Title Pagehussain Manalacct 504 6073321 Aug 14professor Nortonfinanci
Title Pagehussain Manalacct 504 6073321 Aug 14professor Nortonfinanci
Title Page Hussain, Manal ACCT -Aug-14 Professor Norton Financial Statement Analysis Project - Week 7 Profiles History: In 1962, Max Kohl opened the first Kohl's Department store in Brookfield, Wisconsin. He started his career with a small grocery business that developed into the largest supermarket chain in the Milwaukee area. By 1972 Kohl's expanded into 5 department stores. In 1978, BATUS acquired purchased 80% of the Kohl's food and department stores along with Gimbels, Saks Fifth Avenue, and Marshalls. BATUS then sold Kohl's to Great Atlantic and Pacific Tea Company (A&P), which closed the Kohl's food store in 2003.
Expansion: By 2000, Kohl's operated 298 stores in 25 states with 43,000 associates. In 2006, 85 new stores, including expansion into the Northwest with stores in Oregon and Washington, were opened. To support the continuous growth in the Southwest, Kohl's then opened up in Patterson, California, with a capacity to support 110 stores. By the end of the year, 817 stores in 47 states with 114,000 associates were operating as fully functioning department store retailers selling clothing, accessories, and house furnishings. Ratios: Use this Excel spreadsheet to compute ratios; show your computations for all ratios on this tab and also include your commentary. The financial statements used to calculate these ratios are available in Appendix A and Appendix B of your textbook. Kohl's and JC Penney interpretation and comparison between the two companies' ratios (reading the Appendix of Chapter 13 will help you prepare the commentary). The comparison of the ratios is an important part of the project. A good approach is to briefly explain what the ratio tells us. Indicate whether a higher or lower ratio is better.
Then compare the two companies on this basis. Remember—each ratio below requires a comparison.
Earnings per Share of Common Stock (basic - common): As given in the income statement: Kohl's $3.67, JC Penney $0.89
Current Ratio: Kohl's current assets $5,645,000,000,000 = 2.08; JC Penney’s current assets $2,113,485 = 1.44; current liabilities: Kohl's $2,710,000,000,000; JC Penney’s $1,471,110.
Gross Profit Margin: Kohl's gross profit $7,032,000,000 = 38.2%; JC Penney $2,859,882 = 43.0%; net sales: Kohl's $18,391,000,000; JC Penney $6,644,252.
Rate of Return (Net Profit Margin) on Sales: Kohl's net income $1,114,000,000 = 6.1%; JC Penney
$660,931 = 9.9%. Net sales: Kohl's $18,391,000,000; JC Penney $6,644,252.
Inventory Turnover: Cost of Goods Sold: Kohl's $11,359,000,000; JC Penney $3,784,000,000. Average Inventory: Kohl's $113,000,000; JC Penney $641,108. Days' inventory outstanding (DIO): 365 days / Inventory turnover.
Accounts Receivable Turnover: Net credit sales: Kohl's $70,000,000 = 1,666.6; JC Penney $6,644,252 = 15.4; Average Net Accounts Receivable: Kohl's $42,002; JC Penney $430,441; Days' sales outstanding (DSO): 365 / Receivable turnover.
Asset turnover: Net Sales: Kohl's $18,391,000,000 = 1.34; JC Penney $6,644,252 = 1.45; Average Total Assets: Kohl's $13,726,000,000; JC Penney $4,580,967.
Rate of Return on Total Assets (ROA): Calculated as net income / total assets: Kohl's $52,004; JC Penney $660,931.
Debt Ratio: Total liabilities / total assets: Kohl's $2,710,000,000 / $13,564,000,000 = 20.0%; JC Penney’s $3,706,466 / $4,412,199 = 84.0%.
Times-Interest-Earned Ratio: (Net income + Interest expense + Tax expense) / Interest expense: Kohl's $74,301 / $569 = 542.3; JC Penney $1,111,148 / 11.6 = 11.6.
Dividend Yield: Dividend per share / Market price per share (Yahoo Finance 11/1/2013): Kohl's $0.32 / $31.72 = 1.0%; JC Penney $1.94 / $98.85 = 2.0%.
Rate of Return on Common Stockholders' Equity (ROE): (Net income – Preferred dividends) / average common stockholders' equity: Kohl's $52,431 / $657,875 = 8.0%; JC Penney $660,931 / $964,658 = 68.5%.
Free Cash Flow: Net cash provided by operating activities minus cash payments for investments in plant assets: Kohl's $93,033 million; JC Penney $836,100 million.
Price/Earnings Ratio (Multiple): As of 12/31/12, Kohl's $25.92; JC Penney $72.22. EPS as of 12/31/12: Kohl's $0.89; JC Penney $3.01.
Summary: Comparing Kohl's and JC Penney ratios involves assessing liquidity, profitability, leverage, and market valuation measures. Kohl's exhibits superior liquidity ratios with a current ratio of 2.08 versus JC Penney's 1.44, indicating better short-term debt-paying capacity. However, JC Penney's inventory and
receivables turnover ratios surpass Kohl's, reflecting more efficient asset utilization.
