Indigo Financial Ratios
Indigo Books & Music, Inc.
ABSTRACT
The purpose of this report is to make a recommendation on a long-term investment of Indigo Books & Music, Inc. by looking at its financial health from annual reports and recent news reports. The six ratios considered are current ratio, quick ratio, profit margin, operating ratio, debt-equity ratio, and debt-asset ratio. These ratios were compared over time, against its close competitors, which are Amazon.com Inc. and Wal-Mart Stores Inc., and against a calculated industry benchmark. Based on our findings, we conclude that Indigo is financially healthy. For example, current and quick ratios are both higher than its competitors and its industry benchmark. Operating ratio indicated that Indigo is …show more content…
slightly higher efficiency than the industry benchmark. Debt-equity ratio and debt-asset ratio are both significantly lower than its competitors and its industry benchmark. Therefore, we recommend that you invest in Indigo Books & Music, Inc.
Introduction
Purpose
The main purpose of this report is to make a recommendation to the CEO on making a long-term investment in Indigo Books & Music, Inc. (Indigo). This report will analyze the long-term financial health of Indigo and current situation related in recent news reports.
Methodology
No primary research is conducted for this report. All the findings solely rely on secondary sources including company annual reports, news articles, and industry reports.
Using accounting information available on the company, appropriate ratios were calculated and compared with its own performance over three years, with close competitors in the recent year, and the industry benchmark in the recent year. The three years that we analyzed for Indigo were 2013, 2012, and 2011.
Industry benchmarks were calculated by adding the ratios of three large competitors and Indigo’s ratio, and divided the total by four. The three largest comparable companies considered in the benchmark were Barnes & Noble Inc. (Barnes & Noble), Wal-Mart Stores Inc. (Wal-Mart), and Amazon.com Inc. (Amazon).
Four types of financial analysis, liquidity, profitability, financial efficiency, and solvency, were considered when choosing appropriate ratios for evaluating Indigo. The four types are liquidity, profitability, financial efficiency, and solvency, and the ratios used were current and quick ratio, profit margin, operating ratio, and debt-equity ratio, respectively.
Limitations
When comparing financial ratios, companies with different year-end dates do not present an accurate comparison. The largest difference in year-end dates was four months between Wal-Mart and Barnes & Noble. However, the difference is not large when comparing the companies to Indigo’s year end date. Financial information gathered from annual reports are all for a 52-week period.
An industry benchmark could not be found for large book retailers in Canada. Calculating the industry benchmark with only four companies, three of which are from the U.S., do not represent the most accurate industry benchmark.
Indigo’s largest competitors are not U.S.-based, so there are differences in the financial reporting methods. The main differences between IFRS and U.S. GAAP are documents included in the financial statements, recommended separation of current and noncurrent assets and liabilities in the balance sheet, and allowance of extraordinary items. These inconsistencies can cause differences in Indigo’s and its competitors’ reported results.
Company Profile
Indigo Books & Music, Inc. is the largest book retailer in Canada. It sells books, music, movies, gifts, and toys in stores and through its website. It operates under several names, including Indigo, Chapters, World’s Biggest Book Store, Coles, SmithBooks, and The Book Company.
The following are some significant events in Indigo’s history:
In 2001, Chapters and Indigo officially merged to form the largest book retailer in Canada under the corporate name Indigo Books & Music Inc.
In 2010, Indigo launched Kobo Inc., its first digital eReading division.
In 2011, Indigo launched its free, points based plum rewards loyalty program, in which points gained from purchases are redeemable for in-store savings.
In 2012, Indigo discontinued Kobo Inc. (Indigo Books & Music, Inc. 2013)
Indigo’s two largest competitors are Amazon.com Inc. and Wal-Mart Stores Inc. Amazon is an online retailer that started as an online bookstore. Amazon offers a range of products and services through its website. They produce their own eReader called Kindle, which competed with Indigo’s Kobo. Wal-Mart is a large retail company that sells a wide range of merchandise, including books and gifts. They specialize in selling products at discount prices, which also makes them a relatively strong competitor of Indigo.
Liquidity AnalysisTo analyze Indigo’s liquidity, we looked at its current ratio and quick ratio for 2011, 2012, and 2013. Firstly, current ratio is the primary liquidity ratio, and the formula is as follows:
Current Ratio=Current AssetsCurrent Liabilities It can be interpreted as how many times a company’s current liabilities are covered by its current assets (Tóth et al. 2013). Good liquidity is reflected in a large current ratio, because it indicates a stronger ability to pay current liabilities back in a contract period. Using Indigo’s annual reports, we calculated the current ratios in Table 1 to be 1.43 in 2011, 1.98 in 2012, and 2.05 in 2013. Traditionally, a current ratio of two or higher was regarded as appropriate for most businesses to maintain creditworthiness. More recently, a figure of 1.50 was regarded as normal (Tóth et al. 2013). In this case, Indigo’s past current ratio has all been greater than 1.40, and its current ratio has increased to 2.05 in 2013.
