Managerial Accounting

RATIO ANALYSIS FOR THE KROGER COMPANY

In this portion of the report, a ratio comparison analysis will be conducted of the Kroger

Company and compared with the ratios of the industry norm. In this evaluation, an

acknowledgement of the key drivers to the business will also be identified and based upon

those ratios, a conclusion will be suggested in determining whether the Kroger Company is

a week or strong

industry performer.

The suggested ratio comparisons will include the following segments under the financial

strength heading: the current ratio, the quick or acid test ratio, the long term debt to

equity ratio, and the total debt to equity ratio. The gross profit margin and operating

profit margin ratios will be examined under the profitability section. Management

effectiveness will look at the return of assets, the return on investments, and the return of

equity ratios. The fourth area to be examined will include efficiency and be comprised of

accounts receivable turnover ratios, inventory turnover ratios, and asset turnover ratios.

The current ratio is a commonly used measure of short run solvency, which is the ability of

a firm to meet its debt requirements as they come due. Current liabilities are used because

they are considered to represent the most urgent debts, requiring one year or one operating

cycle. The available cash resources to satisfy these obligations must come primarily from

cash or the conversion to cash of other current assets. This ratio is determined by dividing

the current liabilities into the current assets. For the Kroger Company, the ratio is .89

compared to the industry ratio of 1.08. This indicates that Kroger may have a slight

disadvantage when compared to the other players in the market in obtaining quick cash

liquidity. (Is this a correct assumption. I would submise that this ratio could be higher

then what it is for Kroger to operate better. Am I correct in this thinking?)

Yes, you are correct here. Kroger should work to improve this - perhaps an item for the recommendation section???????

As a barometer of short term liquidity, the current ratio is limited by the nature of its

components. The balance sheet is prepared as of a particular date and the amount of

liquid assets may vary considerable from the date on which the balance sheet is prepared.

Further, accounts receivable and inventory may not be truly liquid. A firm could have a

relative high current ratio but not be able to meet demands for cash because the accounts

receivable are of inferior quality or the inventory is salable only at discounted prices. At

this point, it is necessary to use other measurs of liquidity, including cash flow from

operations and other financial ratios that rate the liquidity of specific assets, to supplement

the current ratio.

The quick or acid test ratio is a more rigorous test of short run solvency than the current

ratio because the inventory is eliminated. This is because the inventory is considered the

least liquid current asset and the most likely source of losses. Additionally, most organizations cannot operate without having inventory so simply reducing inventory to make a ratio look better could be detrimental to profitability. This quick ratio is

determined by subtracting the inventory from the current assets and dividing that number

by the current liabilities. For the Kroger Company, the quick ratio is .13 compared to the

industry ratio of .27. This confirms that Kroger is below the industry norm in obtaining

quick cash liquidity. (Am I right in that statment?)Yes, this is a good statement. This ratio should be in line with the current ratio.

The amount of and proportion of debt in a company's capital structure is extremely

important to the financial analyst because of the tradeoff between risk and return. Use of

debt involves risk because debt carries a fixed commitment in the form of interest charges

and principal repayment. A lesser risk is that a firm with too much debt has difficulty

obtaining additional debt financing when needed or finds that credit is available only at

extermely high rates of interest. The debt ratio considers the proportion of all assets that

are financed with debt. The debt to equity ratio mesures the riskiness of the firm's capital

structure in terms of the relationship between the funds supplies by creditors and

investors. The higher the proportion of debt, the greater the degree of risk because

creditors must be satisfied before owners in the event of bankruptcy. The equity base

provides