Keigo Aizawa

FIN 320
4/18/2016
Bill Schweizer
Corporate Finance Company Analysis Project
Best Buy
Introduction
Best Buy is a leading provider of technology products, services and solutions. The
company offers expert service about 1.5 billion times a year to the consumers, small
business owners and educators. Those who visit our stores engage with Geek Squad
Agents or use BestBuy.com or the Best Buy app. The company has operations in the
U.S. where more than 70 percent of the population lives within 15 minutes of a Best
Buy store, as well as in Canada and Mexico, where Best Buy has a physical and online
presence. In this paper, Best Buy Companys financial report is compared with
Consumer Electronics and Appliances Rental Industry from 2013 to 2015. The
purpose of this paper will be to analyze whether Best Buy has better
ratio analysis, leverages and EPS, and valuation compared to the
industry or not. A ratio analysis is a quantitative analysis of information contained
in a companys financial statements. Ratio analysis is based on line items in financial
statements like the balance sheet, income statement and cash flow statement. Ratio
analysis is used to evaluate various aspects of a companys operating and financial
performance such as its efficiency, liquidity, profitability and solvency. The trend of
these ratios over time is studied to check whether they are improving or deteriorating.
Ratios are also compared across different companies in the same sector to see how they
stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of
fundamental analysis. The industry comparison is based on ratio analysis
and operational, financial, and combined leverage. Also, the valuation
of a financial asset is based on determining the present value of
future cash flows. Thus we need to know the value of future cash
flows and the discount rate to be applied to the future cash flows to
determine the current value. Therefore, the purpose of this paper will
be to analyze whether Best Buy has better ratio analysis, leverages
and EPS, and valuation compared to the industry or not.
Ratio Analysis
Profitability Ratios
1. Profit Margin
Best Buy
Consumer Electronics and Appliances
Rental Industry

2013
3.06

2014
1.29

2015
-2.71

8.77

9.23

2013
8.1

2014
3.73

2. Return on assets
Best Buy

201
5
-

Consumer Electronics and Appliances

Rental Industry

7.69
21.3
8

15.19

17.78

2013
24.72

2014
13.12

2015
-32.87

33.43

38.65

44.76

2013
31.51

2014
31.05

2015
19.87

17.8

20.77

25.16

2013
11.42

2014
11.59

2015
18.12

20.23

17.33

14.31

2013
7.8

2014
7.55

2015
7.93

37.83

39.89

47.27

2013
16.38

2014
15.63

2015
13.6

3.25

3.96

4.46

2013
2.64

2014
2.9

2015
2.84

1.69

2.03

2.32

3. Return on equity
Best Buy
Consumer Electronics and Appliances
Rental Industry
Asset Utilization Ratio
4. Receivable turnover
Best Buy
Consumer Electronics and Appliances
Rental Industry
5. Average collection period
Best Buy
Consumer Electronics and Appliances
Rental Industry
6. Inventory turnover
Best Buy
Consumer Electronics and Appliances
Rental Industry
7. Fixed asset turnover
Best Buy
Consumer Electronics and Appliances
Rental Industry
8. Total asset turnover
Best Buy
Consumer Electronics and Appliances
Rental Industry
Liquidity Ratio
9. Current ratio

Best Buy
Consumer Electronics and Appliances
Rental Industry

2013
1.51

2014
1.41

2015
1.16

2.23

2.11

2.19

2013
0.84

2014
0.69

2015
0.52

1.48

1.37

1.43

2013
67.26

2014
71.55

2015
76.6

40.44

46

47.77

2013
16.41

2014
11.83

2015
20.51

9.28

10.22

10.5

2013
15.41

2014
10.83

2015
19.51

8.28

9.22

9.5

10. Quick ratio

Best Buy
Consumer Electronics and Appliances
Rental Industry

Debt Utilization ratio

11. Debt to total assets
Best Buy
Consumer Electronics and Appliances
Rental Industry
12. Times interest earned
Best Buy
Consumer Electronics and Appliances
Rental Industry
13. Fixed charge coverage
Best Buy
Consumer Electronics and Appliances
Rental Industry

