Kroger Co.s financial position and the role of profitability and shareholder equitys ratios in it - Assignment Example

?Introduction The company in discussion is The Kroger Co.(KR). It is a renowned in the retail industry of United s. It has more than 2400 retail grocery stores and multi-department stores in 31 states. Kroger Co. sells grocery and other household pertinent items to people in United States. It is rated among the top five players in thirty-eight out of the forty-two major markets. Most of its competitors have experienced negative growth trend in the recent past however, Kroger Co. has successfully managed to keep a smile on its shareholder’s face by steady sales growth in last twenty-nine quarters. Kroger Co. has a substantial customer base and it and it takes great pride in its loyal customer base as approximately one half of US households have a Kroger loyalty card. This has been a result of Customer 1st strategy that Kroger Co. believes in. It has also been popular among shareholders for its consistent dividend payments. In 2010, it gave out $250 million along with maintaining high investment-grade credit rating and reducing its leverage which eventually resulted in capital gain. Ratios Profitability Ratios Profitability ratios are an indicator of a company’s performance over the year. (BESLEY, Scott and Brigham, Eugene F., 2008) Profitability ratios include operating profit margin, net profit margin, return on asset, and return on equity (FABOZZI, Frank J. et al., 2003). Sales increased by 7.1% to $82.2 billion in 2010, which is more than its competitors. Operating profit margin is calculated by dividing the operating profit by the net sales. The operating profit for the year was $2182 M, as compared to net sales of $82189 M. The operating profit margin was 2.65% for the year. Net profit margin is calculated by dividing the net profit after tax by the net sales amount (PUXTY, Anthony G. et al., 1988). Net profit for the year was $1116 M and it constituted 1.36% of the sales. This margin is relatively low as compared to a retail super store operator. Investors are peculiar about the return on their investment by looking at ratios like return on asset and return on equity (ITTELSON, Thomas R., 2009). Return on asset is calculated by taking net income as a percentage of the assets. The Asset base for the company is of $23505 M. The return on asset is 6.29% for the year 2010. Kroger has been trying to reduce its long term debt in the past few years which makes the company less risky to benefit shareholders. The company has kept its shareholders happy by giving a return of 21.07%. Shareholder’s Equity Ratio: The most important ratio in determining the impact of equity on the company is to find the percentage of equity to total assets. This ratio will give us an idea of the role of shareholder in the company’s operation. Also, companies take up debt to keep the larger portion of the profit with them (HORNE, James C. Van and Wachowicz, John M., 2008). This is a regular practice of profitable and established firms. Likewise, Kroger Co.’s asset base is majorly financed by debt and only 22.5% of its assets are sourced by shareholder. This is one of the reasons of high return on equity. This ratio indicates that Kroger Co.’s business model is profitable and becoming its shareholder will be profitable in future. Use and Application of Financial Reports Financial statements are an integral document for any company. It is used by stakeholders to assess the financial position and performance of the company. These stakeholders can be classified as internal and external (BRIGHAM, Eugene F. and Ehrhardt, Michael C., 2010). The internal users of these statements are management, board of directors and sometimes the employees as well. The external users include investors, lenders, suppliers and customers, government department and agencies, competitors, media, labor unions, supporters and opponents. Following are the three financial statements that is of prime importance for an investor, Balance sheet: It is also known as statement of financial position. It presents the picture of the company’s resources and sources to fund it at a point in time. It also presents the accounting ‘net worth’ of the enterprise that demonstrates its financial status and strength (HEY-CUNNINGHAM, David, 2007). Income Statement: It is known as the statement of financial performance. It notifies revenue earned over the period and the expenses incurred to earn that revenue. Cash-flow Statement: It indicates the inflow and outflow of cash in operating, investing and financing activities. It demonstrates the source and application of funds and the ability of the enterprise to pay its bills as they become due. Types of stakeholders who use financial statements are as follows: Internal Stakeholders: Employees: These are people who serve the organization to achieve the organization’s goals and objectives. Financial statements help the employees to figure out the possibility of growth in their career. If the organization is on the verge of a default then it is likely that employees will start leaving their jobs. Organizations retain employees whose financial statements present a sound picture. (SHIM, Jae K. and Siegel, Joel G., 2008) Manager and owner/operator: These are people who are given the responsibility to manage the enterprise’s resources in order to achieve the strategic goals of the organization. Statements inform them about the economic achievements and debacles and what are the remedies for it (COSTALES, S. B. and Szurovy, Geza, 1993). Board of Directors: The Boards of Directors are the ones who set the strategic direction and objectives for the enterprise and engage managers to achieve them. Financial statements help them to review the performance of the company and weigh achievements of the company in relation to the targeted goals. External Stakeholders: The uses of the financial statements by some of the major external stakeholders are as follows: Investors: Investors are the major stakeholders of the company who buy shares of the firm. Shares entitle an investor to a proportional share of the company’s equity and profits. They asses the financial strength of the company to decide whether buying or selling the stock is appropriate or not. Lenders: Lenders are stakeholders who supply funds to the company. They are mainly financial institutions who provide short term overdrafts, invoice financing for debtors, term loans for expansion plans, leasing finance for equipment purchases or mortgages for property purchases. Suppliers and customers: Suppliers are stakeholders who provide products and services to the company on credit terms. They use the company’s statement to asses the creditworthiness of the business. Conclusion: The paper helped us analyze Kroger Co.’s financial position and the role of profitability and shareholder equity’s ratios in it. Moreover, the use of financial statements and utility derived from it by the internal and external stakeholders presented the worth of the financial statements for the company and people associated with it. It is the company who is of importance to all but stakeholder is the one who will help the company reach the position where it should be. Appendix Ratio Formula The Kroger Co. (KR) Operating Profit Margin 2.65% Net profit margin 1.36% Return on Asset 6.29% Return on Equity 21.07% Shareholder’s Equity 22.5% (KROGER CO., 2010) Bibliography BESLEY, Scott and Eugene F. BRIGHAM. 2008. Principles of Finance. Cengage Learning. BRIGHAM, Eugene F. and Michael C. EHRHARDT. 2010. Financial Management Theory and Practice. Cengage Learning. COSTALES, S. B. and Geza SZUROVY. 1993. The guide to understanding financial statements. McGraw-Hill Professional. FABOZZI, Frank J., Pamela P. PETERSON, and Pamela Peterson DRAKE. 2003. Financial Management and Analysis. John Wiley and Sons. HEY-CUNNINGHAM, David. 2007. Financial Statements Demystified. Allen & Unwin. HORNE, James C. Van and John M. WACHOWICZ. 2008. Fundamentals of financial management. Prentice Hall. ITTELSON, Thomas R. 2009. Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Career Press. KROGER CO. 2010. Kroger Co. Annual Report. PUXTY, Anthony G., J. Colin DODDS, and Richard M. S. WILSON. 1988. Financial management: Method and Meaning. Taylor & Francis. SHIM, Jae K. and Joel G. SIEGEL. 2008. Financial Management. Barron's Educational Series. Read More