Class 10 FSA sears walmart handout-1 PDF

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Financial Accounting Spring - 2020 Session 10 Rodrigo Verdi MIT Sloan School of Management

Sears vs. Walmart What is the central issue in the case?

What are the differences in strategy between the two companies?

2

Sears vs. Walmart How do these firms compare in terms of performance (ROE)?

What is driving the differences in performance between these two companies?

3

ROE (Dupont) Analysis (Disaggregating the Rate of Return on Common S.E.) NI = SE

Return On Equity

Net Income. Ave. Total Assets

X

Ave. Total Assets Ave. Total S. E.

Operating Performance

Capital Structure

Return on Assets

Leverage Ratio

4

Dupont Analysis – Sears vs. Walmart Return on Equity

=

ROA

x

Leverage

Walmart:

Sears:

5

ROE (Dupont) Analysis (Disaggregating the Rate of Return on Common S.E.) NI = SE

Net Income. Ave. Total Assets

X

Ave. Total Assets Ave. Total S. E.

Operating Performance

Capital Structure

Return on Assets

Leverage Ratio

Return On Equity

Net Income Sales Return on Sales (profit margin ratio for ROCE)

X

Sales Ave. Total Assets Total Asset Turnover

6

Dupont Analysis – Sears vs. Walmart Return on Equity

=

Profit Margin

x

Asset x Turnover

Leverage

Walmart:

Sears:

7

Margin vs. Turnover (each point represents an industry) 4

Sales Ave. Total Assets

3.5

GROCERIES & RELATED PDS-WHSL

3 DRUG & PROPRIETARY STORES 'GROCERY STORES

2.5 WOMEN'S CLOTHING STORES

2

RETAIL STORES

Net Income Sales

1.5 MISCELLANEOUS RETAIL

1 CRUDE PETROLEUM & NATURAL GS

0.5 AGRICULTURE CHEMICALS

COGENERATN-SM POWER PRODUCER DEEP SEA FRN TRANS-FREIGHT WATER SUPPLY

NATURAL GAS TRANSMISSION

0 0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

8

Efficiency Ratios Operating Efficiency Asset Turnover = Revenue / Average Total Assets (How fast are you generating revenue from your assets?) A/R Turnover = Revenue */ Average Accounts Receivable (Measures how quickly you collect cash on your credit sales.) Inventory Turnover = Cost of Goods Sold / Average Inventory (How quickly do you sell your inventory?) A/P Turnover = Cost of Goods Sold / Average Accounts Payable (How quickly do you pay your suppliers?) 9

Efficiency Ratios Cash Management Efficiency Days Receivables

= 365 / (A/R Turnover)

Days Inventory

= 365 / (Inventory Turnover)

Days Payables

= 365 / (A/P Turnover)

10

Efficiency Ratios Walmart:

Sears:

Days Receivable:

Days Receivable:

Days Inventory:

Days Inventory:

Days Payable:

Days Payable:

11

Take-Away Slide In real life, you need to be able to move from the BSE to ratios to think about how transactions affect ratios. DuPont decomposition presents a simple but powerful way of doing so.

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