In the most recent year, Amazon had a current ratio of 1.12, and Wal-Mart had a current ratio of 0.83. The industry benchmark from Table 3 shows the average current ratio of 1.29 is lower than Indigo’s current ratio of 2.05. What we can draw a conclusion here is Indigo is a healthier company than its close competitors based on its high current ratio.
Based on the proportion of its current asset over its current liability, it is possible that Indigo may have inefficient use of its cash and other short-term assets. However, according to a MarketLine report on Indigo Books & Music, Inc., in January 2012, the company sold all outstanding shares of Kobo to Rakuten, Inc. for $335 million (MarketLine, Company Profile 2013). We concluded that this is the main reason for why its current ratio increased dramatically that year, rather than an inefficient use of cash.
To further analyze liquidity, quick ratio should be considered. It measures the performance of a company more deeply because it is a more conservative way to measures the amount of the most liquid current assets in order to cover the current liabilities (Loth 2012). The formula for quick ratio is as follows:
Quick Ratio=Cash and Equivalents+Accounts ReceivableCurrent LiabilitiesWhen comparing quick ratios between Indigo and its close competitors in 2011, 2012, and 2013, Indigo had quick ratios 0.41, 0.96 and 1.02 respectively. These are higher than Wal-Mart’s and Amazon’s in general. Furthermore, since the average benchmark is 0.54 in the recent year, we can conclude that Indigo has a good performance demonstrated by its high quick ratios.
Profitability AnalysisThe profitability ratio used was the net profit margin. The profit margin is displayed as a percentage, and its formula is:
Net Profit Margin=Net IncomeRevenue x 100%Net profit margin was used because it is a comprehensive measure for analyzing the profitability of a company. Profitability ratios allow us to assess Indigo’s ability to generate earnings while incurring expenses and relevant costs. Long-term profitability of a company will bring benefits to both the company and the shareholders. The net profit margin measures how much a company earns from every dollar of revenue after tax. Higher profit margins means a company is doing well in terms of profit, and it has good control over its costs CITATION Lot12 \l 4105 (Loth 2012).
However, different recognition of revenue can affect profit margin.
According to Indigo’s 2013 annual report, it uses estimates that have a significant effect on the measurement of revenues. Estimates based on historical data are made for average gift card breakage rates. Estimates are also made for the cost per point in their reward program. Estimates based on different requirements and factors can alter ratios (Indigo Books & Music, Inc. 2013)
From Table 4, net profit margin for the 52-week period ended March 31, 2013 was calculated to be 0.47%. This indicates Indigo earns $0.0047 for every dollar of sales it makes after taxes. This is a very low profit margin where further decreases in sales or increases in costs can generate a loss for Indigo. In 2012, net profit margin was 7.09%. In 2011, net profit margin was -2.03%. On a historical basis, there is no clear trend for the company’s profit margin. Indigo had a loss in 2011, followed by a large increase in 2012, and then a drop in 2013.
According to a press release from Indigo Books & Music, Inc., revenue decline from last year was due primarily to the phenomenal success last year of popular book series, the continuing growth of eReading, and the company operating nine fewer stores (Indigo Books & Music, Inc. …show more content…
2013)
For a large retailer of books, book sales bring low profit margins. Instead, it relies on large customer volume and other products with higher margins. Indigo has been trying to boost its profitability by broadening the range of high-margin products, such as gifts and toys (The Canadian Press 2013).
From table 5, Amazon’s net profit margin in 2012 is -0.06%, and Wal-Mart’s net profit margin is 3.51%. Compared to Amazon, Indigo is doing better in terms of profitability. Amazon has a strategy to keep margins low among its range of products, including books CITATION Tra13 \l 4105 (Trainer 2013). Compared to Wal-Mart, Indigo is doing poorly. However, Wal-Mart’s main range of products is less similar than Indigo and Amazon and has a different strategy.
From table 6, the industry benchmark for 2012 is 0.42%, which is a little lower than Indigo’s net profit margin. This indicates that Indigo is performing above average in its industry in terms of profitability. However, its margin can fall below average with lower revenue and/or higher expenses.
Recently, Indigo released financial statements for their second quarter. As at September 28, 2013, Indigo is at a net loss of $10.1 million, compared to a net loss of $4.0 million from the same period last year. From their press release, the loss was due to lower book sales and the intentionally higher operating, selling and administrative expenses from transformational initiatives. Their transformational strategies included marketing its new categories, advancing digital capabilities, and creating merchandising for its expanded product mix CITATION Ind13 \l 4105 (Indigo Books & Music 2013).
Financial Efficiency AnalysisTo analyze the Indigo’s efficiency we examined its operating ratio compared to that of its competitors. The operating ratio is calculated by dividing the operating expense by the revenue multiplied by one hundred (Accounting for Management 2013). The operating expense ratio measures a company’s operating efficiency by calculating the percentage of revenue that is used to cover operating expense. Lower ratios indicate higher levels of operating efficiency.
