Staples, Inc.: Financial Management

Ratio analysis

Profitability 2009 2010 2011 2012
Net Margin % 3.04 3.59 3.94 -0.86
Return on Assets % 5.53 6.38 7.2 -1.64
Gross Margin % 26.67 26.91 26.94 26.62
Turnover ratios
Days Sales Outstanding 27.64 28 29.09 28.81
Days Inventory 47.83 47 47.83 48.42
Payables Period 43.45 43.95 44.21 41.99
Receivables Turnover 13.21 13.04 12.55 12.67
Inventory Turnover 7.63 7.77 7.63 7.54
Fixed Assets Turnover 10.9 11.38 11.84 12.06
Asset Turnover 1.82 1.78 1.83 1.9
Liquidity
Current Ratio 1.63 1.51 1.54 1.4
Quick Ratio 0.85 0.8 0.81 0.71
Financial leverage ratios
Debt/Equity 0.37 0.29 0.23 0.16
Interest Coverage 5.88 7.31 9.4 2.63

Profitability

The profitability position of Staples Inc. improved between 2009 and 2011. However, in 2012, the company reported a significant decline in profitability. The gross profit margin for Staples Inc. ranged between 26.62% and 26.94%. The net profit margin for Staples Inc. ranged between (0.86%) and 3.04%. Finally, the return on assets for Staples Inc. ranged between (1.64%) and 7.2%.

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Turnover ratios

The inventory turnover ratio for Staples Inc. ranged between 7.54 and 7.77. The receivables turnover ratio for Staples Inc. ranged between 12.55 and 13.21. Further, the payables period for Staples Inc. ranged between 41.99 and 44.21. Finally, the fixed asset turnover ratio improved over the period.

Liquidity

The liquidity position of Staple deteriorated over the period. The current ratio declined from 1.63 in 2009 to 1.4 in 2012 while the quick ratio declined from 0.85 in 2008 to 0.71 in 2012.

Financial leverage

The debt to equity ratio for Staple Inc. declined over the period that is, from 0.37 in 2009 to 0.16 in 2012. This implies that there was a decline in the proportion of debt in the capital structure of the company. Further, interest coverage ratio increased from 5.88 in 2009 to 9.4 in 2011. However, in 2012, the value declined to 2.63. The decline is explained by the reduction of income in 2012. The overall financial performance of the company is below the industry averages.

Analysis of growth for Staples, Inc.

Sustainable growth

Sustainable growth rate = Return on equity * (1 – payout ratio)

2009 2010 2011 2012
Return on Equity (%) 11.98 12.86 14.11 -3.21
Dividend payout ratio (%) 29.2 32.3 29.6 28.6
Retention ratio (%) 70.8 67.7 70.4 71.4
Sustainable growth rate (%) 8.48 8.71 9.93 -2.29

The sustainable growth rate highly depends on the growth of profit over time because a given proportion of profit earned by a company is retained for future growth. In the table, the sustainable growth rate for Staples Inc. increased from 8.48% to 9.93% between 2009 and 2011. However, in 2012 the growth rate declined to (2.29%).

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Actual growth rates

2009 2010 2011 2012
Actual growth rate (%) 5.16 1.11 1.94 -2.56

The company reported a general decline in the actual growth rate.

Graph for the growth rates
Graph for the growth rates.

In the graphs above, it can be noted that the sustainable growth rate is higher than the actual growth rate during the four years. This implies that the company has a potential for increasing growth. In addition, it may also indicate that the company is increasing the shareholders’ fund. Therefore, the company needs to exploit the potential available so as to increase its overall financial performance.

Analysis of potential financing needs

The projected financial statements of the company are presented in the attached excel file. Sales and other items in the financial statements of Staples Inc. will grow by two percent annually. At the end of 2014, the value of sales for Staples Inc. is expected to be $25,365.99 while the additional fund that will be required is $500.

Analysis of financing strategy for Staples, Inc.

