Financial Statement Analysis Of Kelloggs Company Finance Essay - Free Essay Example

JC Penney is one that we all are aware of when going to the mall. This company provides many different clothes from many retailers such as Levy, Gloria Vanderbilt, and other . Its competitors such as Kmart and Retailer will be use to producing the financial performance of explaining the income and balance sheet of two or three years of the horizontal analysis. Also it will provide the different types of ratio and liquidity of the companies within the same industry of its competitors and recommendation of the strengths and risk to investing within the company. In assessing the company financial performance of the company, investors are interested in the sustainable earning and comparison from period to period of the company. In showing the amount of cash with the current year of JC Penney from its prior year of an increase verse decrease, JC Penney cash ended year amount with its total assets shows the proportion of it total assets in the form of cash. In comparison with the other companies, JC Penney total sales for the year with its competitors of Kmart and Retailers total sales with industry average provides information about its relative position within it industry financial ratings . There are three basic tools that are used in financial statement analysis, but only two will be explain into the financial statement data such as Horizontal analysis and Ratio analysis. Horizontal analysis is a technique for evaluating a financial statement data over a period of time. Its purpose is to determine the increase or decrease that take place in the amount or percentage. (Walther, 2012) The horizontal analysis is illustrated of its most recent net sales are given of JC Penny Company: 2007 2006 2005 $18,781 $18,096 $17,513 Let assume that 2005 is the base year; it measure all percentage increases or decreases from this base-period amount. Base Period = Current Year Amount Base Year Amount Base Year Amount For example, let say that the net sales for JC Penny Company increased approximately about 1.0 % or 100% from 2005-2006; Example [($18,096 $17,513) / $17,513]. In dividing the current year amount by the base year, we can express current-year sales as a percentage by the base year. Current Period sales = Current year amount / base year amount The current period sales are expressed as a percentage of the base period. In assuming within the three years 2005 is the base period. 2007 2006 2005 18,781 18,096 17,513 7.2% 3.3% 100% Now looking at JC Penny Company financial statements to illustrate the horizontal analysis: The Horizontal analysis of the income statements shows the changes of percentages. Net sales increased $235 million, or .12.0% ($2,195 $1960). Cost of goods sold increased $141 million, or 12.2% ($1281 $1140). Selling and administrative expenses increased $41,500 million, or 19.6($235 $211,500). Gross profit increased by 17.1% and net income increased by 26.5. The increase in net income can increase in net sales and a decrease in Income tax expense. When using horizontal analysis, it item has no value in a base or preceding year but can have value in the next year, with no percentage change to be computed. Even if there a negative amount in the base or preceding period or a positive amount, it then exists in the following year, with no percentage change to be computed. Many ratios used for evaluating the financial health and performance of the company with a comparative balance sheet show a number of changes from 2007 to 2006 are an example: Current assets increased $1,020 million or 2.96 ($1,020/$344,500). Property assets (net) decreased $800 million, or 43.6% Other assets increased $15 million or 0.8%. Current liabilities increased $344,500 million or 18.8% while long-term liabilities decreased $487,500 million, or 26.5. Retained earnings increased $727 million, or 39.7%. JC Penney Department Store for 2006 to 2005 comparative income statement of a 2-year given in condensed format: JC Penney Department Store Income Statement for December 31, 19X2 Increase or (Decrease) During 2006 Net Sales 2007 2,195 2006 1,960 Amount 235 Percent 12.0 Cost of Goods Sld 2,097 1,837 260 14.2 Gross profits 816 697 119 17.1 Admin Expenses 104,000 108,500 4,500 4.1 Income operation 459 377 82 21.8 Interest expense Income taxes 36 168,200 40,500 139,000 4,500 29,200 24.3 21.0 Net income 263,800 208,500 55,300 26.5 Liquidity ratios measure the short-term ability to paying its maturing obligations and to meet unexpected needs for cash. The Short-term creditors, such as bankers and suppliers, are particularly interested in assessing liquidity. The measures used to determine the short-term debt-paying ability that are the current ratio, the current cash debt coverage ratio, the receivables turnover ratio, the average collection period, the inventory and the turnover ratio, inventory. (Walther,2012) The