Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company

Consider the data for Randall Department Stores presented in Problem P15-31B.

Requirements

1. Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall’s common-size statement, and the second column, the industry averages.
2. For the profitability analysis, compute Randall’s (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall’s profit performance better or worse than the industry average?
3. For the analysis of financial position, compute Randall’s (a) current ratio and (b) debt to equity ratio. Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47, and the debt to equity industry average is 1.83. Is Randall’s financial position better or worse than the industry averages?

Step by step solution

01

Meaning of Common Size Income Statement

The common size income statement refers to a statement in which the cost of income statements will break down into sales percentages, which would treat the sales figure as 100%.

02

(1) Preparing a common-size income statement and balance sheet for Randall.

Randall Department Stores Inc. Common-Size Income Statement Year Ended December 31, 2018
	Randall Averages	Industry Average
Net sales revenue	100.00%	100.00%
Cost of goods sold	67.4%	65.8%
Gross profit	32.6%	34.2%
Operating expenses	20.9%	19.7%
Operating Income	11.7%	14.5%
Other expenses	0.8%	0.4%
Net income	10.9%	14.1%

RANDALL DEPARTMENT STORES, INC. Common size Balance sheet The year ended December 31, 2018
	Randall Average	Industry Average
Current assets	67.4%	70.9%
Property, plant, and equipment	26.0	23.6
Intangible assets	1.6	0.8
Other assets	5.0	4.7
Total assets	100.00%	100.00%
Current liabilities	45.8%	48.1%
Long term liabilities	22.6	16.6
Total liabilities	68.4	64.7
Stockholder’s Equity	31.6	35.3%
Total liabilities and stockholders’ equity	100.00%	100.00%

03

(2) Analysing gross profit and profit margin ratio

	Randall	Industry
Gross profit		34.2%
Profit margin ratio		14.1%

Analysis:

Randall's gross profit percentage and margin ratio are less than the industry average. Randall isn't producing significant sales prices compared to the cost of goods sold, or COGS, which are Randall's costs to produce or buy things.

04

(3) Analysing Randall’s financial position better or worse than the industry averages

	Randall	Industry
Debt ratio		1.47
Debt to equity ratio		1.83

Analysis:

Randall’s debt ratio is reliability safe compared to Industry, but Randall’s debt-equity ratio is more than the Industry but still considered good.

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