Running Head: Toys "R" Us Financial Analysis
Toys "R" Us and Subsidiaries
Financial Statement Analysis
MC500 Management Accounting
Sherri K. Thomas
City University, Tacoma
May 22, 1999
Toys "R" Us and Subsidiaries Financial Analysis
Note: Consistent with the financial report, all amounts are expressed in millions except per share data.
Ernst & Young, LLP, independent auditors for Toys "R" Us Inc. and Subsidiaries issued an unqualified opinion on the company’s financial statements as of February 1, 1997 and on the consolidated results of operations and cash flows for the three years ending February 1, 1997, February 3, 1996 and January 28, 1995. The report by the independent auditors and their issuance of an unqualified opinion serves to provide reasonable assurance to stockholders, management, regulatory agencies and the public, that the financial statements are materially correct. Materiality is interpreted to mean that there are no unrecorded adjustments which would impact the decisions or opinions of the readers of these financial statements. The inclusion of the auditors’ report in the year-end financial report lends credibility to the presentation and allows the users including investors and potential investors to rely on the information as presented.
Common Stock & Treasury Stock
The company does not have preferred stock and has not declared or paid dividends on its common stock. As of February 1, 1997, Toys "R" Us, Inc. and subsidiaries had authorized 650 shares of par value $.10 common stock, of which 300.4 shares were issued. 12.6 shares were held in treasury stock leaving 287.8 shares issued and outstanding. The book value of the common stock issued and outstanding was $14.56 which is down from February 3, 1996 at which time the book value was $18.8. The total paid-in capital for common stock was $ 518.8 as of February 1, 1997 and $572.8 as of February 3, 1996. The average price per share received by the company for all common stock issued since inception of the corporation as of February 1, 1997 was $ 1.73.
"There’s a saying that the nice thing about standards is that there are so many of them to choose from." (Maciag, 1998) It is important to choose carefully the ratios to be analyzed to be sure that there is relevance between the data and the conclusions drawn from it. When choosing industry standards, it is important to select like industries with commonalties that support comparison of results. It would not be appropriate to compare the financial statement of the cattle rancher with the financial statement of the meat processor even though the both derive their income from the beef industry. Their role in the industry is not the same. Their capital requirements, cash flows and profit margins are not comparable. In querying leading investor researchers, Standard & Poors, Thompson, and The Wallstreet Journal, the industry standards consistently mixed results from Toys "R" Us and other retailers with Mattel and Hasbro and others which are primarily manufacturers. While this is not ideal, these ratios are used here for comparison in the absence of other reliable standards. Ten year history from 1990 through 1999 with extensive ratio analysis is included in Appendix A. Analysis of the five years from 1995 through 1999 are included here with comparisons to the industry standards as available in the Spring of 1999. Graphs include nine to ten years of data as available.
The company’s short term liquidity of 1.24 in 1997 does not make it a desirable credit risk. "Many bankers and other short-term creditors traditionally have believed that a retailer should have a current ratio of at least 2 to 1 to qualify as a good credit risk." (Meigs, 1999) The company is equal to the industry standard however. Short term liquidity as measured by the quick ratio which excludes inventory and other short term assets (assumed to be prepaids etc.) is also low at .3, however this is higher than industry standard. It is likely the heavy investment in inventory that drives these ratios to be so low.
Ten Year Trend for Current and Quick Ratios
Another calculation that is worth looking at is the operating cash flow which is cash flow from operations/current liabilities. (Mills, 1998) For 1997 and 1996 this was .29 and .12 respectively. These seem extremely low but without comparable ratios for industry peers, it is difficult to evaluate.
Net return on assets (ROA) is measured by dividing operating income by average total assets to determine whether the company is earning a reasonable return on the resources available. ROA for 1997 was 5.79% as compared to industry standard of -.6%. (Thomson) Return on equity (ROE) measures the return on stockholders’ investment. ROE for the year ending in 1997 was 11.21% compared to the industry standard 16.2% (Thomson). The following graph shows ROE and ROA for the last nine years.
