Comparison Of Financial Performance Of Kmart And Warehouse NZ In New Zealand

Profitability Ratio

Question:

Discuss about the Profitability in Nigerian Pharmaceutical Industry.

Kmart is the 1^st store under discount department in New Zealand. Though the customers knew very little about Kmart then, it became the new era in New Zealand thereafter. They provide their product to the customers at exceptionally low prices through various stores all over New Zealand. The company works hard to assure the customers that they get the daily required products at lowest possible prices. The company is further committed to improve the customer’s lives through delivering quality products and services that will enable to build the customer’s trust and a lifetime relationship with them.  Various key factors of their strategies are to reinvent the brand trough innovation and technology and attaining the best in class efficiency and productivity (Kmart.co.nz, 2017).

On the other hand, established in 1982, Warehouse NZ is counted among the leading retailers in New Zealand. They believe that the healthy business requires a healthy society in the same way as the healthy society requires the healthy business. The company is strongly focussed on the communities they are operating, the team members and the customers and are committed towards a more sustainable business that can minimize wastes, operates ethically and conserves energy (The Warehouse | Fashion, Homewares, Toys & much more, 2017).

Ratio Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2014	2015	2016
Profitability ratio
Gross Margin	14.26	12.34	11.81
Return on assets	3.20	3.24	3.06
Return on Equity	6.00	6.93	7.32
Return on sales	2.22	2.19	2.08
Financial stability ratio
Debt to equity ratio	0.88	1.14	1.39
Receivable turnover ratio	9.60	8.53	7.68
Current ratio	1.50	2.22	2.67
Acid test ratio	0.90	1.09	1.25
Financial structure ratio
Debt to total asset ratio	0.47	0.53	0.58
Equity ratio	0.08	0.09	0.10
Debt to equity ratio	0.88	1.14	1.39
Interest coverage ratio	2.50	2.17	1.88
Turnover ratio
Inventory turnover ratio	15.43	9.05	8.47
Asset turnover ratio	1.44	1.48	8.47
Fixed asset turnover ratio	1.80	2.06	1.47
Working capital turnover ratio	21.60	9.55	7.20

Ratio	2014	2015	2016
Profitability ratio
Gross Margin	33.04	33.18	33.24
Return on assets	6.89	4.34	6.28
Return on Equity	15.00	9.59	15.20
Return on sales	2.94	1.87	2.65
Financial stability ratio
Debt to equity ratio	1.18	1.21	1.42
Receivable turnover ratio	29.13	32.28	21.04
Current ratio	1.38	1.60	1.56
Acid test ratio	0.27	0.38	0.52
Financial structure ratio
Debt to total asset ratio	0.54	0.55	1.05
Equity ratio	0.08	0.06	0.20
Debt to equity ratio	1.18	1.21	1.42
Interest coverage ratio	6.21	4.35	5.50
Turnover ratio
Inventory turnover ratio	3.61	3.64	3.92
Asset turnover ratio	2.34	2.32	2.37
Fixed asset turnover ratio	7.87	7.82	10.87
Working capital turnover ratio	15.69	11.02	10.83

Profitability ratio – looking at the profitability ratios of the company, it is found that the gross margin as well as return on sales both are in decreasing trend. However, the return on assets has dropped slightly during 2016 and the return on equity is in increasing trend. The reason behind the decreasing gross profit margin was the increasing trend of COGS. However, the profitability ratios indicating that the company is able to generate return on shareholder’s equity (Kmart.co.nz, 2017).

Financial stability ratio – it is identified from the ratio calculation that debt to equity ratio is in increasing trend that means the company is increasing its financing through debt instead of equity. Further, the receivable turnover ratio is also increasing that indicates that the company’s efficiency with regard to collecting the receivable is reducing. Moreover, the increasing current ratio indicating that though the company is able to pay off its short-term obligation comfortably, chances are there that the company is not utilizing its working capital efficiently.

