Question

Based on the various numbers and ratios in the spreadsheet, and based on what you know about the companies, what conclusions can you draw about the three companies and how they compare? How do their business models and strategies differ?

COGS Gross Profit 48,872 361.256 15,818 12,068 3,672 20,623 SG&A D&A Operating Income (EBIT) 13,356 2,298 4,969 101,853 22,764 Net Interest expense Income tax expense Net Income 53 1,243 2,350 1,004 1.296 2,669 2,267 6.204 13,643 D&A 1,255 2,298 10,080 EBITDA $3,672.00 $7,267.00 $22,764.00 Gross Margin (%) EBITDA Margin (%) Net Income Margin (%) 13.32% 3.09% 1.98% 29.68% 7.15% 3.84% 25.65% 4.69% 2.81% SGA as % of Rev 10.17% 19.22% 20.96% Number of Stores Total Square Feet (mm) Square feet/store 715 103 144,336 1,802 240 132,908 11,695 1,164 99,564 Revenue/Store ($mm) Revenue/Square fooft $166.04 $0.82 $38.57 $0.52 $41.55 $4.88 EBITDA/Store ($mm) $5.14 $4.03 $1.95

Answer 1

Generally, the companies are evaluated based on the Return on Equity or Return on Assets. As the gross margin may not be correct indicator of the business. As per the Dupont analysis,

$Return on equity = (\frac{Net Income}{Revenue})\times (\frac{Revenue}{Ave Asst})\times (\frac{Ave Asst}{Ave Equity})$

= (Profitability)* (Asset Turnover) * (Financial Leverage)

Now for the given example if we assume store cost are same, and they are the only assets required, we have

	Net Income Margin	Asset Turnover	Leverage
Company 1	1.98%	0.82x	N.A.
Company 2	3.84%	0.52x	N.A.
Company 3	2.81%	4.88x	N.A.

Here x is the variable which will be related to cost of the store.

Based on two factors, company 3 fare good as compared to other two companies, and Company 1 and Company 2 are comparable.

Now, since the balancesheet is not given, commenting on leverage is difficult.

However, by examining the interest expenses by the companies, we understand Company 2 pays highest interest for per square feet of the store. This may be because interest expense of company two is higher, or company 2 have higher debt.

For this case, if we assume, interest rates for all companies are same, then leverage component of Company 2 is higher. A comparison of interest is as per the following table;

	Company 1	Company 2	Company 3
Interest	53	1004	2267
sq Feet Mn	103	240	1164
Estimated leverage	0.51y	4.18y	1.95y

Here, y is a variable dependent on asset price and other things.

Hence, if interest rate are same, company 2 have twice the leverage as compared to company 1.

However, first two component of Company 3 are 6.85 time of company 2. Hence, Return on equity of the Company 3 is better. Further, the first two component represents the return on assets. Hence in terms of return of assets, company 3 may be doing good.