Comparative Ratio Analysis of Three Listed Companies

Of Retail sector (US)

December 02, 2019

TABLE OF CONTENT

Title Page No

Letter of Transmittal 1

Objectives 3

Sources of Data 3

Methodology 4

Findings of the Ratio Analysis 5

Liquidity Ratio 5

Debt Ratio 6

Profitability/Performance 7

Activity Ratio 10

Market Performance 12

Conclusion 13
Objectives

This Study will examine the financial statement and analysis its financial prospects in terms of

liquidity, debt, company performance, efficiency and the market performance of the market.

This report aims at comparative analysis of financial performance of Chocolate manufacturers

in Europe. The analysis is performed from the perspective of key stakeholders for organization

Management, Stockholder and Suppliers.

Companies Considered:

1. Walmart

2. Amazon

3. Kroger

Methodology of Analysis:

Analysis carried out for the Company performance for the years of 2016, 2017 and 2018.

Financial tools considered for analysis were annual audited financial reports of these

organizations. Data selected through their Balance Sheets, Cash Flow statements and Income

Statements were used to calculate key ratios for Vertical & Horizontal Analysis presented in

detail in Company wise Annexures, enclosed with this report

Sources of Data

The main data source ids the published annual reports on US Securities Exchange Commission

by Amazon.com, Walmart and Kroger for the year of 2016,2017 and 2018.

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Methodology

The Financial Ratios:

I. Brief Company Profile

II. Liquidity Ratio

i) Current Ratio

ii) Quick Ratio

III. Debt Ratio

i) Debt-to-equity

ii) Debt-to-Total Asset

IV. Profitability/Performance

i) Gross Profit Margin

ii) Net Profit Margin

iii) Return on Asset (ROA)

iv) Return on Equity (ROE)

V. Activity Ratio

i) Account Receivables Turnover

ii) Average Collection Period

iii) Inventory Turnover

VI. Market Performance

i) EPS

ii) PE Ratio
Brief Company Profiles

Walmart
Walmart Inc., formerly Wal-Mart Stores, Inc., is engaged in the operation of retail, wholesale

and other units in various formats around the world. The Company offers an assortment of

merchandise and services at everyday low prices (EDLP). The Company operates through three

segments: Walmart U.S., Walmart International and Sam's Club. The Walmart U.S. segment

includes the Company's mass merchant concept in the United States operating under the

Walmart brands, as well as digital retail. The Walmart International segment consists of the

Company's operations outside of the United States, including various retail Websites. The Sam's

Club segment includes the warehouse membership clubs in the United States, as well as

samsclub.com. The Company operates approximately 11,600 stores under 59 banners in 28

countries and e-commerce Websites in 11 countries.

Amazon
Amazon.com, Inc. offers a range of products and services through its Websites. The Company's

products include merchandise and content that it purchases for resale from vendors and those

offered by third-party sellers. It also manufactures and sells electronic devices. It operates

through three segments: North America, International and Amazon Web Services (AWS). Its

AWS products include analytics, Amazon Athena, Amazon Cloud Search, Amazon EMR,

Amazon Elasticsearch Service, Amazon Kinesis, Amazon Managed Streaming for Apache

Kafka, Amazon Redshift, Amazon Quick Sight, AWS Data Pipeline, AWS Glue and AWS Lake

Formation. AWS solutions include machine learning, analytics and data lakes, Internet of

Things, serverless computing, containers, enterprise applications, and storage. In addition, the

Company provides services, such as advertising. It also offers Amazon Prime, a membership

program that includes free shipping, access to streaming of various movies and television (TV)

episodes.