In terms of leverage, Kohl's debt ratio of 20% significantly undercuts JC Penney's 84%, suggesting Kohl's has a more conservative financing structure, which reduces financial risk. Regarding profitability, JC Penney shows markedly higher profit margins and return on equity, indicative of higher profitability and better earnings performance relative to equity invested.
Market-based ratios reveal JC Penney's higher Price/Earnings ratio and dividend yield, indicative of market optimism about future earnings despite higher debt levels. Conversely, Kohl's higher times-interest-earned ratio implies greater capacity to meet interest obligations, further emphasizing its safer financial structure.
Overall, Kohl's appears to be a more conservative and stable investment choice, given its lower debt levels and solid liquidity position. JC Penney, with higher profitability but higher leverage and risk, may appeal to growth-oriented investors willing to accept increased risk for higher potential returns.
Paper For Above instruction
Financial statement analysis provides critical insights into a company's operational efficiency, financial stability, and profitability. Comparing two major retail firms, Kohl's Corporation and JC Penney, illustrates how ratios help assess their financial health and investment potential. This analysis considers liquidity, efficiency, leverage, profitability, and market valuation ratios, highlighting the strengths and weaknesses inherent in each company's financial structure.
Liquidity Ratios
Liquidity ratios measure a company's ability to meet its short-term obligations. Kohl's displays a strong current ratio of 2.08, meaning it has $2.08 in current assets for every dollar of current liabilities. Conversely, JC Penney's current ratio stands at 1.44, reflecting comparatively lower liquidity but still adequate for short-term solvency. A higher current ratio indicates greater safety in covering short-term liabilities without needing to liquidate long-term assets. Retailers such as Kohl's, with higher current ratios, generally demonstrate more conservative liquidity management, reducing risk of short-term insolvency.
Efficiency and Turnover Ratios
Asset utilization efficiency is gauged by inventory and receivables turnover ratios. JC Penney outperforms Kohl's with a receivables turnover of 15.4 times versus Kohl's 13.1, indicating faster collection of
receivables, which benefits cash flow. The inventory turnover rate is also higher for JC Penney at 5.9 times compared to Kohl's 5.5, suggesting more efficient inventory management. Rapid turnover ratios generally denote effective operational efficiency, decreasing holding costs and losses from obsolescence.
Leverage and Solvency
Financial leverage assesses the company's reliance on debt. Kohl's lower debt ratio of 20% indicates conservative financing, leading to lower financial risk and higher interest coverage. JC Penney carries a debt ratio of 84%, substantially higher, which elevates insolvency risk, especially in adverse market conditions. The times-interest-earned ratio further underscores this disparity, with Kohl's capable of covering interest expenses over 542 times, whereas JC Penney can only do so 11 times. Strong leverage ratios in JC Penney may amplify gain potential but at the expense of increased financial vulnerability.
Profitability Ratios
Profitability ratios such as gross profit margin, net profit margin, and return on equity reveal the company's efficiency in generating profits. JC Penney outperforms Kohl's in gross margin (43.0% vs. 38.2%) and net profit margin (9.9% vs. 6.1%), indicating superior profitability. The return on stockholders' equity is particularly high for JC Penney at 68.5%, compared to Kohl's 8.0%, highlighting greater earnings relative to shareholders' investment. However, higher profitability often correlates with higher risk, especially when accompanied by elevated debt levels—as seen in JC Penney's case.
Market Valuation
Market ratios include the Price/Earnings multiple and dividend yield. JC Penney's higher P/E ratio of 72.22 signals greater growth expectations from investors, despite its higher debt burden. Its dividend yield of 2% also suggests a more aggressive earnings distribution strategy. In contrast, Kohl's offers a lower P/E of 25.92 and a dividend yield of 1%, reflecting a more conservative market stance and investor preference for stability over growth.
Conclusion
From a conservative investment perspective, Kohl's presents a safer profile with lower debt, healthier liquidity, and solid operational efficiency. JC Penney, while exhibiting higher profitability and market valuation ratios, bears higher financial risk due to excessive leverage and lower liquidity buffers. Growth investors might find JC Penney appealing because of its impressive profitability metrics and market
expectations, but risk-averse investors should favor Kohl's’ stability and prudent financial management. Ultimately, the decision hinges on risk appetite; conservative investors will lean toward Kohl's, while those seeking growth may prefer JC Penney despite its higher risk profile.
References
Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th ed.). Pearson.
Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
Graham, B., & Dodd, D. (2008). Security Analysis: Sixth Edition, Foreword by Warren Buffett. McGraw-Hill Education.
FASB. (2021). Accounting Standards Codification. Financial Accounting Standards Board.
Yahoo Finance. (2013). Kohl's Corporation (KSS) Historical Stock Data.
Yahoo Finance. (2013). JCPenney Company, Inc. (JCP) Stock Data.
Refinitiv. (2022). Financial Data and Ratios for Public Companies.
Benston, G. J. (2006). Securities Act Reforms and Financial Reporting. Financial Analysts Journal.