ANALYZING THE PROFITABILITY OF A SERVICE FIRM. Kelly Services (Kelly) places employees at clients' businesses on a temporary basis. It segments its services into (1) commercial, (2) professional and technical, and (3) international. Kelly recognizes revenues for the amount billed to clients. Kelly includes the amount it pays to temporary employees in cost of services sold. It includes the compensation paid to permanent employ- ees that administer its offices in selling and administrative expenses. The latter expense also includes data processing costs relating to payroll records for all employees, rent, taxes, and insurance on office space. Amounts receivable from clients appear in accounts receivable, and amounts payable to permanent and temporary employees appear in current liabilities.
The temporary personnel business offers clients flexibility in adjusting the number of workers to meet changing capacity needs. Temporary employees are typically less costly than permanent workers because they have fewer fringe benefits. However, temporary workers generally are not as well trained as permanent workers and have less loyalty to clients.
Barriers to entry in the personnel supply business are low. This business does not require capital for physical facilities (most space is rented), does not need specialized assets (most temporary employees do not possess unique skills; needed data processing technology is readily available), and operates with little government regulation. Thus, competition is intense and margins tend to be thin.
Exhibit 4.39 presents selected profitability ratios and other data for Kelly Services, the largest temporary personnel supply firm in the United States. Note that the data in Exhibit 4.39 reflect the capitalization of operating leases in property, plant, and equipment and long-term debt, a topic discussed in Chapter 6.
Required
Analyze the changes in the profitability of Kelly Services during the three-year period in as much depth as permitted by the data provided.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.