Question

U2 - Financial Statement Analysis (50 min) Calculate at least 4 ratios for EACH of the following ratio categories (profitability, liquidity, solvency, efficiency) Intepret the results. Best Buy Ltd. Statement of Earnings (Income Statement) For the Year Ended Dec 31, 2017 In millions of dollars 2013 2014 2015 2016 2017 Revenue Computers Phones Software & Gaming Total Revenue $150.00 $75.00 $50.00 $172.50 $150.00 $62.50 $385.00 $198.38 $210.00 $78.13 $486.50 $62.50 $228.13 $294.00 $97.66 $619.79 $262.35 $411.60 $122.07 $796.02 $275.00 $96.25 $178.75 $134.75 $250.25 $165.41 $321.09 $204.53 $415.26 $238.81 $557.21 Cost of Goods Sold (COGS) Gross Profit Operating Expenses Advertising & Marketing General & Administrative Research, IT, & Development Depreciation & Amortization Total Operating Expenses $27.50 $41.25 $30.00 $25.00 $123.75 $38.50 $57.75 $34.50 $25.00 $155.75 $48.65 $72.98 $39.68 $25.00 $186.30 $61.98 $92.97 $45.63 $25.00 $225.57 $79.60 $119.40 $52.47 $25.00 $276.48 Operating Income Interest Expense Pre-tax Income Income Taxes Net Income (Loss) $55.00 $9.00 $46.00 $9.20 $36.80 $94.50 $9.00 $85.50 $17.10 $68.40 $134.79 $9.00 $125.79 $25.16 $100.63 $189.68 $9.00 $180.68 $36.14 $144.55 $280.74 $9.00 $271.74 $54.35 $217.39 Best Buy Ltd. Statement of Financial Position At Dec 31, 2017 In millions of dollars Assets Cash Accounts Receivable Inventory Total Current Assets 2013 $60.00 $60.00 $100.00 $220.00 2014 $13.40 $70.00 $90.00 $173.40 2015 $4.03 $70.00 $80.00 $154.03 2016 $33.58 $100.00 $70.00 $203.58 2017 $85.97 $130.00 $60.00 $275.97 Gross Property Plant & Equipment Less: Accumulated Depreciation $250.00 -$50.00 $350.00 -$75.00 $450.00 - $100.00 $500.00 $125.00 $600.00 $150.00

Answer 1

a)   Profitability ratios                  
                      
i)    Return on equity= (Profit after tax/(Equity share capital+Retained earnings))*100                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Profit after tax   36.80   68.40   100.63   144.55   217.39
   Equity capital    175.00   175.00   175.00   175.00   175.00
   Retained earnings   100.00   118.40   164.03   248.58   405.97
   Return on equity (%)    13.38   23.31   29.68   34.13   37.42
                      
ii)   Return on assets= (Net profit/Total assets)*100                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Net income   36.80   68.40   100.63   144.55   217.39
   Total assets   520   568.4   644.03   718.58   875.97
   Return on assets (%)   7.08   12.03   15.63   20.12   24.82
                      
iii)   Gross profit= (Gross profit/Sales)*100                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Gross profit   178.75   250.25   321.09   415.26   557.21
   Total sales   275.00   385.00   486.50   619.79   796.02
   Gross profit (%)   65.00   65.00   66.00   67.00   70.00
                      
iv)   Net profit= (Net profit/Sales)*100                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Net profit   36.80   68.40   100.63   144.55   217.39
   Total sales   275.00   385.00   486.50   619.79   796.02
   Net profit (%)   13.38   17.77   20.68   23.32   27.31
                      
b)   Liquidity ratios                  
                      
i)   Current ratio= Current assets/Current liabilities                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Current assets   220.00   173.40   154.03   203.58   275.97
   Current liabilities   70.00   100.00   130.00   120.00   120.00
   Current ratio (times)   3.14   1.73   1.18   1.70   2.30
                      
ii)   Quick ratio= (Current assets-Inventories)/Current liabilities                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Current assets   220.00   173.40   154.03   203.58   275.97
   Inventories   100.00   90.00   80.00   70.00   60.00
   Current liabilities   70.00   100.00   130.00   120.00   120.00
   Quick ratio (times)   1.71   0.83   0.57   1.11   1.80
                      
