Case: Publix Super Markets: Its Strategy in the U.S. Supermarket and Grocery Store Industry

5. How well is Publix performing from a financial perspective? Do some number-crunching using the data in case Exhibits 13 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 to help you diagnose Publixs financial performance.

Table 4.1 Key Financial Ratios: How to Calculate Them and What They Mean Ratio How Calculated What It Shows

Profitability Ratios

1. Gross profit margin Sales revenuesCost of goods sold Sales revenues Shows the percentage of revenues available to cover operating expenses and yield a profit. Higher is better and the trend should be upward.

2. Operating profit margin (or return on sales) Sales revenuesOperating expenses Sales revenues or Operating income Sales revenues Shows the profitability of current operations without regard to interest charges and income taxes. Earnings before interest and taxes is commonly referred to as EBIT. Higher is better and the trend should be upward.

3. Net profit margin (or net return on sales) Profits after taxes Sales revenues Shows after-tax profits per dollar of sales. Higher is better and the trend should be upward.

4. Total return on assets Profits after taxes + Interest Total assets A measure of the return on total monetary investment in the enterprise. Interest is added to after-tax profits to form the numerator since total assets are financed by creditors as well as by stockholders. Higher is better and the trend should be upward.

5. Net return on total assets (ROA) Profits after taxes Total assets A measure of the return earned by stockholders on the firms total assets. Higher is better, and the trend should be upward.

6. Return on stockholders equity (ROE) Profits after taxes Total stockholders equity Shows the return stockholders are earning on their capital investment in the enterprise. A return in the 1215% range is average, and the trend should be upward.

7. Return on invested capital (ROIC) sometimes referred to as return on capital employed (ROCE) Profits after taxes Long-term debt + Total stockholders equity A measure of the return shareholders are earning on the long-term monetary capital invested in the enterprise. A higher return reflects greater bottom-line effectiveness in the use of long-term capital, and the trend should be upward.

8. Earnings per share (EPS) Profits after taxes Number of shares of common stock outstanding Shows the earnings for each share of common stock outstanding. The trend should be upward, and the bigger the annual percentage gains, the better.

Liquidity Ratios

1. Current ratio Current assets Current liabilities Shows a firms ability to pay current liabilities using assets that can be converted to cash in the near term. Ratio should definitely be higher than 1.0; ratios of 2 or higher are better still.

2. Working capital Current assets Current liabilities Bigger amounts are better because the company has more internal funds available to (1) pay its current liabilities on a timely basis and (2) finance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising more equity capital.

Leverage Ratios

1. Total debt-to-assets ratio Total liabilities Total assets Measures the extent to which borrowed funds (both short-term loans and long-term debt) have been used to finance the firms operations. A low fraction or ratio is bettera high fraction indicates overuse of debt and greater risk of bankruptcy.

2. Long-term debt-to-capital ratio Long-term debt Long-term debt + Total stockholders equity An important measure of creditworthiness and balance sheet strength. It indicates the percentage of capital investment in the enterprise that has been financed by both long-term lenders and stockholders. A ratio below 0.25 is usually preferable since monies invested by stockholders account for 75% or more of the companys total capital. The lower the ratio, the greater the capacity to borrow additional funds. Debt-to-capital ratios above 0.50 and certainly above 0.75 indicate a heavy and perhaps excessive reliance on long-term borrowing, lower creditworthiness, and weak balance sheet strength.

3. Debt-to-equity ratio Total liabilities Total stockholders equity Shows the balance between debt (funds borrowed both short term and long term) and the amount that stockholders have invested in the enterprise. The further the ratio is below 1.0, the greater the firms ability to borrow additional funds. Ratios above 1.0 and definitely above 2.0 put creditors at greater risk, signal weaker balance sheet strength, and often result in lower credit ratings.

4. Long-term debt-to-equity ratio Long-term debt Total stockholders equity Shows the balance between long-term debt and stockholders equity in the firms long-term capital structure. Low ratios indicate greater capacity to borrow additional funds if needed.

5. Times-interest-earned (or coverage) ratio Operating income Interest expenses Measures the ability to pay annual interest charges. Lenders usually insist on a minimum ratio of 2.0, but ratios progressively above 3.0 signal progressively better creditworthiness.

Activity Ratios

Days of inventory Inventory. Cost of goods sold 365 Measures inventory management efficiency. Fewer days of inventory are usually better.

Inventory turnover. Cost of goods sold Inventory Measures the number of inventory turns per year. Higher is better.

Average collection period . Accounts receivable Total sales 365 or Accounts receivable Average daily sales Indicates the average length of time the firm must wait after making a sale to receive cash payment. A shorter collection time is better.

Other Important Measures of Financial Performance

Dividend yield on common stock Annual dividends per share Current market price per share A measure of the return that shareholders receive in the form of dividends. A typical dividend yield is 23%. The dividend yield for fast-growth companies is often below 1% (maybe even 0); the dividend yield for slow-growth companies can run 45%.

Price-earnings ratio Current market price per share Earnings per share P-E ratios above 20 indicate strong investor confidence in a firms outlook and earnings growth; firms whose future earnings are at risk or likely to grow slowly typically have ratios below 12.

Dividend payout ratio Annual dividends per share Earnings per share Indicates the percentage of after-tax profits paid out as dividends.

Internal cash flow After-tax profits + Depreciation A quick and rough estimate of the cash a companys business is generating after payment of operating expenses, interest, and taxes. Such amounts can be used for dividend payments or funding capital expenditures.

Free cash flow After-tax profits + Depreciation Capital expenditures Dividends A quick and rough estimate of the cash a companys business is generating after payment of operating expenses, interest, taxes, dividends, and desirable reinvestments in the business. The larger a companys free cash flow, the greater its ability to internally fund new strategic initiatives, repay debt, make new acquisitions, repurchase shares of stock, or increase dividend payments.