1. What ratios are MOST important in assessing current and predicting future value creation for Sears? For Wal-Mart? Sears Sears grew up to the world’s largest retailer by expanding annual sales through diversifying sale products, such as apparel, cosmetics, jewelry, electronics, household appliances, cookware, bedding and hand-tools. This article shows that Sears suffered from a cost increase in 1997, including lawsuits, credit collectibles and sales in Mexico. Besides, the flexible payment facility that Sears offered is also a reason for cost increase. These problems brought Sears with bad debt and hence decreased the cash flow.
The problems of the company came from the liquid market security, so I emphasize the flowing concepts: 1. Profit Margin, ( Net Income / Total Revenue) “It measures how much out of every dollar of sales a company actually keeps in earning. ” This concept is effective to compare similar companies in an industry; a higher profit margin indicates a better leading position in the industry. It is an indicative factor for Sears to forecast its position in this industry 2. Asset Turnover rate ( Revenue/ Asset) This ratio can measure how efficient Sears uses its asset to chase for revenue. . DEBT to Equity Ratio ( Total liability/ equity) (5. 6 in 1997, 6. 3 in 1996)
The ratio of debt to equity measures the risk of the corporation’s creditors and its prospective creditors 4. ROA (Net Income/Total Asset), Since the company has a higher sales in 1997 than the past 2 years but lower net income. To evaluate the performance of the company, we must know how profitable Sears is relative to its total assets. 5. ROE (Profit Margin * Assets Turnover * Leverage Ratio) which is more accurate way to evaluate the performance of Sears in the retailer industry. . Days of receivable Since Sears have a big issue about the credit collection, we need to think about the days of receivable. 7. Liquidate ratio * Cash ratio * Current ratio ( Current Assets / Current Liabilities) (1. 94 in 1997, 1. 90 in 1996) the current ratio is about 1. 9, it indicate Sears is using its liquidity to grow up. * Quick ratio Wal-Mart Wal-Mart was founded in 1962 and has the ROE of 20%. Wal-Mart also offers store Credit Card, but unlike Sears, it is Chase Manhattan Bank rather than its own credit company.
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Wal-Mart also boosts the annual sale by diversifying products as Sears does, but Wal-Mart also has different stores to target at the customers of various market segments, such as Wal-Mart Discount Store, Wal-Mart Supercenters and Sam’s Clubs. In order to measure how the performance of the Wal-Mart now and in the future, (Wal-Mart wants in low price and low cost) we need to analysis some financial ratio from the number on books. 1. Profit Margin, (Net Income / Total Revenue) 2. Asset Turnover rate (Revenue/ Asset) this ratio can measure how efficiency Sears to use its asset for revenue. 3. DEBT to Equity Ratio ( Total liability/ equity) . Leverage Ratio ( Long Term Debt / Shareholder) 5. ROA (Net Income / Total Asset), 2. Do you agree with Ravi Suria's analysis of the credit risks associated with Amazon bonds ? 1 In Ravi Suria’s analysis, “we believe that the current cash balances will last the company through the first quarter of 2001. ” According to Exhibit 12c the cash flow statement, in contrast, the cash balance could last for the first quarter of 2001, when it suffered from 407 losses in operating activities, though positive in investing and financial activities. In summary, Amazon experienced 375 losses in the first quarter in 2001.
Just from the number on the accounting book, we cannot see whether it is wrong or right. We must see the business strategy and where they spent the money, which is the key of the company for the long term. 2 I personal calculate the working capital of the 2000 and 2001 | Working capital ($M)2000| Working Capital 2001| March | 704| 205| Jun | 559| 87| Sep | 504| (21)| Dec | 386| (38)| His analysis was based on the working capital is shirking. The Working Capital table shows a decreasing trend since 2000. I don’t think amazon can still cover the cash flow in 2011 and use its capital efficiently.
However, we cannot only use assumption of Working Capital to analysis a company, we need to look at the strategy, inventory, and so on. As this point, we will know Suria’s analysis is not proper. 3 Suria calculated the inventory as the stable mumble and use the revenue instead of Cost Goods Sold. But the revenue record as the market value, not as cost goods sold can indict the cost for the inventory. Amazon’s revenue varies season by season. We can use COG / average of the inventory to include the seasonal factor, instead of revenue/ inventory. 4 As for the inventory, I think, Suris is misleading by another point.
He only thinks the inventory turnover is very low. However, amazon increases its inventory at the beginning year (from the case, the company only have 4000 books, but later on it run CDs, video, and movie. That’s why amazon has a very low inventory turnover at the beginning years. 5 Suria thinks the Amazon has low “cash flow per unit of product sold”, and he shows us some calculation about his conclusion on page 10. However, this is already a great business mode and strategy in the market. And it has already been proved from the success of Wal-Mart and Costco retailer, which is called “low gross margins”.
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