Earnings per share (EPS) is one of the most widely used ratios in accounting. Earnings per share was $1.54, $.53 and $1.85 respectively for years ending 1997, 1996 and 1995. The following chart shows the volatility of EPS for Toys "R" Us. The industry standard is $.64. (Thomson)
Capital Structure describes the mix of equity and liability used to finance the assets employed in a company. A company with a high level of liability is described as highly leveraged. Common measurements of leverage include assets/equity, and long-term debt/total equity. In 1997, the company’s assets to equity was 1.91 compared to an industry standard of 2.5. (Thomson)
Long-term Solvency and Leverage
Long-term debt/equity for the company was .22 in 1997 compared to .4 for the industry standard. (Thomson). Toys "R" Us has less debt compared to the industry. Toys "R" Us is not highly leveraged but has used retained earnings to finance the acquisition of assets. This is favorable to long-term creditors.
The interest coverage ratio which is calculated by dividing operating income before income and taxes by the interest expense was 5.8 which is strong. 1996 however showed only 1.6 coverage.
Cash Flow Analysis
The company uses the indirect method of preparing its cash flow statement beginning with net earnings and adjusting for expenses, revenues, and non-operating gains and losses not resulting in cash receipts and expenditures. The cash flow statement shows the primary source of cash flows to be operations in both 1997 and 1996. Within operating activities, cash received from customers, $9,918.1 in 1997 (sales adjusted for change in accounts receivable) provided the greatest source of cash. Cash received from customers was the greatest source of cash in 1996 as well. This is preferred by investors since the source of cash is from outside the company and does not rely on incurring debt or contributions from stockholders.
The highest uses of cash for year ended February 1, 1997
Inventory:Cost of sales:Change in inventory: Total: 19976,892.5 194.67,087.1 19966,592.3 193.16,785.4
Other Expenses:Selling, Advertising, General and Admin:Accouts payable, Accrued Expenses & Other LiabilitiesPrepaid Expenses & Other Operating Liabilities Total: 2,019.7( 261.4) 10.1 1,768.4 1,894.8 150.5 15.72,061.0
Summary and Long Term Trends
This financial analysis has focused on short-term liquidity, profitability, capital structure, leverage and long-term solvency. The appendix contains additional ratios and analysis which review each part of the financial statement in detail. In looking at the total picture, this company does not appear to be in trouble but neither is it a super star. Even though inventory comprises a high percentage of their current assets, they are successfully beating the industry averages for inventory turns. In addition their receivables consistently exceed industry standard by a significant amount.
Enhanced Analytics. (May 16, 1999). S&P Personal Wealth. Available: http://www.personalwealth.com.
Industry Info. (May 16, 1999). S&P Personal Wealth. Available: http://www.personalwealth.com.
Maciag, Gregory, A. (April 13, 1998). A wake-up cal for industry standards. National Underwriter. P29.
Meigs, Robert F.; Williams, Jan R.; Haka, Susan F.; Bettner, Mark S., (1999) Accounting. p 619.
Mills, John R.; Yamamura, Jeanne H. (October 1998). The power of cash flow ratios. Journal of Accountancy. V186 n4 p53(7).
Stocksheet: Media General Quick Source Data-One Wev Page—Toys R Us INC. (5/16/99) Available: http://www.stocksheet.com.
Thomson Investors Network Company Report: Toys "R" Us Inc. (5/15/99). Available: http://www.thomson.com.
Vital Stats. (May 16, 1999). S&P Personal Wealth. Available: http://www.personalwealth.com.
Wallstreet Research Net Report: Toys R Us Inc. (May 7, 1999). Available: http://www.wsrn.com.
Berry, Donna Gorski. (Mid-Oct 1998). Mouths of the millennium. Dairy Foods. 73.74.
Word Count: 1254