Problems, Chapter 6 Acct 460

ACC 300 FSA Project Ratio Analysis of The Kroger Co. and Whole Foods Market, Inc. TEAM Jake Eriksen (002) Brycen Goldstein (002) 16 Ross Wright (001) Nicolas Kim Omar Harb (001) (002) Kroger The Kroger Co. (referred to as Kroger) is a large grocery chain audited by PricewaterhouseCoopers LLP.

The chart to the left shows the relative return on equity for EBAY and its competitors. It clearly indicates

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

The Times Interest Earned Ratio is not near the same for these companies. J.C. Penny Co. Inc.’s ratio is 2.57, while Macy’s Inc.’s ratio is 8.13. This means that Macy’s Inc. would be able to pay its interest expense over 3 times longer with current earning than that of J.C. Penny Co. Inc. This may be vital to an investor if they are worried about their ability to remain afloat if something was to drastically change in department store industry or in the economy; however if nothing drastic occurs that will affect its EBIT, then neither company should have a problem continuing to pay their interest

The cause of poor transparency, however, is less important than its effect on a company 's ability to give investors the critical information they need to value their investments. If investors neither believe nor understand financial statements, the performance and fundamental value of that company remains either irrelevant or distorted. Mounting evidence suggests that the market gives a higher value to firms that are upfront with investors and analysts. Transparency pays, companies with fuller disclosure win more trust from investors. Relevant and reliable information means less risk to investors and thus a lower cost of capital, which naturally translates into higher valuations. Of course, there are two ways to interpret this evidence. One is that the market rewards more transparent companies with higher valuations because the risk of unpleasant surprises is believed to be lower. The other interpretation is that companies with good results usually release their earnings earlier. Companies that are doing well have nothing to hide and are eager to publicize their good performance. It is in their best

This report is written in order to perform financial analysis on Whole Foods Market Inc and its competitor Safeway Inc. This in depth report is both to determine which company is doing financially better and how also how they are doing comparing them to their whole industry.

While the foods retail industry is highly competitive, Whole Foods has established a reputation and maintains a brand loyalty with its customers. Increased rivalry will occur in the larger grocery chains like Wal-Mart and Kroger, because of their flexibility in the products they can offer, and the pressures they can put on the sales growth and overall profits of Whole Foods. They have a larger cash and customer base, and the ability to better advertise their products, while Whole Foods still generates most of their

Kroger and Safeway belong to the supermarket industry. In the supermarket industry, the business environment is quite competitive. Besides the traditional grocers, there are now many different types of retailers all fighting to obtain a share of the food wallet. Customers have a huge selection of where to buy their groceries. Not only do the customers have the choice to pick supermarkets around the neighborhood, they also have the option to shop at alternative retailers, such as national discount chains and warehouse stores. From an operating perspective, supermarkets are a homogenous group, meaning similar to each other. Factors that contribute to the differences among the supermarket are geography and store formats. The supermarket industry is faced with the challenges of maintaining market share and profits while attempting new strategies and store formats in an effort of trying to make the store stand out from the other retailers. Major demographic and consumer lifestyle changes have affected not only how consumers shop but also where they shop. Traditional supermarkets have been in a decline since shoppers now spend less and how frequently they shop in a particular store. While some supermarket operators continue to attempt to cut costs so they can offer reduced everyday prices, they find this to be a tough approach when competing with low cost operators like Wal-Mart and Costco.

Kroger and Whole Foods are the two giants in the grocery industry; however, their capital structure and financial measures paint vastly different pictures. The liquidity ratios, which measure short term solvency of the company, were calculated for both companies. The current ratio for Kroger was calculated to be .76 compared to a current ratio for Whole Foods of 1.60. At a glance, Whole Foods is more able to pay their short term debt obligations compared to Kroger. In the same vein, Whole Foods has a much higher quick ratio at 1.20 compared to .25 for Kroger. The capital structure of the two companies

The competition to a chain retail grocery store, such as Kroger, is not limited to other

There is a large discrepancy between prices implied by P/E and EV/EBITDA, presumably due to the distorting effect of company size on interest and depreciation expense. The other, much larger companies, presumably have much more debt and depreciation relative to earnings than Robertson; therefore, further reducing net income compared to EBITDA.

S. Basu (1997) tested for the information content of price-earnings multiple. He tested to see whether low P/E stocks outperform stocks with high P/E ratios. If historical P/E ratios provided useful information for obtaining higher stock returns then it would be refutation of semi strong form of efficient market hypothesis. His results indicated that low P/E portfolios provided superior returns relative to the market and high P/E provided inferior returns relative to the market. The results reported in this paper indicate that P/E ratio information was not fully

Theoretically, with the results of the P / E multiples, the company's value or performance can be determined by multiplying the company's profit with this ratio upon the target company. Phelps’s P/E multiples have increased from the previous quarter in which attract companies’ attention for acquisition. Higher P/E means PD use stock as consideration more frequently. In addition to positive EV/Sales, it shows that Phelps has more debt rather than cash. However, the growth of Phelps’ P/E targets a good prospect in future earnings. For ROE, as higher the return is better so, with this ROE, FCX can use it to compare the other companies.

Ball, R / Shivakumar L. (2005): Earnings quality in UK private firms: comparative loss recognition timeliness, Journal of Accounting and Economics Vol. 39, 2005, pp. 83–128.

How would you relate quality of earnings to the concepts of permanent earnings and transitory earnings? What do these terms mean?