Financial Analysis Often when outside parties such as creditors and investors are assessing a business and determining their value, they utilize ratios designed to gather information for both credit risk analysis (liquidity, solvency, and capital structure) as well as profitability and prospective analysis (investment) (Subramanyam, 2014). However, Smart, Gitman, and Joehnk (2014) contends that interpretations derived from ratio analysis should be not be the sole measurement of a company’s financial position, but rather supplemented with other measures to provide an accurate portrayal. Provided in Appendix A are credit analysis ratios for both Dick’s Sporting Goods and Big 5 Sporting Goods for the last three years (2012-14). As one can determine …show more content…
cash, marketable securities, and receivables), Big 5’s ability to meet short-term obligations is significantly lower compared to their competition, even though Dick’s ratios have decreased considerably the last three years (Investopedia, 2016b). Coupled with an extremely high cash turnover ratio (depicted in Appendix B) caused by low amounts of cash compared to revenues, these ratios signal Big 5’s may be in dire need of short-term financing if confronted with abrupt economic hardships (Keythman, 2016a). Furthermore, Big 5’s capital structure appears to be largely funded by lower-cost debt when compared to equity, which indicates the company funds $1.47, $1.32, and $1.34 through debt for every dollar of equity (Subramanyam, 2014). According to CSI Market industry averages for 2014, the retail apparel industry average for total debt to equity was 0.90, which reveals that Big 5’s values were meaningfully higher while Dick’s values were closer to average (CSI Market, 2016). These dramatically higher values point towards an increased default risk for Big 5 and may affect their ability to obtain additional financing and escalate the likelihood of violating debt covenants in the …show more content…
In addition, cash flow ratios are often included in analysis to determine if the company is producing enough cash for expenditures (i.e. inventories and dividend payments) and the amount reinvested to stimulate potential growth (Subramanyam, 2014). Located on Appendix B are common profitability ratios for both Dick’s Sporting Goods and Big 5 Sporting Goods for the years of 2012-2014 (United States Securities and Exchange Commission, 2015a; United States Securities and Exchange Commission, 2015b). As the table demonstrates, Dick’s Sporting Goods higher return on assets (ROA) and common equity (ROE) show the company is generating significantly more profit for every dollar allocated to assets and equity when compared to Big 5 (Subramanyam, 2014). Since a ROE provides investors with pertinent information regarding profit, growth, and dividend payments, one can determine that with higher debt ratios and lower ROE values when compared to their counterpart, Big 5 represents a riskier investment with a lower potential for returns (Smart et al., 2014). Additionally, although Dick’s gross profit margin is slightly lower than Big 5’s due to higher shipping costs, their operating profit margin values