As indicated in Table 7, the operating ratio for the 52-week period ended March 31, 2013 was 43.71%. This means that 43.71% of Indigo’s revenue is used to cover operating expenses. Also shown in Table 7, the operating ratio in 2012 was 44.83%, and in 2011, the operating ratio was 40.56% (Indigo Books & Music, Inc. 2013). The operating ratio increased by 4.27% from 2011 to 2012, this is because 2012 was the first full year that Indigo has operated its new online distribution centre, which resulted in increased occupancy and online expenses (Indigo Books & Music Inc. 2013). However in 2013, Indigo was able to reduce its operating expenses by reconfiguring its retail distribution centre and implemented new warehouse management software (Indigo Books & Music, Inc. 2013). Over the past three years, Indigo’s operating ratio has remained fairly consistent, which suggests that Indigo will maintain its current level of efficiency in future years.
Compared to its competitor, Amazon, Indigo is much more efficient because the operating ratio for Amazon, as shown in Table 8, was 98.89% (Amazon.com Inc 2013). However, compared to Wal-mart, Indigo is much less efficient because Wal-mart’s operating ratio, as shown in Table 8, was 19.07% (Wal-mart Stores Inc 2013). Wal-mart’s high efficiency compared to Indigo may be due to the greater variety of products offered by the company and a larger customer base. The industry benchmark, as shown in Table 9, for operating ratio is 47.84%. Indigo’s operating ratio is just below the industry benchmark. Therefore compared to the industry, Indigo is considered slightly more efficient.
According to the Globe and Mail, Indigo is in the process of expanding its offerings to include home good, toys, children’s clothing, and electronics, while maintaining books as their main product, in response to rising competition from more general retailers, such as Wal-mart (Strauss 2013). Indigo anticipates achieving the potential benefits of this expansion within the next two years (Strauss 2013). The news of this expansion suggests that Indigo’s financial efficiency may be improving in upcoming years.
Solvency AnalysisThe solvency analysis is designed to help analyze a firm’s ability to meet its long-term obligations (Loth 2012). The ratios chosen for the solvency analysis are the debt-equity ratio and the debt ratio. Starting with the debt-equity ratio, it compares a company’s total liabilities to its total shareholder’s equity. The formula for the debt-equity ratio is as follows:
Debt/Equity Ratio=Total LiabilitiesShareholders EquityThis is a measure of how much suppliers, creditors and obligors have committed to the company versus what the shareholders have committed (Fuhrmann 2013). A lower ratio means that the company is using less leverage and is at a stronger equity position. As indicated in Table 10, the debt-equity ratio is 0.91 in 2011, 0.67 in 2012 and 0.63 in 2013. There is a downward trend from 2011 to 2012 due to a relatively significant increase in equity than debt.
In comparison to its competitors in the recent year, Amazon has a debt-equity ratio of 2.97, and Walmart is at 1.48. Both of the two competitors have a higher debt-equity ratio than Indigo. Furthermore, the industry benchmark from Table 12 is 2.01, which is significantly higher than Indigo’s debt-equity ratio. Therefore, we can conclude that Indigo uses less leverage and has a stronger equity position than its competitors.
The debt ratio compares a company’s total debt to its total assets. The formula for the debt ratio is as follows:
Debt Ratio=Total DebtTotal AssetsThe debt ratio is used to gain a general idea as the amount of leverage. The lower the percentage, the less leverage the company is using. This means the company is considered to have taken on less risk (Loth 2012). From Table 10, Indigo’s debt ratio in 2013, 2012, and 2011 is 0.39, 0.40, and 0.48 respectively. Indigo’s debt ratio was declining as a result of a relatively greater increase in total assets than total debts. In the year of 2013, there is an overall lower debt ratio from Indigo than Walmart’s debt ratio of 0.60 and Amazon’s debt ratio of 0.75. Indigo’s debt ratio is also lower than the industry benchmark’s debt ratio of 0.64. We can conclude that Indigo has a lower operating risk.
According to the company’s annual report in 2012, we find that the company’s gain on the sale of Kobo resulted in the increase in equity and cash balance. The increasing equity is also partially the result of the expensing of employee stock options and Directors’ deferred share units (Indigo Books & Music, Inc. 2013). It indicates that the shareholders have gotten much more benefits from the company during that period. The decreased leverage also indicates that Indigo is considered to have lower risk.
Since both the debt-equity ratio and debt ratio of Indigo are lower than the industry benchmark, and also lower compared with its competitors and over time, we conclude that Indigo is in a potentially healthy investing situation.
