The Kroger Company - Essay Example

Download file to see previous pages Although, most of its competitors have experienced negative sales growth in 2010, Kroger Co. has not failed to keep its shareholders satisfied by steady sales growth in the last 29 quarters. Kroger Co. takes 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 distributed $250 million along with maintaining investment-grade credit rating and reducing long-term debt which eventually resulted in capital gains.
Profitability ratios are an indicator of a company’s performance over the year. Profitability ratios include operating profit margin, net profit margin, return on asset, and return on equity (Puxty, Dodds & Wilson 1988). Sales increased by 7.1% to $82.2 billion in 2010, which is more than its competitors. Operating profit margin for the year 2010 was 2.65% with operating profits of $2.182 billion. Return on sales, also known as net-profit margin, were impressive in 2010 with reported net earnings of $1.12 billion to get $1.74 earning per diluted share. Net profit margin for the year was 1.36%. Shareholders are also interested in return on assets and equity. Their decisions are influenced by these ratios therefore; it is essential that a company projects better return on the asset it employs and the equity it takes. For Kroger, return on equity is impressive with 21%. Moreover, Kroger has been reducing its long term debt in the past few years which makes the company less risky to benefit shareholders. Therefore, a return of 21% is notable in comparison to the industry. Return on asset has also been sufficient with 6.3%. Speaking of efficiency, Kroger Co. has performed well in this regard. Efficiency ratios judge the ability of a company to earn from its resources in an effective and efficient manner (Besley & Brigham 2008). These ratios include asset turnover ratio, receivable turnover ratio and inventory turnover ratio. Total Asset turnover is impressive for Kroger Co. as sales are about 3.5 times the total assets. This means that with every dollar of asset provided, Kroger generates $3.5 worth of sales from it. Inventory Turnover ratio has also been inspiring with a multiple of 16.55 times. This means that in a matter of 21 days, inventory is converted into sale. A high turnover rate implies that Kroger Co. is facing high sales therefore there is minimal investment tied up in the inventory (Fabozzi, Peterson & Drake 2003). Still efforts need to be made to increase its turnover rate as investment in inventory yields zero return and a company would always refrain from having its capital tied up in such an investment. Receivable turnover is calculated by dividing credit sales from average receivables. This ratio measures the efficiency of a company to collect its receivables. Kroger Co. is extremely efficient in this regard as it collects its receivables in less than four days which is remarkable. Kroger Co. generates sales of $82.2 billion and not more than 1 billion is kept as receivable means a job well done. Liquidity ratios illustrate the company’s ability to pay off obligations in the short term (Shim & Siegel 2008). Current asset ratio and acid-test ratio are observed closely when liquidity is in question. Kroger Co. has not been impressive with its ability to keep liquid assets. Current ratio which is current asset divided by current liabilities is below 1. This means that to pay off each dollar of liability, Kroger does not have equal amount of liquid assets on hand. Acid test ratio is in a sorry state as well. Inventory constitutes major portion of current ...Download file to see next pagesRead More