2009 2010 2011 2012
Short term debt 1,473 0 0 439
Long term debt 1,969 0 0 1,599
Total debt 3,442 0 0 2,038
Shareholders’ equity 5,564 6,772 6,944 7,015
Total amount of capital available 9,006 6,772 6,944 9,053
Proportion of debt 38.22% 0.00% 0.00% 22.51%
Proportion of equity 61.78% 100.00% 100.00% 77.49%

The company makes use of both debt and equity financing in their capital structure. Staples Inc. used debt and equity financing in 2009 and 2012. The proportion of equity in 2009 was 38.22%, while in 2012 the proportion of debt was 22.51%. In the future, it is expected that Staples Inc. will use more debt in the capital structure. This can be explained by the need for the company to reverse the current state of negative growth rate of revenue and profit. Thus, the company will need to increase the capital base to a level that can support an increase in sales and profit. It will be easier for the company to raise capital through debt financing than through other sources.

Analysis of return on equity and return on invested capital

2009 2010 2011 2012
Return on Equity (%) 11.98 12.86 14.11 -3.21
Return on Invested Capital (%) 6.36 7.85 9.33 -3.68
Components of return on equity
Net profit margin 3.04 3.59 3.94 -0.86
Return on assets 5.53 6.38 7.2 -1.64
Total assets / shareholders’ equity 71.26 56.15 49.74 -227.60

Return on equity and return on invested capital of the company increased between 2009 and 2011. The values later declined in 2012. Further, the capital structure of Staples Inc. contributes a significant proportion to return on equity. This can be explained by the high percentage of the ratio of total assets to shareholders’ equity.

In the previous section, it was observed that Staples, Inc. makes use of debt and equity financing. The optimal debt level in the capital structure of a firm maximizes the value of a firm and reduces the cost of capital. From the review of the capital structure, it can be drawn that the company has not reached the point of optimal debt level. It can be observed that the company makes use of debt financing as a measure to meet short term financial needs but not as part of their permanent capital structure. The ratio analysis section shows that the return to equity increased for all except in 2012 when Staples Inc. reported a decline. The increase in the value of return to shareholders is supported by the increase in the amount of sales and profit. The company has the potential of delivering the returns to shareholders in future because sales and profit is expected to increase in the future.

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The first key factor that affects the future capital structure of the company is the financial leverage of the company. A company with a high leverage level is unlikely to increase the amount of debt in the future. The second factor is the financing strategy used by a company. A company that prefers to use aggressive financing strategy will use more debt in the capital structure as in the case of Staples Inc. The third factor is the growth rate of the company. A company that intends to grow at a high rate is likely to use more debt in the capital structure. The final factor is the business risk that the companies are exposed to.

Cost of capital analysis for Staples, Inc.

Cost of capital

The cost of capital for Staples Inc. was 8.4% for the 2012 financial year. The cost of debt for Staples Inc. was 7.0%, while the cost of equity was 9.6%.

Discounted cash flow analysis

2013 2014 2015 2016 2017 2018 Total
Free cash flow per share 1.04 0.86 1.24 1.84 2.45 1.43
Cost of equity, 9.6% 1 0.912409 0.83249 0.759571 0.693039 0.632335
Discounted cash flow 1.04 0.784672 1.032287 1.397611 1.697946 0.904239 6.8567

Based on the valuation model used above, the value of shares for Staples Inc. is $6.8567. The current market price for shares of Staples Inc. is $13.82. The difference implies that the shares of the company are trading at a price higher than the intrinsic value. Thus, the shares are overvalued. The difference in the value of equity calculated and the actual value of equity can be as a result of the difference in time period when the prices are calculated. The difference can also be as a result of the different data used in the calculation.