ConclusionBased on our findings, we conclude that Indigo Books & Music, Inc. is a financially healthy company. Indigo is a healthier company than its close competitors based on its higher current ratios and it also has a good performance demonstrated by its high quick ratios. Indigo’s profit margin is low and has been unsteady over the past years, but it has a higher profit margin than Amazon, one of its largest competitors over the next two years. Although Indigo is at a loss in its second quarter of this year, growth is expected to occur from company transformations. Indigo’s financial efficiency is found to be stronger than its industry benchmark, and it is significantly more efficient than Amazon. While Wal-Mart’s efficiency is higher than Indigo, its plans to expand its offerings may allow Indigo to become a stronger competitor for Wal-Mart. Indigo is considered to be operating with lower risk and a stronger equity position because of the lower solvency ratios than its competitors and the industry benchmark. Therefore, we recommend that a long-term investment is made in Indigo Books & Music, Inc.
APPENDICES
Table 1: Indigo’s current ratio and quick ratio compared over three years
Indigo Books & Music, Inc. 2013 2012 2011
Current ratio 2.05a 1.98b 1.43c
Quick ratio 1.02d 0.96e 0.41f a=440,032215,137=2.05, b=453,629229,503=1.98 c=336980235365=1.43, d=211701+7180215137=1.02e=207601+12627229503=0.96, f=83661+12684235365=0.41Table 2: Indigo’s current ratio and quick ratio compared with competitors
2013 Current ratio Quick ratio
Indigo Books & Music, Inc. 2.05a 1.02d
Amazon.com Inc. 1.12g 0.78h
Wal-Mart Stores Inc. 0.83i 0.20j g=2129619002=1.12, h=8084+3364+336419002=0.78i=5994071818=0.83, j=7781+676871818=0.20Table 3: Indigo’s current ratio and quick ratio compared with industry benchmark
2013 Benchmark Current ratio Quick ratio
Indigo Books & Music, Inc. 2.05a 1.02d
Industry Benchmark 1.29k 0.54l k=a+g+i+203761117624194=2.05+1.12+0.83+1.164=5.164=1.29, where20876111762419 is Barnes & Nobel 's current ratio in the year of 2013. l=d+h+i+160470+14241717624194=1.02+0.78+0.20+0.184=0.54where 160470+1424171762419 is Barnes&Nobel 's quick ratio in the year of 2013.
Table 4: Indigo’s profit margin compared over three years.
2013 2012 2011
Indigo Books & Music, Inc. 0.47% A 7.09% B (2.03%) C
A=4,228892,458 x 100% B=66,189933,990 x 100% C=19,384956,449 x 100%Table 5: Indigo’s profit margin compared with competitors.
2013
Indigo Books & Music, Inc. 0.47%
Amazon.com Inc. (0.06%) D
Wal-Mart Stores Inc. 3.51 E
D=(39)61,093 x 100% E=15,699446,950 x 100%Table 6: Indigo’s profit margin compared against its industry benchmark.
2013
Indigo Books & Music, Inc. 0.47%
Industry Benchmark 0.42% F
F=A+D+E+[154,8066,839,005 x 100%]4=0.47%+0.06%+3.51%+(2.26%)4Table 7: Indigo’s operating ratio compared over three years
2013 2012 2011
Indigo Books & Music, Inc. 43.71%m 44.83%n 40.46%o m=390,080892,458×100%=43.71%n=418,701933,990×100%=44.83%o=387,927956,449×100%=40.56%Table 8: Indigo’s operating ratio compared with competitors
2013
Indigo Books & Music, Inc. 43.71%m
Amazon.com Inc. 98.89%p
Wal-Mart Stores Inc.
19.07%q
P=60,41761,093×100%=98.89% q=88,873466,114×100%=19.07%Table 9: Indigo’s operating ration compared with industry benchmark
2013
Indigo Books & Music, Inc. 43.71%m
Industry Benchmark 47.84%r r=43.71%+98.89%+19.07%+(409,8321,379,710×100)4=47.84%Table 10: Indigo’s debt-equity ratio and debt-asset ratio compared over three years
Indigo Books & Music, Inc. 2013 2012 2011
Debt ratio 0.39G 0.40H 0.48I
Debt-equity ratio 0.63J 0.67K 0.91L
G=219,924570,246=0.39 H=236,904592,536=0.40 I=243,644511,007=0.48J=219,924350,322=0.63 K=236,904355,632=0.67 L=243,644267,363=0.91Table 11: Indigo’s debt-equity ratio and debt-asset ratio compared with competitors
2013 Debt ratio Debt-equity ratio
Indigo Books & Music, Inc. 0.39G 0.63J
Amazon.com Inc. 0.75M 2.97N
Wal-Mart Stores Inc. 0.60O 1.48P
M=24,36332,555=0.75 N=24,3638,192=2.97 O=121,367203,105=0.60 P=121,36781,738=1.48Table 12: Indigo’s debt-equity ratio and debt-asset ratio compared with industry benchmark
2013 Debt ratio Debt-equity ratio
Indigo Books & Music, Inc. 0.39G 0.63J
Industry Benchmark 0.64R 2.01S
R=G+M+O+3,049,8723,723,0124=0.39+0.75+0.60+0.824=0.64S=J+N+P+3,049,872673,1404=0.63+2.97+1.48+2.974=2.01LIST OF
REFERENCES
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ABSTRACT
The purpose of this report is to make a recommendation on a long-term investment of Indigo Books & Music, Inc. by looking at its financial health from annual reports and recent news reports. The six ratios considered are current ratio, quick ratio, profit margin, operating ratio, debt-equity ratio, and debt-asset ratio. These ratios were compared over time, against its close competitors, which are Amazon.com Inc. and Wal-Mart Stores Inc., and against a calculated industry benchmark. Based on our findings, we conclude that Indigo is financially healthy. For example, current and quick ratios are both higher than its competitors and its industry benchmark. Operating ratio indicated that Indigo is …show more content…
slightly higher efficiency than the industry benchmark. Debt-equity ratio and debt-asset ratio are both significantly lower than its competitors and its industry benchmark. Therefore, we recommend that you invest in Indigo Books & Music, Inc.
