Income Statement compared with Industry Average
Year Ended December 31, 2020
Randall
Industry Average
Net Sales Revenue
$800,000
100
%
Cost of Goods Sold
627,200
67.4
Gross Profit
172,800
32.6
Operating Expenses
95,000
20.9
Operating Income
77,800
11.7
Other Expenses
8,054
0.8
Net Income
$69,746
10.9
%
RANDALL DEPARTMENT STORES, INC.
Balance Sheet
31-Dec-20
Randall
Industry Average
Current Assets
$300,000
68
%
Property, Plant, and Equipment, Net
130,600
25.2
Intangible Assets, Net
8,400
1
Other Assets
7,500
5.8
Total Assets
446,500
100
%
Current Liabilities
$230,000
65
%
Long-term Liabilities
95,000
17
Total Liabilities
325,000
82
Stockholders’ Equity
121,500
18
Total Liabilities and Stockholders’ Equity
$446,500
100
%
Please refer to the Income Statement and Balance Sheet above and perform the following.
Prepare a vertical analysis for both the income statement and balance sheet.
Write a paragraph comparing the company’s performance with the industry average.
Compute the following ratios and comment on what the results mean when evaluating the company:
Current ratio
The gross profit percentage ratio
Debt ratio
Profit margin ratio
Full Answer Section
Randall vs. 32.6% for industry). This suggests Randall is less efficient at managing its direct costs of sales. While Randall's Operating Expenses (11.9%) are lower than the industry average (20.9%), which is a positive, the initial hit from Cost of Goods Sold still leads to a lower Operating Income (9.7% vs. 11.7%) and ultimately a lower Net Income percentage (8.7% vs. 10.9%) compared to the industry average. On the balance sheet, Randall has a slightly lower proportion of Current Assets and a higher proportion of Property, Plant, and Equipment, Net compared to the industry average, indicating a greater investment in fixed assets. Notably, Randall's Current Liabilities make up a smaller percentage of its total liabilities and equity (51.5%) compared to the industry (65.0%), and its Total Liabilities are also lower (72.8% vs. 82.0%). Conversely, Randall has a significantly higher proportion of Stockholders' Equity (27.2%) compared to the industry average (18.0%), suggesting a more conservative capital structure with less reliance on debt.
Computed Ratios
Here are the computed ratios for Randall Department Stores, Inc. and their interpretations:
- Current ratio: 1.30
- The current ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. A ratio of 1.30 means that Randall has $1.30 in current assets for every $1.00 in current liabilities. This indicates that Randall has a decent level of liquidity and should be able to cover its short-term obligations comfortably. Generally, a ratio between 1.5 and 2.0 is considered healthy, so Randall is slightly below that, but still in a manageable position.
- Gross profit percentage ratio: 21.6%
- The gross profit percentage ratio indicates the percentage of revenue left after deducting the cost of goods sold. Randall's 21.6% gross profit percentage is considerably lower than the industry average of 32.6%. This result suggests that Randall is less efficient than its competitors in managing the direct costs associated with its sales. It could be due to higher purchasing costs, less efficient inventory management, or lower selling prices relative to costs. This lower gross margin directly impacts the company's ability to cover operating expenses and generate net income.
- Debt ratio: 0.73
- The debt ratio measures the proportion of a company’s assets that are financed by debt. A ratio of 0.73 means that 73% of Randall's assets are financed by debt, while the remaining 27% are financed by equity. Compared to the industry average of 0.82 (or 82% debt financing), Randall has a lower debt ratio. This indicates that Randall is less reliant on debt financing than its industry peers and has a more conservative capital structure, which can be seen as a sign of financial stability and lower financial risk.
- Profit margin ratio: 8.7%
- The profit margin ratio, also known as net profit margin, shows how much net income is generated per dollar of net sales. Randall's profit margin of 8.7% indicates that for every $1.00 in sales, the company generates $0.087 in net income. This is lower than the industry average of 10.9%. This result signifies that Randall is less profitable overall compared to its competitors, likely due to its higher cost of goods sold, despite having lower operating expenses relative to sales. It suggests challenges in converting sales revenue into bottom-line profit.
Sample Answer
Vertical Analysis
Income Statement (Year Ended December 31, 2020)
Balance Sheet (December 31, 2020)
Comparison of Company’s Performance with Industry Average
Randall Department Stores, Inc. shows some notable differences when compared to the industry average. On the income statement, Randall's Cost of Goods Sold (78.4%) is significantly higher than the industry average (67.4%), resulting in a much lower Gross Profit margin (21.6% for