iii)   Cash ratio= Cash and cash equivalents/Current liabilities                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Cash and cash equivalents   60.00   13.40   4.03   33.58   85.97
   Current liabilities   70.00   100.00   130.00   120.00   120.00
   Cash ratio (times)   0.86   0.13   0.03   0.28   0.72
                      
iv)   Net working capital= Current assets-current liabilities                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Current assets   220.00   173.40   154.03   203.58   275.97
   Current liabilities   70.00   100.00   130.00   120.00   120.00
   Net working capital   150.00   73.40   24.03   83.58   155.97
                      
c)   Solvency ratios                  
                      
i)   Debt to equity ratio= Long term debt/Total equity (including preference shares)                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Long term debts   150.00   150.00   150.00   150.00   150.00
   Total equity   300.00   318.40   364.03   448.58   605.97
   Debt to equity ratio (times)   0.50   0.47   0.41   0.33   0.25
                      
ii)   Debt ratio=Long term debt/(Long term debt+Total equity)                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Long term debts   150.00   150.00   150.00   150.00   150.00
   Total equity   300.00   318.40   364.03   448.58   605.97
   Debt ratio (times)   0.33   0.32   0.29   0.25   0.20
                      
iii)   Proprietary ratio= Total equity/(Long term debt+total equity)                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Total equity   300.00   318.40   364.03   448.58   605.97
   Long term debts   150.00   150.00   150.00   150.00   150.00
   Proprietary ratio(times)   0.67   0.68   0.71   0.75   0.80
                      
iv)   Interest coverage ratio= Net profit before interest and taxes/Interest on debts                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Operating income   55.00   94.50   134.79   189.68   280.74
   Interest on debts   9.00   9.00   9.00   9.00   9.00
   Interest coverage ratio(times)   6.11   10.50   14.98   21.08   31.19
                      
d)   Efficiency ratio                  
                      
i)   Fixed asset turnover=Sales/Average fixed assets                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Total sales   275.00   385.00   486.50   619.79   796.02
   Opening fixed assets   0.00   300.00   395.00   490.00   515.00
   Closing fixed assets   300.00   395.00   490.00   515.00   600.00
   Average fixed assets (Opening assets+Closing assets)/2   300.00   347.50   442.50   502.50   557.50
   Fixed assets turnover ratio(times)   0.92   1.11   1.10   1.23   1.43
   * since opening figures for the year 2013 is not available we have considered closing as average.                  
                      
ii)   Inventory turnover= Cost of goods sold/Average inventory                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Cost of goods sold   96.25   134.75   165.41   204.53   238.81
   Opening inventory   0.00   100.00   90.00   80.00   70.00
   Closing inventory   100.00   90.00   80.00   70.00   60.00
   Average fixed assets (Opening assets+Closing assets)/2   100.00   95.00   85.00   75.00   65.00
   Inventory turnover ratio(times)   0.96   1.42   1.95   2.73   3.67
   * since opening figures for the year 2013 is not available we have considered closing as average.                  
                      
iii)   Receivables turnover=Sales/Average receivables                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Total sales   275.00   385.00   486.50   619.79   796.02
   Opening receivables   0.00   60.00   70.00   70.00   100.00
   Closing receivables   60.00   70.00   70.00   100.00   130.00
   Average fixed assets (Opening assets+Closing assets)/2   60.00   65.00   70.00   85.00   115.00
   Receivables turnover ratio(times)   4.58   5.92   6.95   7.29   6.92
   * since opening figures for the year 2013 is not available we have considered closing as average.                  
                      
iv)   Total assets turnover ratio=Sales/Average total assets                  
                      
   $ in millions   2013   2014   2015   2016   2017
   Total sales   275.00   385.00   486.50   619.79   796.02
   Opening total assets   0.00   520.00   568.40   644.03   718.58
   Closing total assets   520.00   568.40   644.03   718.58   875.97
   Average fixed assets (Opening assets+Closing assets)/2   520.00   544.20   606.22   681.31   797.28
   Receivables turnover ratio(times)   0.53   0.71   0.80   0.91   1.00
   * since opening figures for the year 2013 is not available we have considered closing as average.