The utilization of ration is crucial for comprehensive financial analysis. In order to appreciate a company’s performance, analysts utilize liquidity ratios, leverage ratios, activity ratios, profitability ratios, and market ratios. Ratios are calculated using the financial statements of the company (income statements and balance sheets). The calculations presented in this section were made using data from Kroger’s annual reports acquired from Yahoo Finance. All the relevant data acquired from these statements is demonstrated in Table 1 below.
Table 1. Selected Financial Data in Millions (Yahoo Finance, 2020a).
|WA of common shareholders outstanding||799||810||895|
Liquidity ratios are utilized to acquire an understanding of how much of the firm’s current assets are available to meet the short-term claims of the creditors. The current ratio is commonly is used to achieve this goal, which is calculated by dividing current assets by current liabilities. If the ratio is equal to 1, the company has just enough current assets to cover its current liabilities.
Leverage ratios demonstrate how much of the assets are financed using debt. In other words, leverage analysis demonstrates how aggressively the company uses debt for development. The most commonly used ratios are Debt-to-Equity ratio and Debt-to-Total Assets ratios.
Activity ratios help to understand how effectively a company is using its assets. The most commonly used metric is the total assets turnover ratio, which is calculated by dividing net sales by average total assets.
Profitability ratios are used to determine how much of an investment will be returned, either form revenues or appreciation of assets. Net profit margin helps to determine how much will be returned from revenues, while return on assets (ROA) calculates the appreciation of assets’ value.
Finally, market ratios are usually utilized by investors to compare different companies in one industry in terms of how much profit they can generate. One of the most comprehensive ratios is earning per share (EPS), which helps to determine how much of the net income is allocated to every common share.
Impact of Ratios
Ratios need to be interpreted to gain valuable knowledge from the calculations. The current ratio is significantly below zero, which demonstrates that the company does not have enough money to pay for short-term obligations. In other words, Kroger is currently experiencing a liquidity problem. The debt to equity ratio demonstrates that for every $1 of its own money, the company uses $4.28 of debt to finance its assets.
The debt to total assets ratio demonstrates that 81% of total assets are financed with debt. This implies that the company uses debt aggressively to develop the company, which may be associated with high risk. Total Asset Turnover demonstrates that total revenues exceed the average total assets by almost three times, which is a relatively strong position.
However, Net profit margin ratio remonstrates that the company gets to keep only 1% of all sales as income, and the utilization of assets to gain income is rather weak (0.04). However, all of these ratios need to be compared to the historical performance of the company and to the performance of the key competitors. This is especially true for the EPS ratio, as it is not informative when taken outside of context.
Changes in Time
The analysis of ratios is more informative when examined over a period of three years. Table 2 below demonstrates how the ratios fluctuated between 2017 and 2019. The analysis demonstrates that the current ratio did not change considerably during the past three years, which implies that the executives are satisfied with the danger of being unable to cover short-term obligations. In terms of leverage, the company increased the percentage of assets being financed with debt in comparison with 2018, which is not a positive dynamic.
Additionally, the total asset turnover ratio is steadily declining for two years in a row, which means that the company’s ability to generate sales from assets is decreasing. This may signal about decreased efficiency of managers. In terms of profitability, the profit margin is rather thin and decreased by three times, and ROA decreased by 2 times in comparison with 2018, which may also mean decreased managerial effectiveness.
This decreased management efficiency may have influenced the EPS ratio, which was the lowest during the past three years. While the dynamics of ratios is not optimistic, it is crucial to compare the performance to that of the key competitors to make sure that the changes did not occur due to the changes in the external environment.
Table 2. Changes in Ratios during the Past 3 Years (Yahoo Finance, 2020a).
|Debt to total assets||0.81||0.79||0.81|
|Debt to equity||4.28||3.87||4.39|
|Total Asset Turnover||2.93||3.22||3.33|
|Net Profit Margin||0.01||0.03||0.02|
|Return on Total Assets||0.04||0.08||0.05|
Comparison to Competitors
Kroger’s key competitors are Costco and Walmart. Table 3 below juxtaposes the ratios of three companies to understand how well Kroger performs against its competitors. As seen from the comparison, Kroger has the lowest performance in terms of liquidity (current ratio) and the highest leverage level (debt-to-equity and debt-to-total assets ratios).
This implies that the company manages its short-term and long-term debt with increased risk when compared to the key competitors. Kroger also has the lowest performance in terms of EPS, ROA, and net profit margin, which implies that the company has more difficulties in generating profit. Kroger took second place among the competitors only in terms of total asset turnover. This implies that the company demonstrates a relatively poor financial performance when compared to key competitors.
Table 3. Comparison of ratios with competitors (Yahoo Finance, 2020a; Yahoo Finance, 2020b; Yahoo Finance, 2020c).
|Debt to total assets||0.81||0.66||0.66|
|Debt to equity||4.28||1.91||1.90|
|Total Asset Turnover||2.93||3.54||2.30|
|Net Profit Margin||0.01||0.02||0.03|
|Return on Total Assets||0.04||0.09||0.07|
Kroger experienced a significant rise in stock prices in 2020. High prices rose by 24%, and the low prices rose by almost 30%. However, this rise in prices was preceded by a 10% decline in stock prices in 2019. Thus, Kroger’s performance is not stable. Simultaneously, both Costco and Walmart demonstrate significant improvements in stock prices for the past three years. Even though their growth rates a smaller, both companies are more stable than Kroger. The comparison of stock prices is provided in Table 4 below.
Table 4. Stock Prices Comparison (Yahoo Finance, 2020a; Yahoo Finance, 2020b; Yahoo Finance, 2020c).
One of the most frequently used metrics to determine the relative value of a company’s share is to use the price-to-earnings (P/E) ratio. This ratio is also known as the price multiple or the earnings multiple. The ratio helps to compare the relative stock prices of the companies. A high P/E ratio means that the stock is overvalued, and there is a danger that the prices will go down in the near future.
At the same time, a high P/E ratio may mean that the investors’ expectations of the company are high. In comparison with its key competitors, Kroger’s P/E ratios is significantly lower (see Table 5 below). This implies that the investors do not expect high growth rates from the company, while Walmart and Costco are expected to grow rapidly.
Table 5. Price-to-Equity Ratio Comparison Yahoo Finance, 2020a; Yahoo Finance, 2020b; Yahoo Finance, 2020c).
Yahoo Finance. (2020a). The Kroger Co. Web.
Yahoo Finance. (2020b). Costco Wholesale Corporation. Web.
Yahoo Finance (2020c). Walmart Inc. Web.