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KROGER
The Kroger Co. (Kroger) manufactures and processes food for sale in its supermarkets. The

Company operates supermarkets, multi-department stores, jewelry stores and convenience

stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900

owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses

and food production plants through divisions, subsidiaries or affiliates. These facilities are

located throughout the United States. As of February 3, 2018, Kroger operated, either directly or

through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which

2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered

Click List and Harris Teeter Express Lane, personalized, order online, pick up at the store

services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three

brands. Its other brands include Simple Truth and Simple Truth Organic.
Findings of the Ratio Analysis

Liquidity Ratio
In a nutshell, a company's liquidity is its ability to meet its near-term obligations, and it is a

major measure of financial health. Liquidity can be measured through several ratios.

I. Current ratio
The current ratio is the most basic liquidity test. It signifies a company's ability to meet its short-

term liabilities with its short-term assets. A current ratio greater than or equal to one indicates

that current assets should be able to satisfy near-term obligations. A current ratio of less than

one may mean the firm has liquidity issues.

Current Ratio = (Current Assets) / Current Liabilities

Company/Years 2016 2017 2018 Average

AMAZON.COM 1.0448 1.04 1.0981 1.06

WALMART 0.9322 0.862 0.7598 0.851
KROGER 0.7626 0.804 0.7831 0.783
Table 1: Current ratio

Among the three companies AMAZON.COM is more liquid then WALMART and then

KROGER.

II. Quick Ratio

The quick ratio is a tougher test of liquidity than the current ratio. It eliminates certain current

assets such as inventory and prepaid expenses that may be more difficult to convert to cash.

Like the current ratio, having a quick ratio above one means a company should have little

problem with liquidity. The higher the ratio, the more liquid it is, and the better able the

company will be to ride out any downturn in its business.

Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable Securities) / (Current

Liabilities)

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 Company/Years 2016 2017 2018 Average
AMAZON.COM 0.78 0.76 0.85 0.79
WALMART 0.18 0.19 0.22 0.19
KROGER 0.24 0.31 0.25 0.26
Table 2: Acid test ratio

The quick ratio also behave like the current ratio. Among the three companies AMAZON.COM

is more liquid than KROGER and then WALMART. One interesting observation is the Current

and Quick ratios of all selected year are same, because of null inventories in their operations.

Ranking in terms of Liquidity

Rank Current ratio Acid test ratio
1 AMAZON.COM AMAZON.COM
2 WALMART KROGER
3 KROGER WALMART
Table 3: Ranking in terms of Liquidity

Debt Ratio
The debt ratio compares a company's total debt to its total assets, which is used to gain a

general idea as to the amount of leverage being used by a company. A low percentage means

that the company is less dependent on leverage, i.e., money borrowed from and/or owed to

others. The lower the percentage, the less leverage a company is using and the stronger its

equity position. In general, the higher the ratio, the more risk that company is considered to

have taken on.

Company/Years 2016 2017 2018 Average

AMAZON.COM 40.00% 89.3% 54.00% 61.1%
WALMART 57.04% 57.52% 72.87% 62.47%
KROGER 20.9% 22.57% 19.43% 20.964%
Table 4: Total debt to equity ratio

WALMART have comparatively higher debt portion relative to the equity than other two

companies. It might not be normal compared to the industry and which might put the firm

under risk but indicate high leverage.

 Company/Years 2016 2017 2018 Average

AMAZNON.COM 76.86% 78.89% 73.16% 76.30%

WALMART 59.49% 60.28% 63.68% 61.22%

KROGER 81.63% 81.43% 79.44% 80.83%

Table 5: Debt-to-Total Asset

KROGER also have comparatively higher debt portion relative to the Assets than other two

companies. It seems using more debt compared to the industry and which might put the firm

under risk pressure but indicate high leverage.

Ranking in terms of high leverage

Total debt to
Rank Debt-to-Total Asset
equity ratio
1 WALMART KROGER
2 AMAZON AMAZON.COM
3 KROGER WALMART
Table 6: Ranking in terms of high leverage

Profitability/Performance
Every firm is most concerned with its profitability. One of the most frequently used tools of

financial ratio analysis is profitability ratios which are used to determine the company's bottom

line. Profitability measures are important to company managers and owners alike. If a small

business has outside investors who have put their own money into the company, the primary

owner certainly has to show profitability to those equity investors.

I. Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at

how well a company controls the cost of its inventory and the manufacturing of its products

and subsequently passes on the costs to its customers. The larger the gross profit margin, the

better for the company. The calculation is: Gross Profit/Net Sales = ____%. Both terms of the

equation come from the company's income statement.

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 Company/Years 2016 2017 2018 Average
AMAZON.COM 35.09 37.08% 40.24% 37.47%
WALMART 45.93% 25.64% 25.12% 32.23%
KROGER 22.15% 22.39% 22.01% 22.18%
Table 7: Gross Profit Margin

Higher GPM indicates higher profitability of the firm.

II. Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the most often margin

ratio used. The net profit margin shows how much of each sales dollar shows up as net

income after all expenses are paid. For example, if the net profit margin is 5% that means

that 5 cents of every dollar is profit. The net profit margin measures profitability after

consideration of all expenses including taxes, interest, and depreciation. The calculation

is: Net Income/Net Sales = _____%.

Company/Years 2016 2017 2018 Average

AMAZON.COM 1.74% 1.70% 4.32% 2.58%
WALMART 2.80% 1.97% 1.29% 2.02%
KROGER 1.71% 1.55% 2.56% 1.94%
Table 8: Net Profit Margin

Here also higher NPM indicates higher profitability of the firm.

III. Return on Asset (ROA)

The Return on Assets ratio is an important profitability ratio because it measures the efficiency

with which the company is managing its investment in assets and using them to generate profit.

It measures the amount of profit earned relative to the firm's level of investment in total assets.

The return on assets ratio is related to the asset management category of financial ratios. The

calculation for the return on assets ratio is: Net Income/Total Assets = _____%. Net Income is

taken from the income statement and total assets are taken from the balance sheet. (Ed., 2019)
 Company/Years 2016 2017 2018 Average
AMAZON.COM 2.84% 2.30% 6.19% 3.77%
WALMART 7.18% 5.14% 3.27% 5.19%
KROGER 5.36% 5.07% 8.07% 6.16%
Table 9: Return on Asset

The higher the percentage, the better the firm’s asset utilization to earn, because that means the

company is doing a good job using its assets to generate sales.

IV. Return on Equity (ROE)

The Return on Equity ratio is perhaps the most important of all the financial ratios to investors

in the company. It measures the return on the money the investors have put into the company.

This is the ratio potential investors look at when deciding whether to invest in the company.

The calculation is: Net Income/Stockholder's Equity = _____%. Net income comes from the

income statement and stockholder's equity comes from the balance sheet. (Ed., 2019)

Company/Years 2016 2017 2018 Average

AMAZON.COM 12.29% 10.94% 23.13% 15.45%
WALMART 17.74% 13.02% 9.05% 13.27%
KROGER 29.16% 27.35% 39.28% 31.93%
Table 10: Return on Equity

In general, the higher the percentage, the better earning capability against its equity, with some

exceptions, as it shows that the company is doing a good job using the investors' money.

Ranking in terms of Profitability & Performance

Gross Profit
Rank Net Profit Margin Return on Asset Return on Equity
Margin
1 AMAZON AMAZON KROGER KROGER
2 WALMART WALMART WALMART AMAZON
3 KROGER KROGER AMAZON WALMART
Table 11: Ranking in terms of Profitability & Performance

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Activity Ratio
Activity ratios measure company sales per another asset account—the most common asset

accounts used are accounts receivable, inventory, and total assets. Activity ratios measure the

efficiency of the company in using its resources. Since most companies invest heavily in

accounts receivable or inventory, these accounts are used in the denominator of the most

popular activity ratios.

I. Account Receivables Turnover

Accounts receivable is the total amount of money due to a company for products or services

sold on an open credit account. The accounts receivable turnover shows how quickly a

company collects what is owed to it.

