Posted: June 5th, 2015
This paper reviews the financial performance for Borders Group through using of ratio analysis. A number of financial ratios are used to evaluate the company’s liquidity, debt paying ability, profitability and attractiveness to investors. It seeks to assess whether Borders Group is a viable investment option given its historical financial performance with a consideration of financial statements for financial years 2008 and 2009.
Keywords: financial ratio analysis
|1||Days’ sales in inventory||Ending inventory *365||1,242.0||169.89||915.2||134.44|
|Cost of sales||2,668.3||2,484.8|
|2||Inventory turnover||Cost of sales||2,668.3||2.15||2,484.8||2.72|
|3||Working capital||Current assets – current liabilities||38||78|
|4||Current ratio||Current assets||1,506.0||1.03||1,071.2||1.08|
|6||Sales to working capital||Sales||3,555.1||93.07||3,242.1||41.83|
|7||Operating cash flow to current debt||Net operating cash flows||105.0||0.19||233.6||0.71|
|Current debt and notes payable||548.6||329.8|
|b||Debt paying ability|
|1||Debt ratio||Total liabilities||1,823.6||79%||1,345.9||84%|
|2||Operating cash flow to total debt||Operating cash flows||105.0||0.06||233.6||0.17|
|1||Net profit margin||Net profit||(157.4)||-4.4%||(186.7)||-5.8%|
|2||Return on assets||Net profit||(157.4)||-6.8%||(186.7)||-11.6%|
|3||Return on total equity||Net profit||(157.4)||-33.0%||(186.7)||-71.1%|
|4||Gross profit margin||Gross profit||929.1||26.1%||790.6||24.4%|
|1||Earnings per common share||Net profit||(157.4)||(2.68)||(186.7)||(3.10)|
|WAV # shares||58.7||60.2|
|2||Operating cash flow to dividends||Operating cash flows||105.0||5.41||233.6||35.94|
Comment on financial ratios
Borders Group exhibited a poor liquidity position as indicated by its low liquidity ratios. For instance, whereas Gitman (2003) observes that the benchmark current ratio should be 2, the company’s current ratios were around 1.0. Its inventory turnover is also quite low and the company takes unnecessarily long to offload its inventory as indicated by the days’ sales in inventory.
A review of its debt paying ability indicates that Borders Group is likely to have challenges in meeting its obligations to debt holders. Arnold (2008) notes that companies with poor debt ratios are exposed to high solvency risks. The company’s reliance on debt financing increased from 79percent in 2008 to 84 percent in 2009 whereas its operating cash flows are much lower that the debt exposure.
The company was in a loss position during the two years under review which according to McLaney (2011) is an indicator of poor financial performance. Consequently, its profitability ratios were very poor with its net loss increasing from 4.4 percent in 2008 to 5.8 percent in 2009. On the other hand, its gross margins dropped from 26.1 percent to 24.4 percent whereas return to total equity was negative 6.8 percent and 11.6 percent in years 2008 and 2009 respectively.
Owing to the poor profitability generated, the company had equally poor returns to investors as indicated by the increased loss per share from a loss of $2.68 in 2008 to $3.10 in 2009. Contrastingly, cash flows to dividends increased from 5.41 times in 2008 to 35.94 times in 2009 as the management became conservative in dividend payment in view of the company’s poor financial performance.
Comment on Net Loss
As indicated above, the company suffered a significant deterioration in performance. Over the past three years, Borders Group has continuously sunk into losses mainly due to its falling revenues. Its sales decreased from $3.53 billion in 2007 to $3.2 billion in 2009. There is therefore an urgent need for the management to consider adopting market development strategies aimed at boost the company’s revenues.
Comment on Significant Trends in the Consolidated Statement of Cash Flows
The major source of operating cash flows in 2009 was the reduction in inventories where management has taken a proactive role to free cash flows tied up in the company’s inventories. This has resulted to an overall improvement in net operating cash flows from $39.1 million in 2007 to $105 million in 2008 and ultimately $233.6 million in 2009.
The company has however reduced its investment in growth ventures and thereby capital expenditures have been reduced significantly over time. This has helped to improve investing cash flows over time. Debt financing was the most significant source of financing cash flows though there was a huge repayment in 2009. Generally, the company has faced cash flow challenges over the review period.
Comment on Possible Failure
Cash flow/total debt
The company’s cash flows to total debt is quite low and therefore according to Arnold (2008), there is a risk of possible failure for the company due to inability to meet is debt obligations.
Net Income to Total Assets
The return on assets ratio for the company was negative 33 percent in 2008 and negative 71.1 percent in 2009. The company has very poor financial performance and hence its exposure to possible failure.
Total Debt to Total Assets
The company’s exposure to solvency risks is quite high and therefore the likelihood of collapse. Due to its poor financial performance, the company was forced to increase its overreliance on debt financing with its debt ratio increasing from 79 percent to 84 percent between year 2008 and 2009.
Based on the financial ratios analysis above, it is evident that Borders Group had a very poor financial performance. It recorded losses over the review period. on the other hand, its financial strength was also poor given that the company over relied on debt financing and thereby its exposure to solvency risks is quite high. As such, Borders Group does not provide a viable investment opportunity.
Arnold, G., (2008). Corporate financial management, 4th ed. FT Prentice Hall
Gitman, L.J., (2003). Principles of managerial finance: brief. Boston: Addison Wesley Publishers
McLaney, E.J., (2011). Business finance: theory and practice, 9th ed. Harlow, England: Financial Times Prentice Hall
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