Introduction
Purpose
The main purpose of this report is to make a recommendation to the CEO on making a long-term investment in Indigo Books & Music, Inc. (Indigo). This report will analyze the long-term financial health of Indigo and current situation related in recent news reports.
Methodology
No primary research is conducted for this report. All the findings solely rely on secondary sources including company annual reports, news articles, and industry reports.
Using accounting information available on the company, appropriate ratios were calculated and compared with its own performance over three years, with close competitors in the recent year, and the industry benchmark in the recent year. The three years that we analyzed for Indigo were 2013, 2012, and 2011.
Industry benchmarks were calculated by adding the ratios of three large competitors and Indigo’s ratio, and divided the total by four. The three largest comparable companies considered in the benchmark were Barnes & Noble Inc. (Barnes & Noble), Wal-Mart Stores Inc. (Wal-Mart), and Amazon.com Inc. (Amazon).
Four types of financial analysis, liquidity, profitability, financial efficiency, and solvency, were considered when choosing appropriate ratios for evaluating Indigo. The four types are liquidity, profitability, financial efficiency, and solvency, and the ratios used were current and quick ratio, profit margin, operating ratio, and debt-equity ratio, respectively.
Limitations
When comparing financial ratios, companies with different year-end dates do not present an accurate comparison. The largest difference in year-end dates was four months between Wal-Mart and Barnes & Noble. However, the difference is not large when comparing the companies to Indigo’s year end date. Financial information gathered from annual reports are all for a 52-week period.
An industry benchmark could not be found for large book retailers in Canada. Calculating the industry benchmark with only four companies, three of which are from the U.S., do not represent the most accurate industry benchmark.
Indigo’s largest competitors are not U.S.-based, so there are differences in the financial reporting methods. The main differences between IFRS and U.S. GAAP are documents included in the financial statements, recommended separation of current and noncurrent assets and liabilities in the balance sheet, and allowance of extraordinary items. These inconsistencies can cause differences in Indigo’s and its competitors’ reported results.
Company Profile
Indigo Books & Music, Inc. is the largest book retailer in Canada. It sells books, music, movies, gifts, and toys in stores and through its website. It operates under several names, including Indigo, Chapters, World’s Biggest Book Store, Coles, SmithBooks, and The Book Company.
The following are some significant events in Indigo’s history:
In 2001, Chapters and Indigo officially merged to form the largest book retailer in Canada under the corporate name Indigo Books & Music Inc.
In 2010, Indigo launched Kobo Inc., its first digital eReading division.
In 2011, Indigo launched its free, points based plum rewards loyalty program, in which points gained from purchases are redeemable for in-store savings.
In 2012, Indigo discontinued Kobo Inc. (Indigo Books & Music, Inc. 2013)
Indigo’s two largest competitors are Amazon.com Inc. and Wal-Mart Stores Inc. Amazon is an online retailer that started as an online bookstore. Amazon offers a range of products and services through its website. They produce their own eReader called Kindle, which competed with Indigo’s Kobo. Wal-Mart is a large retail company that sells a wide range of merchandise, including books and gifts. They specialize in selling products at discount prices, which also makes them a relatively strong competitor of Indigo.
Liquidity AnalysisTo analyze Indigo’s liquidity, we looked at its current ratio and quick ratio for 2011, 2012, and 2013. Firstly, current ratio is the primary liquidity ratio, and the formula is as follows:
Current Ratio=Current AssetsCurrent Liabilities It can be interpreted as how many times a company’s current liabilities are covered by its current assets (Tóth et al. 2013). Good liquidity is reflected in a large current ratio, because it indicates a stronger ability to pay current liabilities back in a contract period. Using Indigo’s annual reports, we calculated the current ratios in Table 1 to be 1.43 in 2011, 1.98 in 2012, and 2.05 in 2013. Traditionally, a current ratio of two or higher was regarded as appropriate for most businesses to maintain creditworthiness. More recently, a figure of 1.50 was regarded as normal (Tóth et al. 2013). In this case, Indigo’s past current ratio has all been greater than 1.40, and its current ratio has increased to 2.05 in 2013.