Total Credit Sales

Accounts Receivable Turnover =

Accounts Receivable

Company/Years 2016 2017 2018 Average

AMAZON.COM 16.30 13.50 13.96 14.58
WALMART 83.26 89.12 81.87 84.75
KROGER 69.94 74.93 76.25 73.70
Table 12: Receivable Turnover

The higher the receivable turnover indicates quicker chance of receivable collection.

II. Average Collection Period/Day’s Sales in receivables

This indicates the collection period in days of the receivables of credit sales.

Company/Years 2016 2017 2018 Average

AMAZON.COM 22.389 27.01 26.13 25.17
WALMART 4.38 4.09 4.45 4.30
KROGER 5.21 4.87 4.78 4.95
Table 13: Average Collection Period
The lower the collection period indicates quicker receivable collection.

III Inventory Turnover

For a company to be profitable, it must be able to manage its inventory, because it is money

invested that does not earn a return. The best measure of inventory utilization is the inventory

turnover ratio (aka inventory utilization ratio), which is the total annual sales, or the cost of

goods sold divided by the cost of inventory.

Total Annual Sales or Cost of Goods Sold

Inventory Turnover =

Inventory Cost

Using the cost of goods sold in the numerator is a more accurate indicator of inventory
turnover, and allows a more direct comparison with other companies, since different
companies would have different markups to the sale price, which would overstate the actual
inventory turnover.

Company/Years 2016 2017 2018 Average

AMAZON.COM 7.70 6.97 8.10 7.59
WALMART 8.39 8.52 8.70 8.53
KROGER 13.64 14.64 13.86 14.04
Table 14: Inventory Turnover

The higher turnover indicates the maximum utilization of inventory efficiently.

Ranking in terms of activity ratios

Account Average
Inventory
Receivables Collection
Rank Turnover
Turnover Period

1 WALMART WALMART KROGER

2 KROGER KROGER WALMART

AMAZON.CO
3 AMAZON.COM AMAZON.COM
M

Table 15: Ranking in terms of activity ratios

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Market Performance

I. EPS

The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.
Calculated as:

Company/Years 2016 2017 2018 Average

AMAZON.COM 4.90 6.15 20.14 10.39
WALMART 4.38 3.28 2.26 3.30
KROGER 2.05 2.09 3.76 2.63
Table 16: EPS

II. PE Ratio
The P/E looks at the relationship between the stock price and the company’s earnings. The P/E

is the most popular metric of stock analysis, although it is far from the only one you should

consider. P/E = Stock Price / EPS

Company/Years 2016 2017 2018 Average

AMAZON.COM 152.7 190.16 74.61 139.15
WALMART 14.39 22.56 57.32 31.42
KROGER 14.01 11.78 6.79 10.86
Table 17: PE Ratio

Ranking in terms of Market performance

Rank EPS P/E

1 AMAZON.COM KROGER
2 WALMART WALMART
3 KROGER AMAZON.COM
Table 18: Ranking in terms of Market performance
Conclusion

It is to be concluded for this study that, it is not appropriate to make decision about any of the
firms’ performance and the measurement tools, because all the formulas and functions are
applied to attain a specific requirement of the firm as the part of the firm’s financial strategy. So,
the qualitative information will also need to understand the purpose of the firm to use any of
the tools to measure their performance. Finally, it could be recommended that, the importance
of the ratio analysis depends on the stakeholder’s specific need and the situational
requirements.

However, we can summarize the following.

Amazon is outperforming others on liquidity ratio i.e. current ratio ( to meet short term
liability ) and quick ratio.
Amazon is more attractive for Profitability ratio for GPM & NPM, however Kroger is doing
better in ROA (signifies efficiency) & ROE (return on equity) as first choice for investors.
Amazon is better in EPS and Kroger is the best among three in P/E ratio.

SUBMITTED BY: Group 10, Sec -B, EPGDIB 19-20,

Diwyanshu Agarwal (Roll no-12)

Nitin Khare (Roll No 25)

Sravanth (Roll No 42)

Raghav Kesar (Roll no 32)

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