Accounting Project of Best Buy Incorporated - Assignment Example

Accounting Project – Best Buy Introduction: Best Buy Incorporated deals with consumer electronics and has a huge base. As the indicates, Best Buy focuses on providing customers with electronic products at affordable prices and of high quality. Some of the main brands of Best Buy include Audio Vision, Five Star Appliance, Future Shop, Geek Squad, Magnolia, Napster, Pacific Sales, Speak Easy and Carphone Warehouse (BestBuy-Brands). The company was started in Canada and then soon it expanded globally and moved to China, Europe and Mexico. In this analysis, the financial statements of Best Buy for the periods ending 28 February 2009, 1 March 2008 and 3 March 2007 are critically examined by applying ratio analysis techniques. The Annual Report of the company in 2009 is also examined to identify the potential issues and strengths of the company. This is carried out to examine the financial position and performance of Best Buy during the recent three years so that a decision can be made whether it will be profitable to include this company’s stocks in the investor portfolio. Initial Review: Though the profits have declined in the last two years, over 100 stores were opened by Best Buy worldwide in the years 2008 and 2009. The company now has a total of about 155,000 employees (full time, part time and seasonal). In 2008, Best Buy acquired 50 % stakes in Best Buy Europe, Napster and 75 % stakes in Five Star. This has increased the portfolio of Best Buy and indicates the international growth in terms of number of stores, investments and product base. The objectives set out for the near future include growing the market share, providing digital solutions, attaining international growth and improving the effectiveness and efficiency of the operations. The net earnings have decreased by 29 % in 2009; however the revenue has increased mainly due to acquisition of Best Buy Europe. A reduction in customer traffic was recorded in 2009 when compared to 2008, mainly due to the global economic slowdown and reduction in consumer expenditure (Form10-K). Liquidity Analysis: The liquidity ratios compute the ability of the company to meet its liabilities with the assets in hand. They also indicate the effectiveness of the company in terms of debt collection and moving inventory to sales. The liquidity ratios for Best Buy are computed as shown below: Liquidity Ratios 2009 2008 2007 Current Ratio 0.97 1.08 1.44 Quick Ratio 0.28 0.30 0.69 Avg. Sales per day $ 123,328.77 $ 109,652.05 $ 98,449.32 Collection Period 15.15 5.01 5.57 Cost of goods sold per day $ 93,197.26 $ 83,498.63 $ 74,424.66 No. of days in inventory 51.00 56.38 54.12 The liquidity position of Best Buy has become very weak over the three years and the quick ratio is just 0.28 in 2009. The decrease in liquid assets can be attributed to the decreased customer traffic. The current ratio is also slightly lesser than 1 and this trend is financially not healthy for Best buy. However the average sales per day have increased in 2009 by about 20 % due to the increased revenue from the recent acquisition, Best Buy Europe. At the same time, the cost of goods sold per day also has increased substantially in 2009. The number of days taken to move the stock to sales has decreased in 2009 and further reduction in the future years will result in reduction of storage costs and in turn, increased income. The collection period has increased to 15 days in 2009 from 5 days in 2008, about 200 % increase. The effectiveness in collecting debt from clients has declined for Best Buy. This is one of the main reasons for the deterioration of the liquidity position of the company (Pendlebury and Groves). Profitability Analysis: The profitability of the company, the returns available to the shareholders and the quality of the profit earned are analysed using profitability ratios. The profitability ratios for Best Buy for the three recent years are computed and listed below in the table: Profitability Ratios 2009 2008 2007 Gross Profit percentage 24.43 % 23.85 % 24.40 % Operating Income percentage 4.15 % 5.40 % 5.56 % Return on Equity 21.98 % 26.34 % n/a Return on Assets 7.02 % 10.69 % n/a Cash Return on Assets 13.13 % 15.38 % - Quality of Income 1.87 1.44 1.28 There is not much variation in the gross profit ratios in the three years. However the operating profit ratio has fell by 1.25 % in 2009 when compared to 2008. The trend is in line with the global economic crisis and indicates that the company is affected by it. The return on equity has also decreased by 5 %, thus creating doubts in the minds of the investors (Gillespie, Lewis and Hamilton). The same is reflected as an issue in the Annual Report. The cash return on assets has also declined slightly. Though the quality of income has increased, the actual cash in hand will be lesser due to the decreased income. Best Buy has to take immediate measures to recover from this downfall by reducing operating costs and improving the efficiency of the processes. Key Competitor – Walmart: One of the major competitors for Best buy is Wal-mart inc. who also provide consumer electronic products in the United States. In order to analyse whether the profits of Best Buy are substantial, the ratios are compared with that of Wal-mart for the most recent fiscal year for both the companies (Yahoo-Finance). The profitability ratios for the two companies are listed below: Profitability Ratios Best Buy Wal-mart Gross Profit percentage 24.43 % 24.53 % Operating Income percentage 4.15 % 5.62 % Return on Equity 21.98 % 20.63 % Return on Assets 7.02 % 8.20 % Cash Return on Assets 13.13 % 14.16 % Quality of Income 1.87 1.73 It is imperative to note that Best Buy, though performing poorly when compared to previous years, is at par with the key competitor in the industry, namely Wal-mart. Only the operating margin is lesser than that of Wal-mart. Return on Equity is higher and hence it is better to add Best Buy to the portfolio rather than Wal-mart. Solvency Analysis: The solvency ratios indicate the company’s leverage on various sources of finance. They also identify the extent to which the long term obligations can be effectively met with the owner’s equity. The solvency ratios for the three years are shown in the following table: Solvency Ratios 2009 2008 2007 Debt to Equity Ratio 2.41 1.85 1.19 Debt to Asset Ratio 0.71 0.65 0.54 Times Interest earned 19.09 36.94 n/a The debts have increased in 2009, as the funds required for various acquisitions were mainly raised through debts. Hence the debt to equity ratio and the debt to asset ratio are higher in 2008 and 2009. It is not an optimum value for the company as the shareholders’ equity is much lesser when compared to debt. This will make the dividend payments to common stockholders as the least priority of the company. The company is relying heavily on borrowed funds (Pendlebury and Groves). The interest cover has also decreased to a great extent in 2009 and might affect the future borrowing capacity of the company. Conclusion: The analysis conducted clearly indicates that Best Buy has been affected by the economic crisis and has a weak liquidity position. The debts are also comparatively higher. However, the company’s assets have grown and there is a lot of potential for future growth. The increase in the number of stores, acquisition of major bodies such as Best Buy Europe, Five Star, etc indicate high earning capacity in the future. I will definitely add this company to my portfolio as my criteria is substantial long term returns rather than short term financial benefits. Bibliography BestBuy-Brands. Best Buy - Our Brands. 2009. 7 12 2009 . Form10-K. Annual Report. 28 2 2009. 7 12 2009 . Gillespie, I., R. Lewis and K. Hamilton. Principles of Financial Accounting. Europe: Prentice Hall, 1997. Pendlebury, M and R Groves. Company Accounts – Analysis, Interpretation and Understanding. London: Thamson Learning, 2004. Yahoo-Finance. Wal-mart Stores Inc. 2009. 8 12 2009 . Read More