Homework answers / question archive / Financial Statement Analysis Case 4: Dollar General and Dollar Tree Ratio Analysis Find the data for this case in the Excel file “4

Financial Statement Analysis Case 4: Dollar General and Dollar Tree Ratio Analysis Find the data for this case in the Excel file “4

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Financial Statement Analysis

Case 4: Dollar General and Dollar Tree Ratio Analysis

Find the data for this case in the Excel file “4. DT and DG FY19 Data.xlsx”.

1. Create common size income statements and perform a basic ratio analysis of the two companies for fiscal year 2019, which is the fiscal year ended on Feb. 1, 2020/Jan. 31, 2020. (Note: fiscal year 2019 for both companies ends in the 2020 calendar year.) Be sure to discuss notable differences and similarities of the following: a. Return on Assets (ROA)
   2. Return on Equity (ROE), computed as net income ÷ average shareholders’ equity
   3. Leverage, computed as average Assets ÷ average Equity
   4. Profit Margin, including drivers of differences gathered from common size income statement
   5. Turnovers, including drivers of differences like working capital (cash conversion cycle) and PPE turnover.
   6. Which company has the better performance with references to the above related ratios to justify your selection.  
2. Categorize the financial statements into operating and nonoperating components. For brevity, list out only the nonoperating income statement and balance sheet accounts for both companies.  
3. Calculate the following for each firm for fiscal year 2019:
   1. Return on Net Operating Assets (RNOA)
   2. Net Operating Profit Margin (NOPM)
   3. Net Operating Asset Turnover (NOAT)
   4. Financial Leverage (FLEV)
   5. Spread (=RNOA – Net Nonoperating Expense Percent)
   6. Show that RNOA + (SPREAD × FLEV) equals the same ROE that in computed in 2a. above.
   7. In light of new information gathered from the separation of operating and nonoperating financial statement items, which company has the better performance?

Use a fiscal year 2019 statutory tax rate of 24.7% for Dollar Tree and 23.8% for Dollar General.

4. Dollar Tree disclosed the following in its FY19 10-K’s Item 1A. - Risk Factors:

In fiscal 2019 and 2018, we recorded a $313.0 million and a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge, respectively, related to our Family Dollar reporting unit. In 2018, as a result of a strategic and operational reassessment of the Family Dollar segment following challenges that the business experienced which impacted our ability to grow the business at the originally estimated rate when the Company made the acquisition in 2015, we determined that the carrying value of the Family Dollar assets was greater than its estimated fair value and recorded an impairment charge. These challenges included slower sales growth, increased freight costs driven by the driver shortage, reinvestment in store labor and higher shrink. Failure to fully address these challenges, significant negative industry or general economic trends, other disruptions to our business and unanticipated significant changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Following our annual impairment assessment, we recorded an impairment charge in the fourth quarter of 2019. We will continue to monitor key assumptions and other factors utilized in our goodwill impairment analysis, and if business or other market conditions develop that are materially different than we currently anticipate, we will conduct an additional impairment evaluation. Any reduction in or impairment of the value of goodwill or intangible assets will result in a charge against earnings, which could have a material adverse impact on our reported results of operations and financial condition.

You could remove the effects of the goodwill impairments and then re-compute the Dollar Tree’s FY19 advanced ratio analysis. What are reasons you would and would not want to do so? (A qualitative answer will suffice; you do not need to do additional quantitative analysis.)