Leverage and EPS

1. Degree of operational leverage
Best Buy

1/31/2015
$40,339,00
0

Sales

2/1/2014
$40,611,00
0

3/3/2012
$45,457,00
0

2/27/2010
$49,243,00
0

EBIT
$1,477,000 $1,183,000 $2,277,000 $2,421,000
*There is no data of 2013 and 2011.
(Date used from:
http://www.nasdaq.com/symbol/bby/financials?query=incomestatement)
Industry

2015

2014

2013

2012

$1,586,670

$1,652,962

$1,754,258

$1,781,010

EBIT
$234,950
$240,456
$259,453
(Date used from:
http://www.bizminer.com/reports/if_report.php?
id=1365952&format=html)

$251,363

Sales

Best Buy
DOL
Industry
DOL

2015
-37.11

2014
4.51

2012
0.77

2015

2014

2013

0.57

1.27

-2.14

10
5
0
-5
-10

DOL

-15

Best Buy

-20

Linear (Best Buy)

-25

Industry

-30

Linear (Industry)

-35
-40
2013

2014

Year

2015

It's clear from the company with high operating leverage

ratios can essentially make more money from incremental revenues
than others, because they don't have to increase costs
proportionately to make those sales. Accordingly, companies with
high operating leverage ratios are poised to reap more benefits from
good marketing, economic pickups, or other conditions that tend to
boost sales. As the data provided above Best Buy used to be better
leveraged than the industry average in 2013 and 2014, but it is
becoming less leveraged in 2015. It is because sales was less than
last year in 2015, and EBIT was greater than 2014. As the data shows,
therefore, DOL of 2015 is negative.
2. Degree of financial leverage
Best Buy
EBIT-Interest

EBIT

Industry
EBIT-Interest

EBIT
Best Buy

1/31/2015
$40,339,00
0

2/1/2014
$40,611,00
0

3/3/2012
$45,457,00
0

2/27/2010
$49,243,00
0

$1,477,000

$1,183,000

$2,277,000

$2,421,000

2015

2014

2013

2012

$1,586,670

$1,652,962

$1,754,258

$1,781,010

$234,950

$240,456

$259,453

$251,363

2015

2014

2012

DFL

1.064888248

1.092336103

1.051246537

Industry
DFL

2015
1.105251769

2014
1.10849061

2013
1.120815082

Best Buy
Linear (Best Buy)
Industry
Linear (Industry)

2013

2014

2015

Year
When a company has a high degree of financial leverage, the
volatility of its stock price will likely increase reflect the volatility of its
earnings. When a company has a high level of stock price volatility, it
must record a higher expense associated with any stock options it has
granted. This constitutes an additional cost of taking on more debt. As
the data shows, it can be said that EBIT - Interest is less sensitive to
the fluctuation to its EBIT than that of industry average.
3. Degree of combined leverage
Best Buy
2015
2014
2012
DOL

-37.11

4.51

0.77

DFL

1.064888248

1.092336103

1.051246537

Industry
DOL
DFL

2015
0.57
1.105251769

2014
1.27
1.10849061

2013
-2.14
1.120815082

2015

2014

2012

DCL

-39.51800288

4.926435825

0.809459833

Industry
DCL

2015
0.629993508

2014
1.407783074

2013
-2.398544275

Best Buy

10
0
-10

DCL

-20

Best Buy
Linear (Best Buy)

-30

Industry
Linear (Industry)

-40
-50
2013

2014

2015

Year
Together when combined, both the financial leverage ratio
and the operating leverage ratio can provide you with an idea of how
much risk per share are involved. It is up to the company to maintain
the degree of combined leverage so as to minimize the risks involved
in the business. As the data shows, the combined leverage of Best
Buy is lower than the industry average. This suggests that it is less
risky to invest on Best Buy than any of the average company in the
industry next year.
EPS
Fiscal Quarter
April
Revenue
EPS
Dividends

