A complete financial analysis for Dollar General Company.
Financial Analysis Guidance
Your financial analysis is the heart of your valuation. It gives you insights as to how your company is performing and the likelihood those results may continue. Because the data from which it is derived is based upon historical financial reports and the underlying accounting principles used to prepare financial reports it is essential you apply your skills in reading behind the numbers. This skill involves the potential problems inherent in data itself and the potential for managerial influences on that information.
At the very least your financial analysis should include the areas of profitability, liquidity, and solvency. Within these classifications is the goal of providing informed inputs to your forecast. Thus, for profitability that would require you to examine disaggregated parts of ROE such as margin, turnover, and leverage currently and over time. The trends for this performance metric are essential. You should also look at ROA and the extent of asset employment.An examination of comprehensive income (CI) may also help you to locate items not noted on the income statement but likely to impact future income and cash flows. Thus, you could compare CI versus NI over the last three years to determine if any items of economic consequence are missing from NI.
In your liquidity analysis you should examine the current ratio and quick ratio noting their importance. Other measures such receivables and inventory turnover can be discussed here as well. You might also look at the relationship of cash flow from operating activities to net income as a measure of a firm's capacity to generate sufficient cash.
For solvency examine at least one debt ratio, interest coverage, and a cash flow measure.
All of the ratios noted above should be examined in terms of trends and compared to a benchmark such as the industry average or a major competitor. You should also consider any problems that accounting may play in their calculation and whether some analytical adjustment is necessary. The impact of off balance sheet items such as operating leases on the debt ratio is an example here as would the potential impact of unrealistic pension assumptions on future cash flows.
For analyzing a company such as the department store Kohls that is growing by adding new stores you should look at the same store sales or growth in the number of new stores and any other measure you deem relevant.For Kohls you might even consider the impact of store renovations on future cash flows. While not an issue for Kohls it is wise to look at the segment footnote and see where sales are derived. Are the firm's sales mostly domestic or do a large percentage come from overseas? Will this impact future growth? Is there any impact from potential lawsuits or changes from competitors? You should always be looking for explanations for large changes and the likelihood these may continue.
For specifically examining Kohls you would note from eVal's ratios that return on equity declined sharply beginning at 1/31/2009 year-end because of the recession. They have recovered since that time. This should not be surprising. Your industry analysis would have prepared you for that result. Prior years had healthier returns. From 2009 profit margins also declined along with turnover. Leverage over the time period was relatively stable. You should compare these results for another company such as Penneysand determine the relevance of these trends to changes in the economy and what you might expect in the future given S&P's forecast for growth and Kohls strategy, etc. These are the kinds of issues to examine for any company you will be valuing.
The same type of analysis should be made for the measures of liquidity and solvency noted above.
You should try and reflect on the information obtained for your industry and strategy analysis and accounting analysis as you approach both the financial analysis and forecast. Are international sales fueling growth or likely to impact future growth? What are the major drivers of profitability? Are there any aspects of the industry that deserve a detailed analysis because of their impact on firm success? Does the company rely on product differentiation or cost leadership as part of their overall strategy. Also remember you may use web resources beyond a company's 10K for information about strategy. However, please make sure to cite any web sites or documents used for this part of your analysis.
Attachment:- sec-dollar.pdf