Sample Ratio Analysis Between Companies Essay Example

as we do not have access to their financial statements.

Looking at the numbers, Costco is below average compared to the industry. Home Depot and Walmart are the other two companies that are close to the mean. The remaining companies have a significant amount of debt compared to their Equity. For instance, Nordstrom has a debt to equity ratio of 227 to 1, which is exceptionally high.

The high number typically indicates that the company is risky, which we have seen with Nordstrom. However, Nordstrom has the capability to pay, yet it still utilizes financial leverage. When comparing the Gross Margin and Net profit margin for the companies, it is evident that Nordstrom is leading with the highest Gross Margin ratio at 36.83% and Net Profit Margin Ratio at 7.4%. These ratios clearly indicate that Nordstorm's Cost of goods sold, which includes variable and fixed costs directly associated with the product such as materials and labor, is significantly lower than its sales.

Nordstrom demonstrates superior efficiency in generating income through the conversion of raw materials. Additionally, Nordstrom boasts the highest Net Profit Margin at 7.4, indicating that the company maintains higher sales prices while minimizing operating expenses. The High-profit Ratio emphasizes Nordstrom's commitment to maintaining higher quality standards, distinguishing itself from the wholesale industry due to its relatively lower net sales compared to other companies. In contrast, Costco exhibits the Lowest Gross Margin at 12.39.

The company's gross margin (40.39) and return on assets (ROA) exceed average industry standards, indicating efficient asset utilization and good profitability. However, the net profit margin (1.77) falls below industry standards, suggesting the need for increased sales or reduced expenses to enhance profitability. Similarly,

Macy's has a high gross margin (40.39) but a low net profit margin (3.07), indicating significant operating expenses that should be considered.

Overall, ROA is a crucial ratio for assessing a company's management effectiveness in generating after-tax revenue from its assets, including interest expenses. A high ROA signifies efficient asset utilization while a low ratio indicates the opposite.

The retail sector has an average ratio of 2.17. Out of the six companies selected in this report, Nordstrom is the clear leader with a ratio of 11.25. This means that they generated the worth of all their assets 11 times over in the last financial year. In comparison, Macy's has the lowest ratio of the selection with only 2.85. Another important ratio to measure resource utilization is the Return on Investment (ROI) ratio. This ratio indicates how successful a firm is at generating profit from its investments. Typically, it is expected that any investment made by the firm would be successful enough to cover its cost and generate profit. The industry standard for this sector is 3.47.

This report highlights six companies, all of which are performing above average. Nordstrom leads the pack with a score of 15.97, while Macy's has the lowest score of 3.55, barely surpassing the industry average. The Return on Equity (ROE), also known as Stockholder's return on investment, indicates the rate at which shareholders are earning on their investments. Companies with high ROE value provide substantial returns to their shareholders, generating significant assets for each dollar invested. Among the six companies mentioned, Nordstrom once again excels with a ratio of 42.16, which is seven times greater than the industry's average of 6.07. Conversely, Macy's

lags behind with a ratio of only 8.2.

Nordstrom is the clear leader in Management Effectiveness, based on the three ratios used in this report. They excel in maximizing assets to contribute to their bottom line. Additionally, Nordstrom provides shareholders with a remarkable 42 times the equity they invest, leading in the ROI ratio. They also outperform the other six firms in managing investments, suggesting they may be more conservative and risk-averse. However, it is important to note that without a figure for Costco's ROI ratio, it is unfair to definitively conclude that Nordstrom is the most effective.

When comparing other ratios related to Management Effectiveness, Nordstrom easily comes out on top. Walmart and Costco, on the other hand, demonstrate impressive efficiency with their considerably higher receivable turnover ratios. Compared to the sector's average of 5.46, Walmart has a ratio of 131.11 and Costco has a ratio of 111.2. This indicates that Walmart takes about 2.78 days and Costco takes about 3.28 days to receive payment for their sold goods, whereas the sector's average is 66.85 days. In conclusion, Walmart and Costco excel at collecting payments and operate primarily on a cash basis in comparison to the rest of the sector. Additionally, in terms of inventory turnover, Costo has a ratio of 14.38 and Walmart has a ratio of 8.63, ranking them highest in this aspect.

The average number of days that inventory stays on the shelves is 25 for Costco and 42 for Walmart, compared to the 78 days in an average retail store. This indicates that both Walmart and Costco have efficient processes for moving merchandise from their warehouses to customers. Additionally, while all six companies

have higher asset turnover ratios than the sector average, the relatively high ratios of Costco and Walmart suggest that they utilize their assets more efficiently than their competitors.