Novo Nordisk

Ratio analysis

Profitability margins 2009 2010 2011 2012
Net Margin % 21.08 23.7 25.77 27.47
Return on Assets % 20.42 24.8 27.12 32.88
Gross Margin % 79.56 80.78 81.03 82.74
Turnover ratios
Days Sales Outstanding 48.8 46.73 49.1 44.41
Days Inventory 343.56 307.89 277.21 257.19
Payables Period 79.14 80.44 89.84 96.91
Receivables Turnover 7.48 7.81 7.43 8.22
Inventory Turnover 1.06 1.19 1.32 1.42
Fixed Assets Turnover 2.69 3.06 3.2 3.67
Asset Turnover 0.97 1.05 1.05 1.2
Liquidity
Current Ratio 2.44 2.02 1.91 1.86
Quick Ratio 1.54 1.36 1.45 0.84
Financial leverage ratios
Debt/Equity 0.03 0.01 0.01 0.01
Interest Coverage 12.06 9.89 23.86 16.55

Profitability

The profitability position of Novo Nordisk improved over the period. The gross profit margin ranged between 79.56% and 82.74%. The net profit margin ranged between 21.08% and 27.47%. The return on assets ranged between 20.42% and 32.88%.

Turnover ratios

The inventory turnover ratio ranged between 1.06 and 1.42. The receivables turnover ratio ranged between 7.48 and 8.22. Further, the payables period ranged between 79.14 and 96.91. Finally, the asset turnover and fixed asset turnover for the company improved over the period.

Liquidity

The liquidity position of Novo Nordisk declined over the period. The current ratio for the company declined from 2.44 in 2009 to 1.86 in 2012 while the quick ratio declined from 1.54 in 2009 to 0.84 in 2012.

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Financial leverage

The debt to equity ratio for Novo Nordisk decline from 0.03 in 2009 to 0.01 in 2012. The value shows that the company has a low amount of debt in the capital structure. Further, the interest coverage ratio ranged between 9.89 and 23.86 in the period. The interest coverage ratio for the company fluctuated over the period. The analysis above indicates that the company performs better than other companies in the same industry.

Analysis of growth

Sustainable growth

2009 2010 2011 2012
Return on Equity (%) 31.31 39.62 45.95 54.9
Dividend payout ratio (%) 24.6 22.1 23.9 26.3
Retention ratio (%) 75.4 77.9 76.1 73.7
Sustainable growth rate (%) 23.61 30.86 34.97 40.46

The sustainable growth rate for Novo Nordisk increased from 23.61% to 40.46% between 2009 and 2012. This implies that the management of the company can increase sales for the company by up to 40.46% without seeking for external sources of finance.

Actual growth rates

2009 2010 2011 2012
Actual growth rate (%) 11.85 18.99 9.16 17.60

The actual growth rates were erratic over the period.

Actual and Sustainable growth rate
Graph for the growth rates.

The sustainable growth rate is higher than the actual growth rate during the four years. This implies that the company has a potential for increasing growth.

Analysis of potential financing needs

Sales and other items in the financial statements of Novo Nordisk will grow by seven percent annually. At the end of 2014, the value of sales for Novo Nordisk will be DKK89,331.97. The additional fund that will be required to finance the support the growth in sales is DKK9,515.

Analysis of financing strategy

2009 2010 2011 2012
Short term debt 1,337 418 1,720 351
Long term debt 984 970 504 502
Total debt 2,321 1,388 2,224 853
Shareholders’ equity 33,058 35,734 36,965 37,448
Total amount of capital available 35,379 37,122 39,189 38,301
Proportion of debt 6.56% 3.74% 5.68% 2.23%
Proportion of equity 93.44% 96.26% 94.32% 97.77%

The company makes use of both debt and equity financing in its capital structure. The proportion of debt in the capital structure declined from 6.56% in 2009 to 2.23% in 2012. The amount of debt in the capital structure will continue to decline in the future because the company has unexploited potential.

Analysis of return on equity and return on invested capital

2009 2010 2011 2012
Return on Equity (%) 31.31 39.62 45.95 54.9
Return on Invested Capital (%) 27.02 33.5 42.2 50.49
Components of return on equity
Net profit margin 21.08 23.7 25.77 27.47
Return on assets 20.42 24.8 27.12 32.88
Total assets / shareholders’ equity 7.27 6.74 6.57 6.08

The return on equity and return on invested capital for Novo Nordisk increased over the period. The corporate operational performance contributes a substantial amount of the return equity. This can be explained by the high ratio of net margin and return on assets.

