Financial Analysis Project Foot Locker, Inc. Sample History With its headquarters in New York, Foot Locker Inc. is one of the largest retailers of shoes and apparel. It was originally established in 1974 as a F.W. Woolworth Company, and did not separate as “Foot Locker” until 1988. It specializes in athletic wear and has many divisions of business. It currently operates in 20 countries worldwide with 3,921 primarily mall-based stores. The company participates in many philanthropic missions to serve under-privileged areas with regards to schools and athletic programs. Year after year, Foot Locker has risen in Fortune 500 rank as it gains popularity and strength as a corporation. Foot Locker is a global leader in the athletic footwear and apparel department. Financial Analysis Foot Locker, Inc. continuously breaks financial records as it rises in Fortune 500 rank. Financial analysis of this company undoubtedly shows that this is a strong business that has strong investment potential when compared to industry standards. Ratios and financial analysis are evaluated using the annual SEC 10-K filings. Appendix A describes several financial analysis ratios used to evaluate the liquidity, solvency, and profitability of Foot Locker, Inc. The equations are described and the majority of the data points come from the company’s income statement and balance sheet. Appendix B shows the results of several financial ratios in regards to the 2015 and 2014 annual income statement and balance sheet. Appendix C compares the financial ratios to the industry standard. Appendix D shows a vertical analysis of the income statements. Appendix E shows a horizontal trend analysis of the balance sheets. Foot Locker, Inc. is a strong company for investors since the ratios calculated either remained similar or gained positive value when comparing 2015 and 2014. Liquidity ratios measure the short-term ability for a company to pay off debts that are due within the next year. The current ratio is a good indicator of liquidity as it compared current assets with current liabilities. The current ratio increased from 3.52 to 3.72 from 2014 to 2015. This indicates that the company is capable of paying off more debt in 2015. Overall the current ratio for Foot Locker is higher than the industry standard of 2.73. With horizontal analysis of the company’s balance sheet, the total current assets increased by 6.11%, while the total current liabilities only increased by 0.57%. This explains the improved current ratio since Foot Locker was able to keep their current liabilities amount mostly stationary between 2014 and 2015. The working capital amount also determines a company’s liquidity and financial health by comparing current assets and current liabilities. This shows the amount of free cash to invest back into the business for other obligations. There was about an 8.3% increase in working capital for Foot Locker from 2014 to 2015. Inventory turnover ratio is also a measure of liquidity of inventory. The ratio from 2014 to 2015 remained the same at 3.82. The industry standard is 3.84, which shows that Foot Locker has adequate management of inventory. A company who can optimize inventory is able to grow at a faster rate, which is very valuable to an investor. Overall, Foot Locker Inc. has a strong ability when compared to the industry standard to pay off short-term debt, which is a very important factor in analyzing the future growth of a business by an investor. Solvency ratios determine a company’s ability to pay off long-term debt that can be for several years. If a company is able to pay off long-term debt than the company will grow and have potential increased dividends for investors. Most of these ratios are derived from the balance sheet just like liquidity ratios. The debt-to-total-assets ratio is an example of a solvency ratio. This ratio compares total liabilities with total assets. This figure includes current assets and liabilities. The higher the ratio, the more unlikely the company is able to pay long-term debts. The ratio for Foot Locker in 2014 was 0.3 and only slightly increased to 0.32 in 2015. This shows that the company was able to maintain the total assets with total liabilities. This is the strong indicator for investors with regards to stability. The industry standard for this ratio is 0.15, but it is difficult to compare given the size of Foot Locker, Inc. being one of the largest shoe and apparel companies that may have different inventory, assets, and liability needs. Although it is higher than the industry standard, Foot Locker has shown its ability to pay long-term debt. With horizontal analysis of the balance sheet, the total assets increased by 5.54% and the total liabilities increased by 13.04% between 2014 and 2015. Although total liabilities increased by a larger amount, it is not necessarily a bad indicator. This can