Analysis of Financial Ratios: Case of Macy’s Inc.
Macy’s Inc. has been selected for carrying financial analysis. The annual report for the year ending 2013 has been downloaded from the investor relations’ section of the company’s website . The extracts have been presented in the appendix A.
The literature related to ratio analysis has categorized ratios in five primary categories, namely activity ratios, liquidity ratios, solvency ratios, profitability ratios, and valuation ratios .
The financial ratios can be meaningfully interpreted using some benchmarks . These benchmarks can be intra-company comparison or inter-company comparison. For the purpose of this research, intra-company comparison of the financial ratios for the year ending 2013 has been done for the same ratios for the year ending 2012. The change over the period of time can convey some meaningful results about the performance of the selected company.
The consolidated statement of income of Macy’s Inc. clearly presents three types of the profits, namely gross margin, operating income and net income. Thus, all these profit ratios have been calculated. The ratios depict the improvement in the overall performance of the firm. Despite the decreased gross profit margin, the company managed to limit the effect of that decrease on the operating profit, and finally, the net profit presented an increase over the previous year.
Return on shareholders’ equity measures the profits generated on the shareholders’ fund. The ratio has increased over the previous year. A closer look into the figures show that the company’s capital structure was changed by raising more equity and redeeming debt. This leads to decrease in the total interest payment. Overall, this decision has enhanced the returns earned by the shareholders.
Current ratio can be categorized as one of the liquidity ratios, which measures the amount of the current assets to repay the current liabilities. The current ratio signals the capacity of the firm to repay its debts in short term, say one year. If current assets are not sufficient to repay current liabilities (in other words, current ratio is less than 1), then the short-term external finance may have to be raised to pay off the current liabilities . In case of Macy’s Inc., the current ratio is almost the same. However, a closer look into the current assets indicate the presence of huge merchandise inventory, but little receivables. A closer look into the current liabilities present that the company has been able to arrange the short-term finance by buying on credit. This situation is very specific to the retail industry.
The Interest Coverage Ratio has been categorized as the solvency ratio, which measures the company’s ability to pay back the interest on the loaned funds. Higher ratio provides confidence to the lenders regarding their regular interest repayments .
Source:
Analysis from stakeholder’s perspective:
The utility of each of the ratio categories depend upon the purpose of analysis. Different stakeholders consider different ratios to decide if they should do business with the company, or not. However, it is not important that one set of stakeholders analyse only one category of ratios . Following section presents the analysis from two stakeholders’ point of view:
Accountant for a potential vendor for this company:
Vendors are the supplier of raw material to the company. Due to the increased competition, suppliers have to offer some period of credit, generally 2-3 months . The primary objective for them is to analyze if they can get their money back in time. Since, the credit period is short-term, the liquidity ratio (current ratio in this case) best indicates the short-term financial position of the business. The supplier can also observe if the company is generating sufficient profits margins.
The current ratio of Macy’s Inc. has decreased from 1.55 in the year 2012 to 1.52 in 2013. According to the above explanation of the current ratio, Macy’s Inc. have sufficient current assets to repay its current liabilities. Further, the company is generating good gross profit margin, and overall profitability is increasing over the previous year. This indicates that the company is operating efficiently.
As discussed earlier, the current assets of Macy’s Inc. have huge amount of inventory, which is considered as the most illiquid current asset. Thus, quick ratio can provide a better short-term liquidity position. Further, efficiency ratios such as stock, debtor and creditor turnover ratios would provide useful insight into the company’s working capital position.
Accountant for a potential investor in this company:
Potential investors are the ones who are examining for some investment opportunities, say shares or debentures, in expectation of getting some return along with the principal repayment.
Overall opinion of this company based on the limited analysis:
Based on the limited analysis, the company’s profitability ratios are satisfactory as it signifies an overall increase. The return on equity is also increasing, thus, justifying the changes in the capital structure in favor of the investors. The current ratio also seems satisfactory according to the explanation, but quick ratio can present a better view of the short-term liquidity position. The current assets have huge proportion of merchandise inventory, which if become obsolete, can distort the liquidity position. Also, the company is arranging finance from the suppliers and creditors. Thus, studying the overall working capital cycle would add value. Having said that, since Macy’s Inc. is in retail business, its most of the merchandise would be directly converted into cash, rather than accounts receivable. This is a positive signal for the suppliers. Further, the company’s solvency position is also promising as the interest coverage ratio is high.
This research paper have helped to appreciate the use of the financial ratios. The critical analysis of the limited financial ratios and corresponding it to the requirement of the some stakeholders have helped to appreciate the relevance of other related ratios. The results over two years is also not appearing sufficient. The analysis of the trend, say 7 years, or comparison of these figures with the industry standards would help in making informed decision.
References:
Hyam, R. (28. Feb 2014). Woolworths posts strong first-half profit growth. Australia.
Macy's Inc. (2013). Macy's Inc: Annual Report 2013. Von Macysinc: http://www.macysinc.com/Assets/docs/for-investors/annual-report/2013_ar.pdf abgerufen
Pala, B., Sanab , S., & Chaudhuria, K. (2013). Three stage trade credit policy in a three-layer supply chain–a production-inventory model. International Journal of Systems Science.
Robinson, T., Greuning, H., Henry, E., & Broihahn, M. (2008). International Financial Statement Analysis. John Wiley & Sons.
Schönbohm, A. (2013). Performance Measurement and Management with Financial Ratios – the BASF SE Case. Leibniz Information Centre for Economics, 1-26.
Appendix A: Extracts from Financial Statements
