The times-interest-earned ratio is used to show a company’s ability to meet the current portion of its debt obligations. Having a negative times-interest-earned ratio is not desirable because it signals the inability of a company to meet its interest payments. Inability to meet interest payments is an alarming signal that a company is not doing well, and could even be headed towards default on debt or even bankruptcy. Staples had a positive times-interest-earned ratio in all five years, even in 2012 when the company had a net loss. This is a good sign in that the company has always been able to meet its debt obligations even in years where it could not ultimately provide a return to its shareholders. Staples position is even more favorable …show more content…
In general, and as applicable to both companies analyzed here, the more turnover, the better. More turnover can be for one of two main reasons, first, from increased sales, second, from lower inventory balances at a given time. Both situations are valuable as more sales generates more revenue, and lower inventory balances generate fewer inventory holding costs. Staples and Office Depot have substantially similar turnover rates for both 2011 and 2012 but 2013 saw a tremendous disparity between the two. Staples’ rate of turnover stayed relatively constant in all years measured with maximum variation of about six-tenths of a point. This signifies that Staples has a strength in inventory management and is comparatively good at ordering what it can sell and selling what it orders. This is important because unsold inventory can quickly become obsolete and even a liability (Lecture).
Fixed asset turnover is a measure of how well a company can utilize its fixed assets, such as property, plant, and equipment, to generate sales. As above for Inventory, higher is better for this ratio. The more a company can generate a return using the fixed assets that company has, the better off that company will be. For companies like Staples and Office Depot that have large stores and warehouses, return on these assets is an important
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Staples ratio is slowly trending upward, while Office Depot’s ratio varies widely. What is very important here is that Office Depot has a significantly better turnover rate in the last two years than does Staples. This represents a tremendous opportunity for Staples to find more efficient ways to utilize the facilities that it has to generate better returns, or to close inefficient facilities and cut down on expenses. Because Staples is in a generally better financial position than is Office Depot, it could likely replicate their success in this area if proper resources were devoted to the
The fixed-asset turnover: This ratio measures a company's ability to generate net sales from fixed-asset investments
Lowe’s is the 14th largest retailer in the United States and is presently planning aggressive expansion, opening a new store on average every three days. Lowe's revenue growth is primarily a function of penetration of the market increase resulting from a burst of new locations instead of the same store sales. Although Lowe’s has grown tremendously, it remains half the size of Home Depot and has serious debt burden that increases its risk level drastically. Lowe’s is Home Depot’s largest competitor because both companies have the same products, services, and enormous warehouse formats. In this major retail market Lowe’s and Home Depot stores go toe
Asset turnover depicts investment efficiency, because it shows how many sales dollars are generated for every dollar invested in the company’s assets. Lowe’s had relatively lower asset turnover ratios than Home Depot because their recent investment in PP&E.
However, in 1999, Lowe’s recorded very high sales growth alongside its expansion in preparation for the new millennium. From 1999 to 2001, Lowe’s began to assert itself as a worthy competitor for Home Depot, embodied in its significantly better margins and turnover ratios despite the recessionary economic environment. This improvement in ratios is indicative of positive change in the management of the
With the exception of ROE, most financial ratios and even absolute values bear testimony to Wal-Mart’s recognition as the leader in the retailing industry. The reason behind Sears’s higher ROE can be explained by a comparison of the 3 ratios that constitute the ratio known as DuPont identity that is profit margin, asset turnover and equity multiplier. While both firms had similar profit margins, Wal-Mart’s asset turnover was 2.8 compared to Sears’ 1.1 due to the firm’s effective utilization of assets and lease agreements to facilitate revenue generation.
Macy's Inc. is one of the nation's largest and well known department store chains. Started over 150 years ago, Macy's has continually generated excellent returns for its shareholders and employees. Currently, in the midst of a global recession, Macy's has generated huge profits with same store sales increasing 5.3% year to date. In 2012 same store sales increased 4.6% in the month of February alone (Macy's Inc., 2012). In fact, throughout the duration of 2012, Macy's is projecting even larger profits for its underlying business operations. Even though Macy's has experienced success with both its assortments and brand, its competitors haven't faired so well. Sears, due in part to part to a lackluster holiday season, has been forced to close nearly 120 locations to generate excess liquidity in an effort to shore up its balance sheet (Isidore, 2011).Other competitors who cater specifically to the middle class consumer have also lost significant amounts of market share as consumers trade down due to the economy. This performance is primarily due to the core functions and operations of the business. Planning, organizing, leading, and controlling. Macy's excels at these forms of management, which has allowed the company to perform at a higher level relative to its peers in the industry.
