[Insertheading of your CEO]
Asthe saying goes, a company’s liquidity, profitability and solvencyratios give us a good indication of a company’s financial position.However, it is not advisable to look at these ratios in isolationbecause the nature of the industry can make the ratios abnormallyhigh or low. Thus comparing these ratios with the industry averageand that of close competitors gives a much clearer picture of thecompany’s financial position.
Inthe case provided it is clear that the current ratio of the twocompanies is slightly higher than 2. This means that both companiesare able to meet their short term obligations. The gross profitmargin is also within the same range meaning that this might be theindustry average. However, looking at the net profit margin it isclear that while Kohl’s has 6.1% J.C. Penny has only 2.2%. Thismeans that Kohl’s has less overhead costs or the company has strictinternal operations that enable the company to have a higher netprofit margin than J.C. Penny.
Fromthe data calculated it is also clear that the inventory turnoverrate, the day’s inventory outstanding, and asset turnover rate arealmost equal for both companies. However, it appears that Kohl’s ismore efficient at utilizing its assets because the company has ahigher return on assets (ROA) when compared to J.C. Penny.
Onthe other hand, in terms of solvency it appears that J.C. Penny is amuch riskier company to invest in. this is because the company has avery high debt ratio, little free cash flow, and a lowtimes-interest-earned ratio. In addition the company’s rate ofreturn on equity is also less than that of Kohl’s.
Fromthis analysis it is clear that Kohl’s is in a better financialposition while compared to J.C. Penny. The company’s value in termsof market capitalization seems to be better than that of J.C. Penny,and happens to have higher earnings per share too.