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Financial Ratio Analysis Report

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FINANCIAL RATIO ANALYSIS REPORT

The fiscal year 2004 was a relatively soft year for Barnes & Noble, Incorporated (B&N). Blockbuster nonfiction books that came out during the year may not have come from the company, but business remained strong. This is due to the million of books already in the market, including phenomenal fiction hits “The Da Vinci Code,” “The Five People You Meet in Heaven,” and “The Rule of Four,” and thousands of new releases during the year. This claim was supported by the stable and strong figures embodied in the financial statements.

The current ratio shows the company’s ability to meet its currently maturing obligations, and serves as the primary test to measure one’s liquidity position. B&N achieved a relatively strong liquidity position for the year 2004 at 1.48:1. Comparing it to the previous 2 years’ figure of 1.52:1 and 1.53:1, the reduction is immaterial as the company still has enough ready resources to meet the current liabilities. Moreover, the current assets of discontinued operations increased the ratio of 2003 but were evened out by 2004. As a more stringent measure, the acid-test ratio of the company increased from .23:1 in 2003 to .46:1 in 2004. This vast improvement was attributable to the increased cash and receivables figures of US$253M and US$23M, respectively.

The company not only improved its liquidity position but also in efficient utilization of fast-moving assets. This can be measured by using Activity Analysis ratios. One of these is the Accounts Receivable Turnover rate, which measures the average number of sale-collection cycles completed by the firm during the year. From the 2002 rate of 32.07 times, B&N enhanced their sales-collection efforts as proven by the rates 50.52 times and 77.60 times for the years 2003 and 2004 respectively. This development would find their ultimate effect in the increased sales figure of 11.47% and cash balance of 89.75%. As a result, collection time for sales also improved as can be determined by computing the Number of Day’s Sales in Receivables. The rate of 4.7 days for the year 2004 is a vast improvement from 7.22 and 11.38 days for the years 2003 and 2002, respectively. This means the company had a shorter collection period.

Another ratio that may aid in evaluating a company’s activity efficiency is the Inventory Turnover rate. This is most relevant to businesses that keep big amounts of resources in stock like B&N of which inventory are accounted for 65% of total current assets, and 39% of total assets. Inventory Turnover rate measures the number of times inventories were acquired and sold during the period, and thus relates to sales volume. In B&N’s case, the rate is of a steady increase, from 1.96 times in 2002 to 2.28 times in 2003, and 2.64 times in 2004. This trend continued in the Number of Day’s Sales in Inventory, which is primarily used to measure the appropriateness of inventory levels in terms of time required to sell, or “turnover” of goods. From 186.12 days in 2002, the company improved to 138.19 days by 2004, or 48.33 days.

To measure the overall efficiency of asset utilization, analysts usually use the Asset Turnover rate. It should be noted that when a long-term investment does not contribute to sales, such as land held for investment, the same should be excluded from the computation. B&N’s history shows that asset turnover rate on 2002 was pegged at 1.31. By 2003, this decreased by .03. It can be attributed to current and non-current assets of discontinued operations in which by year 2004, those were already eliminated. However, 2004 saw the rebound of the asset turnover rate to 1.37.

For the investors, the profitability of the company is the primary concern. As such, many measures are developed in order to measure this business aspect. Profit Margin on Sales rate specifically measures profit percentage per dollar of sales. There was a slight reduction in 2004 (2.94%) from that of the previous year (3.47%). This is attributable again to profit brought in by discontinued operations wherein year 2003 has the higher amount of US$7.53M. Just because B&N is primarily a merchandising company wherein cost of goods sold is a vital expenditure, the Gross Profit Margin rate is a significant ratio as this helps in evaluating inventory control measures. Moreover, gross profit is the very thing that recovers operating expenses. B&N maintains the rate at 30% with slight differences through the comparative years. The year 2004 figure of 30.51% is consistent with the company’s overall improvement.

The rate used to evaluate the efficiency of assets to generate income is called the Rate Earned on Average Assets, or Return on Investment (ROI). There was a slight decrease in 2004 from 2003, posing the figures 4.03% and 4.46%, respectively.

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