In the most recent year, Amazon had a current ratio of 1.12, and Wal-Mart had a current ratio of 0.83. The industry benchmark from Table 3 shows the average current ratio of 1.29 is lower than Indigo’s current ratio of 2.05. What we can draw a conclusion here is Indigo is a healthier company than its close competitors based on its high current ratio.
Based on the proportion of its current asset over its current liability, it is possible that Indigo may have inefficient use of its cash and other short-term assets. However, according to a MarketLine report on Indigo Books & Music, Inc., in January 2012, the company sold all outstanding shares of Kobo to Rakuten, Inc. for $335 million (MarketLine, Company Profile 2013). We concluded that this is the main reason for why its current ratio increased dramatically that year, rather than an inefficient use of cash.
To further analyze liquidity, quick ratio should be considered. It measures the performance of a company more deeply because it is a more conservative way to measures the amount of the most liquid current assets in order to cover the current liabilities (Loth 2012). The formula for quick ratio is as follows:
Quick Ratio=Cash and Equivalents+Accounts ReceivableCurrent LiabilitiesWhen comparing quick ratios between Indigo and its close competitors in 2011, 2012, and 2013, Indigo had quick ratios 0.41, 0.96 and 1.02 respectively. These are higher than Wal-Mart’s and Amazon’s in general. Furthermore, since the average benchmark is 0.54 in the recent year, we can conclude that Indigo has a good performance demonstrated by its high quick ratios.
Profitability AnalysisThe profitability ratio used was the net profit margin. The profit margin is displayed as a percentage, and its formula is:
Net Profit Margin=Net IncomeRevenue x 100%Net profit margin was used because it is a comprehensive measure for analyzing the profitability of a company. Profitability ratios allow us to assess Indigo’s ability to generate earnings while incurring expenses and relevant costs. Long-term profitability of a company will bring benefits to both the company and the shareholders. The net profit margin measures how much a company earns from every dollar of revenue after tax. Higher profit margins means a company is doing well in terms of profit, and it has good control over its costs CITATION Lot12 \l 4105 (Loth 2012).
However, different recognition of revenue can affect profit margin.
According to Indigo’s 2013 annual report, it uses estimates that have a significant effect on the measurement of revenues. Estimates based on historical data are made for average gift card breakage rates. Estimates are also made for the cost per point in their reward program. Estimates based on different requirements and factors can alter ratios (Indigo Books & Music, Inc. 2013)
From Table 4, net profit margin for the 52-week period ended March 31, 2013 was calculated to be 0.47%. This indicates Indigo earns $0.0047 for every dollar of sales it makes after taxes. This is a very low profit margin where further decreases in sales or increases in costs can generate a loss for Indigo. In 2012, net profit margin was 7.09%. In 2011, net profit margin was -2.03%. On a historical basis, there is no clear trend for the company’s profit margin. Indigo had a loss in 2011, followed by a large increase in 2012, and then a drop in 2013.
According to a press release from Indigo Books & Music, Inc., revenue decline from last year was due primarily to the phenomenal success last year of popular book series, the continuing growth of eReading, and the company operating nine fewer stores (Indigo Books & Music, Inc. …show more content…
2013)
For a large retailer of books, book sales bring low profit margins. Instead, it relies on large customer volume and other products with higher margins. Indigo has been trying to boost its profitability by broadening the range of high-margin products, such as gifts and toys (The Canadian Press 2013).
From table 5, Amazon’s net profit margin in 2012 is -0.06%, and Wal-Mart’s net profit margin is 3.51%. Compared to Amazon, Indigo is doing better in terms of profitability. Amazon has a strategy to keep margins low among its range of products, including books CITATION Tra13 \l 4105 (Trainer 2013). Compared to Wal-Mart, Indigo is doing poorly. However, Wal-Mart’s main range of products is less similar than Indigo and Amazon and has a different strategy.
From table 6, the industry benchmark for 2012 is 0.42%, which is a little lower than Indigo’s net profit margin. This indicates that Indigo is performing above average in its industry in terms of profitability. However, its margin can fall below average with lower revenue and/or higher expenses.
Recently, Indigo released financial statements for their second quarter. As at September 28, 2013, Indigo is at a net loss of $10.1 million, compared to a net loss of $4.0 million from the same period last year. From their press release, the loss was due to lower book sales and the intentionally higher operating, selling and administrative expenses from transformational initiatives. Their transformational strategies included marketing its new categories, advancing digital capabilities, and creating merchandising for its expanded product mix CITATION Ind13 \l 4105 (Indigo Books & Music 2013).
Financial Efficiency AnalysisTo analyze the Indigo’s efficiency we examined its operating ratio compared to that of its competitors. The operating ratio is calculated by dividing the operating expense by the revenue multiplied by one hundred (Accounting for Management 2013). The operating expense ratio measures a company’s operating efficiency by calculating the percentage of revenue that is used to cover operating expense. Lower ratios indicate higher levels of operating efficiency.
