.
Is this good or bad? Generally, higher
is better. Definitely want it to be
above $1.
Best way is to compare to another
company.
Walmart: $6.08
Accounts Payable Turnover
Formula:
COGS/Avg. Accts Payable
Interpretation:
How efficient is management at paying their suppliers?
Where to find?
Income Statement: COGS
B/S (listed as the first current asset): Accounts payable
COGS/Avg. Accts Payable
74963/((15478+12859)/2) = 5.29
Interpretation:
Target turns over their AP
5.29 times a year.
365/5.29= 63 (Average age of
Target payables: 63 days)
Good or bad?
Walmart: 8.21,
Average days to pay: 44.4
Times Interest Earned (aka Interest Coverage Ratio)
Formula:
(Net Income + Interest Exp. + Income Tax Exp.)/interest expense
Interpretation:
Is a firm generating enough profit to pay its interest obligations?
Where to find?
All in income statement
Can use Interest net. Most firms don’t break it out.
Formula:
(Net Income + Interest Exp. +
Income Tax Exp.)/interest
expense
=(6946+421+1961)/421= $22.20
Target generates $22.20
income for every dollar
EBIT of interest expense they
have.
EBT
They can easily cover
their interest expenses
each year
Walmart: 11.18
Debt to Equity Ratio
Formula:
Total Debt/Total Stockholder’s Equity
Interpretation:
A firm can finance assets either with debt or equity.
Where to find?
Balance Sheet
Note: Target’s debt is shown in 2 pieces, current and noncurrent
Also, might have to back out liabilities from Stockholders Equity Plus Liabilities by subtracting out the
Stockholder’s equity portion of that total.
A=L+SE
A-SE=L
Formula:
Total Debt/Total Stockholder’s Equity
=(21747+19237)/12827= 3.2
For every dollar of equity, Target has $3.20
dollars of debt. In other words most of their
assets are financed by debt.
Is this good or bad? Financing with debt is
generally considered more risky than financing
with equity.
Walmart: $1.66
Earnings per share
Formula:
Net income (less preferred dividends) / avg # common shares outstanding.
Interpretation:
EPS indicates how much money (profit) a company makes for each share of its stock and is a
widely used metric for estimating corporate value.
Popular because it is easy to compare firms
Good to look at comparisons over time and as an indication of profitability
Where to find?
Is shown on every I/S in two versions. Basic and diluted.
Net income (less preferred dividends) / avg
# common shares outstanding.
No Need to calculate.
Interpretation:
For every share outstanding, Target earns
$14.23.
Walmart: $4.90
Dividend Yield
Formula:
Dividends per share/Market Price per share.
Interpretation:
How much does a company pay out in dividends compared to their price?
(Does your firm pay dividends? Look in the financing section of your Statement of Cash Flows,
or can Google it (if they combine it with something else in the SCF)
Where to find?
Can just look up online. www.finance.yahoo.com
Quality of Income ratio
Formula:
CF Ops/Net Income
Interpretation:
How much cash does each dollar of Net income generate?
(Remember, not all net income results in cash: A/R, gains)
Where to find?
Statement of Cash Flows: Cash Flow from Operations
Income Statement: Net income
Formula:
CF Ops/Net Income
8625/6946=$1.24
Interpretation:
For every $1 of net income, $1.24
in cash was generated.
Is that good? A lot?
Walmart: $1.73 cash
produced a dollar of profit
Capital Acquisition Ratio
Formula:
CF from Operations/Cash paid for PPE
Interpretation:
Can a company purchase new PP&E using cash (rather than debt)?
Where to find?
Statement of Cash flows
◦ Investing section: cash outflows for PPE
Notice that cash PAID for PPE will show up as a negative number. When we study Statement of Cash
Flows in Chapter 12, you will see that positive/negative in the investing section depends on whether
cash is going in or out. Cash goes out to make purchases. Use this number, but as a positive number.
Formula:
CF from Operations/Cash paid for PPE
=(8625/3544) = $2.43
Target generates $2.43 in cash
flows from operations for every
$1 of PPE they purchased.
If this stays true, they don’t have
problems purchasing PPE with
cash.
Walmart $1.84
Free Cash Flow (FCF)
Formula:
CF ops-dividends-capital expenditures
Interpretation:
Positive FCF means money is available for additional capital expenditures, other investments, to
pay bills and dividends.
Where to find?
Statement of Cash Flows
(Note: Dividends paid is not dividends per share from income statement, but from the financing
section of the Statement of Cash Flows)
Formula:
CF ops-dividends-capital expenditures
=8625-1548-3544 = $3,533
Interpretation: Positive FCF means money is
available for additional capital expenditures, other
investments, to pay bills and dividends.
Walmart:
$4,923
