Foot locker was incorporated in 1989. The company deals with athletically inspired shoes and apparel. This paper seeks to provide an intensive financial analysis of the company using the company financial ratios of years 2013 and 2014(Foot Locker Inc., 2016).
Financial Ratios
Current Ratios
The main current ratios are the acid test ratio and current ratio. The current ratio is calculated when determining the ability of the company to meet the current liabilities from current assets. On the other hand, acid test ratio determines the ability of the company to meet current liabilities from all current assets apart from inventories (Foot Locker Inc., 2016).
Current ratio= current assets / current liabilities
Acid test ratio = (current assets-inventory)/ current liabilities
Industry average = 1.98
Industry average= 0.9
Capital Structure Ratios
The main capital structure ratio is the debt ratio. This ratio compares the total company liabilities to the total assets. Debt ratio= total liabilities/total assets
Industry average= 0.6
Profitability ratios
The profitability ratios determine the ability of management to raise return out of the sale of the inventory. The main profitability ratio is the profit margin. It determines the amount of profit realizable out of the sale of one dollar of inventory after paying all business operating costs.
Profit margin= net profit/revenue
Industry average= 0.04
Efficiency Ratios
The main efficient ratio is the asset turnover. This ratio determines the ability of management to use the assets of the company to raise revenue (Morningstar, 2016).
Asset turn over = revenue/total assets
Industry average = 0.93
Major Changes
Retain earnings rose from 2,387million in the year 2013 to 2780 in the year 2014. This indicates that the company reinvests a large proportion of the profit realized. This management policy reduces the dividends payable to common stock and the demand for debt financing.
The revenue of the company grew from 6,505million in the year 2013 to7, 151million in the year 2014. This indicates that the company has been able to increase the market for its products. Thus, it is likely that the additional revenue translated to additional returns (Foot Locker Inc., 2016).
The Company Financial Health
The analysis of current ratios showed that the company maintained current ratio and acid test ratio of above one. The current ratio shows that the company can meet its obligation from the current asset. Moreover, an acid test ratio of above one indicates that the company can meet its current obligation even without selling its inventory. Comparing the ratios with those of the entire industry the company is more reliable in meeting current obligation than the majority of its competitors. The management should be appreciated for maintaining the current ratios at considerably high level. However, the management should avoid keeping excessive cash that could otherwise be invested to earn additional returns Richard, 2013.
The debt ratio is below 0.5 for both years considered. This shows that the management is less aggressive in using debt to finance the business expansion. The company is less likely to suffer from bankruptcy than its peers in the market because its debt ratio is below the industrial average. This is quite commendable. However, the debt management policy should be questioned if the company it fails to acquire loans whose interest rate is lower than the business internal rate of return to expand its operations.
The company’s profit margin increased from 0.06 in the year 2013 to 0.08 in the year 2014. This shows an increase in management ability to control over heads through cost cutting measures. Moreover, the industry average ratio is less than that of the company. Lastly, the asset turnover increased from 1.86 to 2. This shows that the management was able to use company assets to realize more revenue in the year 2014 than the year 2013. This is an indication of increased efficient.
Current Issues
The company issued restricted stock of 578 million dollars and additional 912 million dollars under director and stock plans. This is likely to decrease the debt ratio (Richard, 2013).The business risk of the company is quite low because the company has developed extensive customer loyalty over years through effective differentiation and advertisements.
References
Foot Locker Inc. (2016). FORM 10-K. Retrieved February 22, 2016, from
http://www.sec.gov/Archives/edgar/data/850209/000114420415019391/v403865_10k.htm#tCFS
Richard Loth (2013). Ratio Analysis: Using Financial Ratios | Investopedia. Retrieved February
22, 2016, from http://www.investopedia.com/university/ratio-analysis/using-ratios.asp
Morningstar (2016). Foot Locker Inc. Retrieved February 22, 2016, from
http://financials.morningstar.com/ratios/r.html?t=FL