In the previous section, it was observed that the company makes use of debt and equity financing. From the review of the capital structure, it can be drawn that the company has not reached the point of optimal debt level. The company makes use of debt financing as a measure to meet short term financial needs but not as part of their permanent capital structure.

The company has the potentials of delivering the returns to shareholders in future because sales and profit is expected to increase in the future.

Cost of capital analysis

Cost of capital

The cost of capital for Novo Nordisk was 12% for the 2012 financial year. The cost of debt for Novo Nordisk was 10.2%, while the cost of equity was 14%.

Discounted cash flow analysis

2013 2014 2015 2016 2017 2018 Total
Free cash flow per share 0.49 0.47 0.65 0.78 0.96 1.1
Cost of equity, 9.6% 1 0.877193 0.769468 0.674972 0.59208 0.519369
Discounted cash flow 0.49 0.412281 0.500154 0.526478 0.568397 0.571306 3.0686

The value of shares for Novo Nordisk is $3.0686. The current market price for the shares is $38.15. The difference implies that the shares of the two companies are trading at a price higher than the intrinsic value. Thus, the shares are overvalued.

Comparative analysis

Ratio analysis

Profitability

The profitability for Novo Nordisk is higher than that of Staples Inc. This can be explained by the fact that Staples Inc. operates in a retail industry that is characterized by high cost sales. Further, the ratios indicate that Novo Nordisk is more efficient in managing the cost of operation and pricing its products than Staples Inc. Finally, Novo Nordisk is more efficient in generating profit from the assets.

Turnover ratios

The inventory turnover ratios show that the inventory of Staples Inc. moves faster than that of Novo Nordisk. Further, the receivables turnover ratios show that the debtors of Staples Inc. pay their debt within a shorter period than debtors of Novo Nordisk. Further, the payables periods show that the Staples Inc. pays their debts within a shorter period than Novo Nordisk. Also, Staples Inc. is more efficient in generating sales from the assets than Novo Nordisk. Thus, it can be concluded that the overall operating efficiency for Staples Inc. is better than that of Novo Nordisk. This can be explained by the fact that commodities in retail industry move faster than Pharmaceutical industry.

Liquidity

The two companies in the two industries experienced a decline in the liquidity. Further, it can be noted that the liquidity position Novo Nordisk is better than that of Staple Inc.

Financial leverage

The ratios discussed above indicate that the Novo Nordisk has a better financial leverage than Staple Inc. Based on the ratio analysis, it can be concluded that the financial performance of Novo Nordisk is better than that of Staples Inc.

Analysis of growth

The analysis above indicates that both the sustainable and actual growth rates for Novo Nordisk are higher than that of Staples, Inc. Further, the two companies have a potential for increasing growth. Therefore, the companies need to exploit the potential available so as to increase their overall financial performance.

Analysis of financing strategy

The two companies make use of both debt and equity financing in their capital structure. However, Novo Nordisk uses a lower amount of debt in the capital structure than Staples Inc.

Analysis of return on equity and return on invested capital

The return on equity and return on invested capital for Novo Nordisk are greater than those of Staples Inc. during the four year period. This implies that Novo Nordisk is more efficient in generating profit from available capital than Staples Inc.

From the review of the capital structure of the two companies, it can be drawn that the two companies have not reached the point of optimal debt level. It can be observed that the two companies make use of debt financing as a measure to meet short term financial needs but not as part of their permanent capital structure.

The ratio analysis section shows that the two companies have the potentials of delivering the returns to shareholders in future because sales and profit is expected to increase in the future.

Cost of capital analysis

Cost of capital

Analysis of the cost of capital indicates that the shareholders of Novo Nordisk receive higher returns on their investment than the shareholders of Staples Inc. Further, it may also imply that it is riskier to invest in Novo Nordisk than Staples Inc. hence the higher cost of capital.

Discounted cash flow analysis

The discounted cash flow analysis indicates the shares of the two companies are trading at a price higher than the intrinsic value. Thus, the shares are overvalued.

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