Financial structure ratio – as the debt to total asset ratio of the company is in increasing trend, it indicates that the company is becoming more risky for loaning and investing purpose as it is becoming more leveraged. If the equity ratio is considered, it can be identified that the equity ratio of the company is considerably low which means the company is less sustainable and more risky for the purpose of future loans. Further, as it can be seen that for all the years under consideration the interest coverage ratio of the company is more than 1, it indicates that the company is earning enough money to pay off their interest obligation. While considering the company for making a loan, the bank generally prefers the ratio of 1.5 (Kmart.co.nz, 2017).

Financial Stability Ratio

Turnover ratio – if the inventory turnover ratio is considered, it can be seen that Kmart is having quite high inventory turnover and it indicates that the company is not spending more through purchasing large amount of inventories and wasting it through storing the non-saleable inventories. Further, the asset turnover ratio is indicating that for 2014 and 2015, the company is earning more than 1 dollar for sale of each unit. Moreover, for 2016 the company is earning more than 8 dollar for sale of each unit which is a very good sign. Further, the fixed asset turnover ratio as well as the working capital turnover ratio both is indicating that the company has positive turnover. However, the fixed asset turnover ratio is quite low that indicates that the company is not using their fixed assets efficiently.

Particulars	2016	2017	2018
Amount ($)	Amount ($)	Amount ($)
Net sales	7,20,000	9,36,000	9,72,000
Less: Cost of goods sold	6,35,000	8,25,500	8,57,250
Gross profit	85,000	1,10,500	1,14,750
Less: Operating expenses	38,000	40,280	41,420
Net profit before interest and tax	47,000	70,220	73,330
Less: Interest	25,000	25,750	26,250
Net profit before tax	22,000	44,470	47,080
Less: Tax	7,000	14,150	14,981
Net profit after tax	15,000	30,320	32,099

Profitability ratio – it can be identified that all the ratios under profitability that is the gross margin ratio, return on assets ratio, return on equity ratio and return on sales are better for the Warehouse NZ as compared to Kmart Ltd. Therefore, Kmart shall take necessary steps to increase its profitability.

Financial stability ratio – if the financial stability ratios are considered, it can be identified that Kmart is considerably at better position as compared to Warehouse NZ. The financial stability indicates that the company is in better position while asking for any loan or when the investor considers the company for investment purpose (The Warehouse | Fashion, Homewares, Toys & much more, 2017).

Financial structure ratio – if the financial stability ratios are considered, it can be identified that Warehouse NZ is considerably at better position as compared to Kmart as Warehouse NZ is in better position with respect to interest coverage ratio and is in the better position to pay-off its interests.

Turnover ratio – if the inventory turnover ratio is taken into account, it can be identified that the inventory turnover ratio of Kmart is better as compared to Warehouse NZ; However, the other three ratios under turnover that is the asset turnover ratio, working capital turnover ratio and fixed asset turnover ratio is better for Warehouse NZ is better as compared to that of Kmart. Therefore, it is evidential that the turnover position of Warehouse NZ is far better than Kmart (The Warehouse | Fashion, Homewares, Toys & much more, 2017).

Conclusion

From the above analysis and interpretation of Kmart Ltd. as well as Warehouse NZ, it is found that both the companies are among the leading retailers in New Zealand and hold a large amount of market share. However, from the financial analysis of both the companies it is found that with regard to profitability position warehouse NZ is in better position as compared to that of Kmart Ltd. However, if the financial stability ratios are considered, it can be identified that Kmart is considerably at better position as compared to Warehouse NZ. Further, Warehouse NZ is in better position to pay off their interest. Further, with regard to turnover position Warehouse NZ is in better position as compared to Kmart Ltd. therefore, it can be concluded that with regard to all over financial performance, Warehouse NZ is in better position as compared to Kmart.

It can be recommended that Kmart shall try to reduce their operating expenses as well as COGS to improve its profitability position. Further, the company shall take necessary steps to increase its sales, so that it can achieve better turnover position. However, if Kiwibank Ltd considers the financial position to extend the loan, it can be identified that considering financial position, as the debt to total asset ratio of the company is in increasing trend, it indicates that the company is becoming more risky for loaning and investing purpose as it is becoming more leveraged. Further, if the equity ratio is considered, it can be identified that the equity ratio of the company is considerably low which means the company is less sustainable and more risky for the purpose of future loans. Therefore, it will not be a wise decision on the part of Kiwibank to extend the loan.

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