Question 1
Ratios calculations for Walgreens and Rite Aid Corporation of fiscal year 2001 and 2000
LIQUIDITY RATIOS
Current ratio = Current assets ÷ Current liabilities
Quick ratio = (current Assets-Inventory) / current liabilities
ACTIVITY RATIOS
Inventory Turnover = sales/inventory
Accounts receivables Turnover = sales/ accounts receivables
Asset Turnover = Total sales/ Total Assets
LEVERAGE RATIOS
Debt to Equity Ratio = Total Debt/ Total Equity
Long-term Debt to Equity Ratio = Long-term debt/equity
Debt Ratio =Total Debt/ Total Assets
PROFITABILITY RATIOS
Gross profit margin = {sales –COGS} / sales
Operating profit margin = EBIT/ sales
Net profit margin = Net Profit After Taxes/ sales
Return on Total Assets = Net Income/ Total assets
Return on Stockholders Equity = Net Income/ Stock holder’s Equity
The table below indicate the calculated ratios for Walgreen and Rite Aid Corporation
Analysis
The ratio analysis indicates that the financial condition of Walgreen is stable compared to Rite Aid Corporation as seen in their financial statements. Walgreen has established well with creditors and investors as seen in the financial statement compared to Rite Aid Corporation. Therefore, Walgreen has better financial positions than Rite Aid Corporation. There is no great difference of financial performance in 2000 and 2001 as shown in the table.
Question 2
Based on the profitability ratios the Walgreen is more profitable compared to the Rite Aid Corporation because its management is more effective. For instance, the net profit margin of Walgreen (0.04) is greater than that of a Rite Aid Corporation (-0.1). Similarly, the liquidity ratios indicate that the Rite Aid Corporation is less likely to default on its current obligation compared to Walgreen because it has a higher current ratio. The Rite Aid Corporation is incurring an opportunity cost because it is losing additional profit.
Walgreen has ability to satisfy its obligations immediately compared to the Rite Aid Corporation. In additional, Walgreen uses its resources more effectively compared to Rite Aid Corporation. Therefore, Walgreen is more feasible and profitable compared to Rite Aid Corporation. The red flags that I have noticed are the deficit of the Rite Aid Corporation because it has a Net income loss. This is a red flag for the company because it indicates its management is not effective in accounting for all costs and income Taxes. This indicates the company with more liquidity because it is losing profits.
Question 3
The income deficit of the Rite Aid Corporation indicates the company is less profitable compared to Walgreen, which has income surplus. This indicates the Walgreen is a large enterprise with well-established relationship with banks that can offer credit services and other short-term loan products when it requires liquidity. On the other hand, Rite Aid Corporation does not have the same access to credit and tend to operate with more liquidity hence losing additional profits.