When it comes to the impact of the Five Forces of Competition and its effect on the performance of Staples and Office Depot, there does not appear to be a strong threat of new entrants in the big-box retail office supply segment of the industry. It seems unlikely that anyone will want to open a new office supply store. While there is a level of service differentiation between the two companies, there is little product differentiation between the two. Likewise, there would be little product differentiation from a new competitor. The threat of substitutes comes into play between Staples and Office Depot in that both companies offer basically the same products. If the customer can’t get what he wants at one store, he can go to the other. Likewise, if the customer becomes disenfranchised with one company for whatever reason, he can easily go to the other company. There doesn’t seem to be much bargaining power of customers or suppliers. There does seems to be a strong industry rivalry which, as with most industries, is the major determinant of the competitiveness of the industry.
The current assets relative to total assets for Staples decreases from 2008 to 2009 and slightly increased in 2010. This happened even though there was a stable rise in current assets from 2008 to 2010. The reason for this as reflected in the vertical analysis is due to the high merchandize inventory that was retained in 2008. On the contrary current liabilities increased relatively from 2008 at 28.9% to 2009 at 37.1% thereafter decreasing remarkably in 2010 at 27.6%. This can be clearly explained on the vertical analysis table using current liability emanating from the commercial paper line item. In 2008 and 2010 where current liabilities are low relatively, there were no liabilities against commercial paper. Considering the account receivable and account payable variables in this analysis the trend depicts that from 2008 through 20010, where the highest account receivable was established, the lowest account payable was incurred and vice versa. Account receivable increased from 2008 at 9.1% to 2009 at 14.1% meanwhile accounts payable decreased from 2008 at 17.3% to 2009 at 15.1%.
Receivables Turnover: This shows the degree of realization in accounts receivables. Company N has a lower turnover rate, a lower rate implies that receivables are being held longer and the less likely they are to be collected. Also there is an opportunity cost of tying up funds in receivables for a long period of time. Company M is 29 times higher than company N.
In order to make this concept real, Staples has to build competitive advantage through finding the right management team who are experienced in this area, looking for the right location to open their stores in order to be close to the target customers, deciding on how many staffs needed in a store to be effective, establishing a distribution channel where suppliers will cooperate according to their operations, choosing the selection of the product required and the amount inventory to keep, managing costs and be efficient all the time, and communicating their value to the target customers. A key organizational capability that Staples realizes instantly is to have an information system that can help them to manage the process better in place, which greatly contributes to increase Staples' efficiency. Such system is able to help Staples to get the right merchandise mix in order to be profitable through monitoring customers' needs, and attain low cost structure by making sure that the inventories turnover accordingly. In sum, Staples is successful in building most of its intangible and tangible asset and develop organizational capability
Inventory turnover in days is an assistant figure of inventory turnover. The shorter of the days, the faster of the inventory turning to cash, and the better use of short-term capital. This figure of the firm was very high in 2001 and began to fell down from 2002,then lower than industry in 2004 and 2005.This indicates the management of the firm became better.
A company must pay attention to the number of days of its sales it holds in inventory to determine the amount of time it will take to convert the inventory on hand into sales (Gibson, 2011). As shown in Exhibit 3, 3M increased from 81.74 days of sales in inventory in 2007 to 82.20 days in 2008. At face value, an increase suggests a slight negative trend for 3M as it is holding onto more inventory, taking longer to sell
Abbott’s fixed asset and total asset turnover ratios can tell us how well the firm uses its assets to generate revenue. The fixed asset ratio provides the proportion of sales to fixed assets and tells us how much revenue is
In 1996, there were three largest and absolutely dominant office superstores (OSS) chains in United States office supply market, Staples, Office Depot and OfficeMax. Office superstores can get access to much more convenient and cheaper supply of goods than small retailers through signing a mass of contracts with suppliers. They are mostly located in downtown business districts, and own considerable floor areas, a wide variety of product types and sizable supply size. Therefore, they can provide consumers with great user experience and convenience by
Long term creditors and shareholders are interested in this part of ratios and very carefully to deal with it. It evaluates how the company is using or managing its debt. Debt asset ratio and times interest earned and times interest earned will be calculated in