July
Revenue
EPS
Dividends

October
Revenue

2016

2015

2014

$8,558(m)
0.36 (5/2/2015)
0.23

$8,639(m)
1.31 (5/3/2014)
0.17

$9,347(m)
-0.24 (5/4/2013)
0.17

$8,528(m)
0.46 (8/1/2015)
0.23

$8,459(m)
0.42 (8/2/2014)
0.19

$9,266(m)
0.78 (8/3/2013)
0.17

$8,819(m)

$9,032(m)

$9,327(m)

EPS
Dividends

January
Revenue
EPS
Dividends

Totals
Revenue
EPS
Dividends

0.36
(10/31/2015)
0.23

0.29 (11/1/2014)
0.19

0.15 (11/2/2013)
0.17

$13,623(m)
1.38 (1/30/2016)
0.73

$14,209(m)
1.47 (1/31/2015)
0.74

$12,671(m)
0.84 (2/1/2014)
0.17

$39,528(m)
2.56
1.42

$40,339(m)
3.49
1.29

$40,611(m)
1.53
0.68

Valuation
Common stock valuation
-Dividend Discount Model (DDM)
Dividend Discount Model
(DDM)
2016
Divideds per share
0.568
Earnings per share
1.024

2015
0.516
1.396

2014
0.272
0.612

2015
1,935,000
-561,000
1.37m

2014
1,094,000
-547,000
673m

2,016
12.7
2.2
0.3
6.6

2015
13.5
3
0.3
8.9

2014
3.7
0.3
4.2

2016
19.07
0.73

2015
21.48
0.36

2014
0.18

-Discounted Cash Flow Model (DCF)

Discounted Cash Flow Model
(DCF)
2016
Operating Cash Flow
1,322,000
Capital Expenditures
-649,000
Free Cash Flow
547m
- Comparable Method
Price/Earnings
Price/Book
Price/Sales
Price/Cash Flow
Preferred stock valuation
The rate of return (average %)
Dividend next period

Formula

Preferred stock valuation (V) = 0.91

Conclusion
By looking at date, Best Buy and comparing with industry, it can be said that
Consumer Electronics and Appliances Rental Industry has better performance. Best Buy
is the biggest consumer electronics retile, but there are many competitors such as WalMart, Apple, and Amazon. Therefore, ratio analysis between Consumer Electronics and
Appliances Rental Industry and Best Buy shows that industry produced better
performance rate in categories. Also, the data and degree of leverages and
EPS of Best Buy and comparing those with the industry average, Best
Buy is having problem in leveraging operationally and financially.
Since combined leverage of Best Buy is still better that industry
average, it would be better if Best Buy could manage to reduce its
fixed costs to be more highly leveraged operationally. Furthermore,
the justification for using dividends to value a company is that
dividends represent the actual cash flows going to the shareholder,
thus valuing the present value of these cash flows should give you a
value for how much the shares should be worth. Based on the
valuation, Best Buy is really high value. Although the preferred shares
give a dividend, which is usually guaranteed, the payment can be cut
if there are not enough earnings to accommodate a distribution. This
risk of a cut payment needs to be accounted for. This risk increases as
the payout ratio (dividend payment compared to earnings) gets
higher. Also, the dividend has growing, so the value of the shares will
be higher than the result of the constant dividend.

References
Best Buy Homepage:
http://www.bestbuy.com

Best Buy Balance Sheet:

https://finance.yahoo.com/q/bs?s=BBY+Balance+Sheet&annual
Best Buy Income Statement:
https://finance.yahoo.com/q/is?s=BBY+Income+Statement&annual
Best Buy Cash Flow:
https://finance.yahoo.com/q/cf?s=BBY+Cash+Flow&annual
Bizminer (Industry date):
http://www.bizminer.com/reports/if_report.php?id=1365952&format=html
Best Buy Financial Report:
http://www.nasdaq.com/symbol/bby/financials?query=incomestatement
Consumer Electronics and Appliances Rental Industry Average:
http://www.bizminer.com/reports/if_report.php?
id=1365952&format=html