show that a company took on more debt to improve their business. Times interest earned ratio shows a company’s ability to meet interest payments by comparing net income, interest expense, and income tax expense. The ratio for 2015 was 210.25 and 162.8 for 2014. This is a 29% increase, which shows the long-term strength of Foot Locker making it a very attractive business for investors. In vertical analysis of the income statement, Foot Locker increased the percentage of net income and decreased the percentage of interest expense and income tax expense with regard to net sales. The overall solvency of Foot Locker, Inc. has a very positive outlook. Profitability ratios measure the operating success of a company for any period of time. These ratios mainly focus on the income statements rather than the balance sheet. Earnings-per-share is an example of a profitability ratio that shows net income earned on each share of common stock. Stockholders can analyze how their investments contribute to the overall profitability of the business. In 2015, Foot Locker had a ratio of 3.89 compared to 3.61 in 2014. This is a positive trend showing that the company is being more profitable with each share of common stock. Vertical analysis of the income statement shows that net income was 7.3% of net sales in 2015 and 7.27% in 2014. Although this is only a slight difference, it is a positive trend. The gross profit ratio is another example of a profitability ratio. It increased from 33% to 34% from 2014 to 2015. This is computed by comparing gross profit to net sales with the use of the cost of goods sold value. With vertical analysis of the income statements it can be shown that cost of goods sold decreased in relation to net sales. In 2015 it was 66.2% of net sales, and in 2014 it was 66.8%. The industry standard for gross profit rate is 45%. Although Foot Locker, Inc. has a lower gross profit rate than the industry standard it is still showing positive cash flow. The profit margin ratio, which compares net income with net sales, remained the same at 7% for 2014 and 2015. This shows that Foot Locker is having steady return on sales. The return on assets ratio compares net income to average total assets. The value was similar at 14% in 2015 and 15% in 2014, which is not much of a difference showing stability in the company. The industry standard for return on assets in 18%, which shows that Foot Locker may not be making as much money with regards to their assets. This correlates with the asset turnover ratio, which compares net sales to average total assets. It also showed a very minimal difference with 1.96 in 2015 and 2 in 2014. The industry standard is 1.46, which shows that Foot Locker is producing more in sales, but may have higher costs since the return on assets ratio was lower than industry standard. In the overall analysis of Foot Locker, it has positive profitability trends. After reviewing the recent financial statements for Foot Locker Inc., one can conclude that it is a very strong business showing growth trends in regards to liquidity, solvency, and profitability. They have been able to improve in many financial ratios throughout the years, which shows that an investment in the business can potentially increase rewards. A financially stable company such as Foot Locker would be an ideal asset to have in a shareholder’s investment portfolio. Appendix A Calculation Equations Used to Calculate Listed Ratios Topic Equation Location Current ratio (2,13) current assets/ current liabilities Balance Sheet Working capital (not really a ratio) (2, 13) current assets – current liabilities Balance Sheet Debt to total assets ratio (2, 13) Total liabilities/ total assets Balance Sheet Earnings per share (2, 13) (Net income – preferred dividends)/ avg. common shares outstanding Income Statement Gross profit ratio (5, 13) gross profit/ net sales Income Statement Profit margin ratio (5, 13) Net income/ net sales Income Statement Inventory turnover ratio (6, 13) cost of goods sold/ avg. inventory Income Statement Accounts Receivable turnover ratio (8, 13) net credit sales/ avg. net accounts receivable Both/Other Return on assets (9,13) net income/ avg. total assets Both/Other Asset turnover ratio (9, 13) net sales/ avg. total assets Both/Other Times interest earned (aka interest coverage) (10,13) (net income + interest expense + tax expense)/interest expense Income Statement Return on equity (11, 13) (Net income – preferred dividends)/ avg. common stockholders’ equity Balance Sheet Price-earnings ratio (13) price per share/ earnings per share Both/Other Appendix B Appendix C Appendix D Appendix E Foot Locker 10-K SEC Filing Financial Data References Investor Relations. (n.d.). Retrieved November 21, 2016, from MSN Money – Foot Locker. (n.d.). Retrieved November 21, 2016, from Foot Locker (FL). (n.d.). Retrieved November 21, 2016, from