Interpreting Financial Results: Family Dollar Stores

Interpreting Financial Results By
Richard Stewart
FIN 571
March 10, 2015
Dale Hilken

Interpreting Financial Results

A company’s financial ratios play a significant part in determining how the business is doing on a financial basis (Parrino, Kidwell, Bates, 2012). The financial ratios will show the positive and negative financial status of the company. This paper will show the ratios for Family Dollar Stores and the stability over two years.
Family Dollar Stores

Liquidity Ratios FY-12 FY-11

Current Ratio = Current Assets/Current Liabilities

1,768,170 1,533,844 = 1.7 1.5
1,065,657 1,017,055

Quick Ratio = Current Assets – Inventory/Current Liabilities

1,768,170 – 1,426,163 1,533,844 – 1,154,660 = 0.32 0.37 1,065,657 1,017,055

(Market Watch, 2014)

Liquidity ratios show the ability of a business to pay its short term obligations with its short term assets.
The obligations must be paid without endangering the firm (Parrino, Kidwell, Bates, 2012). A higher liquidity shows that the company has a greater ability to make short term payments. Over two years Family Dollar shows a high liquidity ratio.

Efficiency Ratios

Inventory Turnover = Cost of Goods Sold/ Inventory 6,071,058 5,515,540 = 4.3 4.8 1,426,163 1,154,660

Accounts Receivable Turnover = Net Sales/ Accounts
Receivable 9,331,005 8,547,835 = 13.8 12.5 674,202 685,063

Total Assets Turnover = Net Sales/Total Assets FY-12 FY-11

9,331,005 8,547,835 = 2.8 2.9 3,373,065 2,996,205

(Market Watch, 2014)

Efficiency ratios show the ability of the business to use its assets to yield sales (Parrino, Kidwell, Bates, 2012). Possessing a swift inventory turnover shows a company is doing well at reducing the investments in its inventory (Parrino, Kidwell, Bates, 2012). Family Dollar had higher efficiency ratios between 2012 and 2011 showing that it is reducing inventory efficiently.
Leverage Ratios

Total Debt Ratio = Total Debt/Total Assets 516,320 532,370 = .15 .18 3,373,065 2,996,205

(Market Watch, 2014)

Leverage ratios show if a business is using the fitting amount of debt financing (Parrino, Kidwell, Bates, 2012). Greater potential on return and greater bankruptcy risk are shown by higher ratios (Parrino, Kidwell, Bates, 2012). Family Dollar had a lower leverage ratio than it two competitors Dollar Tree and Dollar General in leverage ratio.
Profitability Ratios

Gross Profit Margin = Net Sales – Cost of Goods Sold / Net Sales = .35 .35 9,331,005- 6,071,058 8,547,835 – 5,515,540 9,331,005 8,547,835

Net Profit Margin = Net Income/Net Sales FY-12 FY-11

422,240 388,445 = .045 .045 9,331,005 8,547,835

(Market Watch, 2014)

ROA = Asset Turnover * Profit Margin

2.8 x 0.45 2.9 x 0.45 = 1.26 1.31 ROE = Net Income/Net Sales + Total Assets/ Net Sales + Total Assets/Total Equity

.45+13.8+2.6 .45+12.5+1.5 = 16.9 14.5

(Market Watch, 2014)

Profitability ratios show if the profits that are generated from the assets are suitable higher ratios specify better performance (Parrino, Kidwell, Bates, 2012). Family Dollar had higher ratios than Dollar Tree and Dollar General. Therefore the ratios state that Family Dollar has better performance in fiscal years 2011 and 2012.
Market Value Ratios

P/E (price-earning) = Price per Share/Earning per Share 0.68 1.15 = 0.19 0.37 3.61 3.15

(Market Watch, 2014)

Market value ratios show the percentage at which the market is valuing the equity of the business (Parrino, Kidwell, Bates, 2012). A higher ratio in market value ratio shows larger stockholder capital (Parrino, Kidwell, Bates, 2012).

Conclusion

Company owners and investors often use financial ratios to analyze a company’s performance. Ratios for the current period are compared with ratios in prior years to determine developing trends. Ratios are also compared to industry surveys and benchmarks to assess a company’s performance in its industry sector. When a company is not performing to expectations or industry benchmarks, ratios are an invaluable resource for pinpointing areas of financial difficulty. Two consecutive financial years (2011-2012) show limited success/stability for Family Dollar. A much broader study must be accomplished to capture Family Dollar’s true financial performance.

References
Market Watch. (2014). Family Dollar Stores. Retrieved from: http://www.marketwatch.com/investing/stock/hd/financials/balance-sheet Parrino, R. Kidwell, D. S., & Bates, T.W. (2012). Fundamental of Corporate Finance (2nd ed.). Hoboken, NJ: John Wiley & Sons.