As indicated in Table 7, the operating ratio for the 52-week period ended March 31, 2013 was 43.71%. This means that 43.71% of Indigo’s revenue is used to cover operating expenses. Also shown in Table 7, the operating ratio in 2012 was 44.83%, and in 2011, the operating ratio was 40.56% (Indigo Books & Music, Inc. 2013). The operating ratio increased by 4.27% from 2011 to 2012, this is because 2012 was the first full year that Indigo has operated its new online distribution centre, which resulted in increased occupancy and online expenses (Indigo Books & Music Inc. 2013). However in 2013, Indigo was able to reduce its operating expenses by reconfiguring its retail distribution centre and implemented new warehouse management software (Indigo Books & Music, Inc. 2013). Over the past three years, Indigo’s operating ratio has remained fairly consistent, which suggests that Indigo will maintain its current level of efficiency in future years.
Compared to its competitor, Amazon, Indigo is much more efficient because the operating ratio for Amazon, as shown in Table 8, was 98.89% (Amazon.com Inc 2013). However, compared to Wal-mart, Indigo is much less efficient because Wal-mart’s operating ratio, as shown in Table 8, was 19.07% (Wal-mart Stores Inc 2013). Wal-mart’s high efficiency compared to Indigo may be due to the greater variety of products offered by the company and a larger customer base. The industry benchmark, as shown in Table 9, for operating ratio is 47.84%. Indigo’s operating ratio is just below the industry benchmark. Therefore compared to the industry, Indigo is considered slightly more efficient.
According to the Globe and Mail, Indigo is in the process of expanding its offerings to include home good, toys, children’s clothing, and electronics, while maintaining books as their main product, in response to rising competition from more general retailers, such as Wal-mart (Strauss 2013). Indigo anticipates achieving the potential benefits of this expansion within the next two years (Strauss 2013). The news of this expansion suggests that Indigo’s financial efficiency may be improving in upcoming years.
Solvency AnalysisThe solvency analysis is designed to help analyze a firm’s ability to meet its long-term obligations (Loth 2012). The ratios chosen for the solvency analysis are the debt-equity ratio and the debt ratio. Starting with the debt-equity ratio, it compares a company’s total liabilities to its total shareholder’s equity. The formula for the debt-equity ratio is as follows:
Debt/Equity Ratio=Total LiabilitiesShareholders EquityThis is a measure of how much suppliers, creditors and obligors have committed to the company versus what the shareholders have committed (Fuhrmann 2013). A lower ratio means that the company is using less leverage and is at a stronger equity position. As indicated in Table 10, the debt-equity ratio is 0.91 in 2011, 0.67 in 2012 and 0.63 in 2013. There is a downward trend from 2011 to 2012 due to a relatively significant increase in equity than debt.
In comparison to its competitors in the recent year, Amazon has a debt-equity ratio of 2.97, and Walmart is at 1.48. Both of the two competitors have a higher debt-equity ratio than Indigo. Furthermore, the industry benchmark from Table 12 is 2.01, which is significantly higher than Indigo’s debt-equity ratio. Therefore, we can conclude that Indigo uses less leverage and has a stronger equity position than its competitors.
The debt ratio compares a company’s total debt to its total assets. The formula for the debt ratio is as follows:
Debt Ratio=Total DebtTotal AssetsThe debt ratio is used to gain a general idea as the amount of leverage. The lower the percentage, the less leverage the company is using. This means the company is considered to have taken on less risk (Loth 2012). From Table 10, Indigo’s debt ratio in 2013, 2012, and 2011 is 0.39, 0.40, and 0.48 respectively. Indigo’s debt ratio was declining as a result of a relatively greater increase in total assets than total debts. In the year of 2013, there is an overall lower debt ratio from Indigo than Walmart’s debt ratio of 0.60 and Amazon’s debt ratio of 0.75. Indigo’s debt ratio is also lower than the industry benchmark’s debt ratio of 0.64. We can conclude that Indigo has a lower operating risk.
According to the company’s annual report in 2012, we find that the company’s gain on the sale of Kobo resulted in the increase in equity and cash balance. The increasing equity is also partially the result of the expensing of employee stock options and Directors’ deferred share units (Indigo Books & Music, Inc. 2013). It indicates that the shareholders have gotten much more benefits from the company during that period. The decreased leverage also indicates that Indigo is considered to have lower risk.
Since both the debt-equity ratio and debt ratio of Indigo are lower than the industry benchmark, and also lower compared with its competitors and over time, we conclude that Indigo is in a potentially healthy investing situation.