current ratio is widely used to measure the relationship of current assets to current liabilities, computed by dividing current assets by current liabilities. (Walther, 2012) The quick ratio, also known as the acid-test ratio, is a liquidity ratio that is more refined and more stringent than the current ratio. Instead of using current assets in the numerator, the quick ratio uses a figure that focuses on the most liquid assets. The main asset left out is inventory, which can be hard to liquidate at market value in a timely fashion. The quick ratio is more conservative than the current ratio and focuses on cash, short-term investments and accounts receivable. Quick Ratio = (Cash Equivalents + Short-Term Investments + Accounts Receivable) Current Liabilities Taking a look at the 2007 financial statements for JC Penney Department Store, we find that cash and equivalents are $100,000 accounts receivable are $230,000 and short-term investments are $0. Current liabilities are $1,999.2 for the year. Plugging these figures into our formula gives us a quick ratio of 318, rounded to 0 4, for fiscal-2010. For Example: Financial Statement Data for JC Penney 2010 Cash equivalents 8,600 Accounts receivable 2,700 Short-term investments 0 The cash ratio is the most conservative of the three liquidity ratios that is simply the ratio of cash and equivalents compared to current liabilities. This ratio looks only at assets that can easily used to pay off short-term debt, and it disregards receivables and short-term investments. The argument for using the cash ratio is that receivables and short-term investments often cannot be liquidated in a timely manner. Receivables can be sold, or monetized, but the firm will not be able to get the full value of the receivables sold. Keep in mind that, due to their high liquidity, short-term notes are considered cash equivalents, not short-term investments. The formula for the cash ratio is as follows: Cash Ratio = Cash Equivalents Current Liabilities For fiscal-2010, the calculation for cash ratio involves using $10,200,000 for the numerator of the equation and $9,100,000 for the denominator. After plugging in the numbers, we find that the cash ratio for fiscal-2010 is 0.90, rounded to 100. Calculating the ratios is typically the easy part. The difficulties lie in analyzing the ratios, interpreting their meaning and making an educated investment based on the findings. A competitive analysis and industry and sector analyses are good first steps. Comparing Liquidity Ratio JC Penney Department 2008 2007 2006 Kmart Department 2008 2007 2006 Current Ratio 0.8 1.3 1.5 Current Ratio (X) 0.6 0.7 0.8 Quick Ratio 0.7 1.2 1.4 Quick Ratio (X) 0.5 0.6 0.6 Cash Ratio 0.2 0.8 1.1 Cash Ratio (X) 0.1 0.1 0.3 The liquidity ratios for 2008 through 2010 are listed for JC Penney Department Store and one of its main competitors, General Mills. Note that the quick ratio we calculated for JC Penney Department Store for 2008 is slightly different. Instead of short-term investments, Stock Investor Pro uses marketable securities in the numerator of the equation, causing its quick ratio calculation to be slightly higher. Formula works as long as you remain consist in your analysis as stated, a company or businesses with higher liquidity ratios are better able to meet their short-term obligations. You can see that JC Penney Department Store has significantly higher liquidity ratios across the board compared to General Mills. For fiscal-2010 Quicker Oaks has a cash ratio of just 0.1, meaning that it only has enough cash on hand to cover 10% of its short-term obligations. Another major observation can be made using time-series analysis. Ratios for both organizations were the strongest at the end of 2006, bottomed out in late 2008, and rebounded in 2009 through the end of 2010. This can be easily explained by the recession we experienced in 2008. JC Penney and Kmart both are quality and retail store. In conclusion, although, competitors such as Kmart will be use to producing the financial performance of explaining the income and balance sheet of two or three years of the horizontal analysis. Also it will provide the different types of ratio and liquidity of the companies within the same industry of its competitors and recommendation of the strengths and risk to investing within the company. Looking at these ratios can lead you to believing that JC Penney is a strong company but may be better to invest in the early 2009. However, on the other hand Kmart is a large company but its liquidity ratios may be due its expansion policies. Not rely too heavily on single set ratios but it research organization as a whole. Overall, I would recommend investor, because it is a strong organization and always will be strong compare to industry of it high ratios and it show how well the company or organization handling there business financial liquidity for cash.