ConclusionBased on our findings, we conclude that Indigo Books & Music, Inc. is a financially healthy company. Indigo is a healthier company than its close competitors based on its higher current ratios and it also has a good performance demonstrated by its high quick ratios. Indigo’s profit margin is low and has been unsteady over the past years, but it has a higher profit margin than Amazon, one of its largest competitors over the next two years. Although Indigo is at a loss in its second quarter of this year, growth is expected to occur from company transformations. Indigo’s financial efficiency is found to be stronger than its industry benchmark, and it is significantly more efficient than Amazon. While Wal-Mart’s efficiency is higher than Indigo, its plans to expand its offerings may allow Indigo to become a stronger competitor for Wal-Mart. Indigo is considered to be operating with lower risk and a stronger equity position because of the lower solvency ratios than its competitors and the industry benchmark. Therefore, we recommend that a long-term investment is made in Indigo Books & Music, Inc.
APPENDICES
Table 1: Indigo’s current ratio and quick ratio compared over three years
Indigo Books & Music, Inc. 2013 2012 2011
Current ratio 2.05a 1.98b 1.43c
Quick ratio 1.02d 0.96e 0.41f a=440,032215,137=2.05, b=453,629229,503=1.98 c=336980235365=1.43, d=211701+7180215137=1.02e=207601+12627229503=0.96, f=83661+12684235365=0.41Table 2: Indigo’s current ratio and quick ratio compared with competitors
2013 Current ratio Quick ratio
Indigo Books & Music, Inc. 2.05a 1.02d
Amazon.com Inc. 1.12g 0.78h
Wal-Mart Stores Inc. 0.83i 0.20j g=2129619002=1.12, h=8084+3364+336419002=0.78i=5994071818=0.83, j=7781+676871818=0.20Table 3: Indigo’s current ratio and quick ratio compared with industry benchmark
2013 Benchmark Current ratio Quick ratio
Indigo Books & Music, Inc. 2.05a 1.02d
Industry Benchmark 1.29k 0.54l k=a+g+i+203761117624194=2.05+1.12+0.83+1.164=5.164=1.29, where20876111762419 is Barnes & Nobel 's current ratio in the year of 2013. l=d+h+i+160470+14241717624194=1.02+0.78+0.20+0.184=0.54where 160470+1424171762419 is Barnes&Nobel 's quick ratio in the year of 2013.
Table 4: Indigo’s profit margin compared over three years.
2013 2012 2011
Indigo Books & Music, Inc. 0.47% A 7.09% B (2.03%) C
A=4,228892,458 x 100% B=66,189933,990 x 100% C=19,384956,449 x 100%Table 5: Indigo’s profit margin compared with competitors.
2013
Indigo Books & Music, Inc. 0.47%
Amazon.com Inc. (0.06%) D
Wal-Mart Stores Inc. 3.51 E
D=(39)61,093 x 100% E=15,699446,950 x 100%Table 6: Indigo’s profit margin compared against its industry benchmark.
2013
Indigo Books & Music, Inc. 0.47%
Industry Benchmark 0.42% F
F=A+D+E+[154,8066,839,005 x 100%]4=0.47%+0.06%+3.51%+(2.26%)4Table 7: Indigo’s operating ratio compared over three years
2013 2012 2011
Indigo Books & Music, Inc. 43.71%m 44.83%n 40.46%o m=390,080892,458×100%=43.71%n=418,701933,990×100%=44.83%o=387,927956,449×100%=40.56%Table 8: Indigo’s operating ratio compared with competitors
2013
Indigo Books & Music, Inc. 43.71%m
Amazon.com Inc. 98.89%p
Wal-Mart Stores Inc.
19.07%q
P=60,41761,093×100%=98.89% q=88,873466,114×100%=19.07%Table 9: Indigo’s operating ration compared with industry benchmark
2013
Indigo Books & Music, Inc. 43.71%m
Industry Benchmark 47.84%r r=43.71%+98.89%+19.07%+(409,8321,379,710×100)4=47.84%Table 10: Indigo’s debt-equity ratio and debt-asset ratio compared over three years
Indigo Books & Music, Inc. 2013 2012 2011
Debt ratio 0.39G 0.40H 0.48I
Debt-equity ratio 0.63J 0.67K 0.91L
G=219,924570,246=0.39 H=236,904592,536=0.40 I=243,644511,007=0.48J=219,924350,322=0.63 K=236,904355,632=0.67 L=243,644267,363=0.91Table 11: Indigo’s debt-equity ratio and debt-asset ratio compared with competitors
2013 Debt ratio Debt-equity ratio
Indigo Books & Music, Inc. 0.39G 0.63J
Amazon.com Inc. 0.75M 2.97N
Wal-Mart Stores Inc. 0.60O 1.48P
M=24,36332,555=0.75 N=24,3638,192=2.97 O=121,367203,105=0.60 P=121,36781,738=1.48Table 12: Indigo’s debt-equity ratio and debt-asset ratio compared with industry benchmark
2013 Debt ratio Debt-equity ratio
Indigo Books & Music, Inc. 0.39G 0.63J
Industry Benchmark 0.64R 2.01S
R=G+M+O+3,049,8723,723,0124=0.39+0.75+0.60+0.824=0.64S=J+N+P+3,049,872673,1404=0.63+2.97+1.48+2.974=2.01LIST OF
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