Financial analysis

of
Toys “R” Us, Inc.
Introduction

 Toys "R" Us, Inc. is an American toy retailer since1948.

 They retailed product based on baby & juvenile. (baby cloth, toys and
baby furniture)
 An international company has 1,600 stores within the U.S.A and
abroad.
 Year of Incorporation 1966.
 Headquarters is at Wayne, New Jersey, United States.
 Working around 64,000 employees.

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 Products of the Organization

 Power wheels & powered ride-

 Cloths for baby and kids.
ones.
 toys for juvenile (including
 preschool learning toys.
baby).
 Bicycles.
 learning toys.
 Baby toys.
 entertainment type toys.
 Board games.
 Seasonal toys.
 Play kitchens & housekeeping.
 Baby furniture, Lego.

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Company’s plans for future

 Product differentiation.
 Refining Store Format.
 Redeployment of inventory investment.
 Redeployment of Expense dollars.
 Unlocking the Value of their asset.

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Company’s accounting policy

 Principles of consolidation.
 Cash and cash equivalents.
 Merchandise inventories.
 Property and Equipment.
 Financial Instruments.
 Forward foreign exchange contracts.
 Use of estimates.

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Objectives of the analysis
Broad Objectives
 The main objective of this report is to show how we can get the real view of a
company’s financial condition from their annual report.

Specific Objectives
 To understand how to read a company’s annual report.
 To evaluate the given data of a company’s report.
 To know how to get the realistic financial condition of the company from their
report.
 To know the elements that has an indirect relation with stockholder’s
profitability.
 To assess the company's future potentiality.
 To judge the effectiveness of their business’s future Strategy.
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Financial performance of the organization

7
 Net sales
Year 2000 1999 1998
Net sales $11,862 $11,170 $11,038

Net sales Interpretation: net sales increase

$12,000 by 6.19% than 1999.
$ 11,862

$11,500 $ 11,038
Analysis:
Net sales • Slowly but surely company is doing
$11,000 $ 11,170
good in its sales.
$10,500 • as volume of sales is increasing
1998 1999 2000
along with this possibility of
profiting also increasing.

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 Net earnings/(Loss)
Years 2000 1999 1998

Net earnings/(Loss) $279 $(132) $490

(in million)

Interpretation: in 2000, company is

succeed to came out from the negative
Net earnings/(Loss)
net earnings.
$600 $ 490
$500 Analysis:
$400 • In 1999, there is a negative value
$ 279
$300 only for company charges
Net
$200 restructuring charges.
earnings/(Loss)
$100 • comparatively high cost of sales
$(132)
$0 against sales.
($100) 1998 1999 2000 • high financial cost & lower
($200) interest earnings.

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 Working capital
Year 2000 1999 1998 Interpretation: in 2000, working
Working $ 35 $ 106 $ 579 capital is decreasing by 67% than
capital 1999 & it is a gradual decreasing from
prior years.
Working capital
$800 Analysis:
$ 579 • Two third decreasing is vulnerable
$600 for the company.
$400 • stores are increasing so a sufficient
Working capital amount of working capital is needed
$200 to run their outlets.
$ 106 $ 35
• To subsidize this shortage may force
$0
the company to take short-term debt.
1998 1999 2000
• whereas their total liability already
has increase by 9.30% than 1999.

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Financial statements:
Income Statement

11
Analysis (Income Statement)

 Increased in sales by 6.19% in this year is a good sign but not good compared to
1998.

 Increasing selling & administrative expenses is comparatively high.

 Keeping the COGS & interest expense lower, increasing in interest income gives
company opportunity to earn a positive net income.

 Having a loss in 1999 & they are taking new initiative so it’s better to not
giving dividend to its shareholder’s in this year.

 Need to focus on boosting sales.

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Balance sheet

14
Analysis (Balance sheet)

 Current assets & current liability section of the balance sheet is giving an
important message of liquidity crisis in the coming year.

 since, their working capital is too lower than the last year, so to meet up this
crisis they may need to take additional loan.

 Thus their liabilities will increase.

 Current ratio is also at the very edge to the bankruptcy that is 1.01:1 in 2000.

 They must keep current ratio at least 1.5:1, if the limit is crossed than they
will have idle capital. (this benchmark varies industry to industry)

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Liquidity Ratios

Working capital

Interpretation: working capital is

decreasing by 67% than 1999.
Working capital How to improve:
120

100
$106 m • focus on cash sales.
80 • holding marketable securities & bond will
60
Working capital
increase current assets.
40 • try to keep lowering the current liabilities.
$35 m
20
(accrued expenses, short term debt etc.)
0
1999 2000

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Current Ratio

Interpretation: Current assets against

 Current Ratio (1999) = 1.04:1 each dollar of current liabilities is very least
in both years. Moreover it decreases 1.04 to
 Current Ratio (2000) = 1.01:1
1.01 in 2000.
current ratio
1.045 Analysis:
1.04
1.04
1.035
• for a low assets against liabilities will
1.03 create problem like liquidity crisis, shortage
1.025
1.02 of working capital.
1.015 current ratio
1.01
• for that they have to take additional debt
1.01
1.005
to meet another debt.
1
0.995 • chances of takeover or bankruptcy will
1999 2000

increase.

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 Average days’ sales uncollected
 Average days sales uncollected (1999) = 6.66 days

 Average days sales uncollected (2000) = 1.53 days

Interpretation: sales uncollected days decreased
Average days' sales uncollected indicates efficiency in handling credit sales in
7
6.66
2000.
6

5 Analysis:
4
•less time indicates to collect its Account
Average days' sales uncollected
receivables efficiently.
3
• less time is also make company safe from bad
2 debt.
1.53
1 • that increase a company's current asset &
liquidity as well.
0
1999 2000

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 Interpretation: inventory turnover increased
Inventory Turnover 3.75 to 4.23 in 2000.

Analysis:
•higher turnover indicates company’s efficiency in its
 Inventory Turnover (1999) = 3.75 times
production & sales.
 Inventory Turnover (2000) = 4.23 times
• high turnover makes inventory productive in terms
of making profit.
Inventory turnover • low turnover can add risk in company’s operation by
4.3
not using inventory properly.
4.2
4.23 • moreover the low turnover can increase stock &
4.1

4
maintenance cost of the company.

3.9
Inventory turnover
How to increase turnover: the much the
3.8 3.75
company can generates sales & production this
3.7
will also increase.
3.6

3.5
1999 2000 18
 Days' Inventory on Hand Ratio

 Days’ Inventory on hand (1999) = 97.33 days Interpretation : day’s inventory on

hand decrease 97.33 to 86.28 days than
 Days’ Inventory on hand (2000) = 86.28 days 1999. that indicates within this day
company successfully sold out its
Days' inventory on hand inventory.
100

98 Analysis:
96 97.33

94 • Lower days of inventory on hand

92 indicates pace of the sale
90
Days' inventory on hand
• has a cost benefit of not carrying
88
86.28
excessive inventory stock &
86 maintenance cost.
84

82

80
1999 2000

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 Profitability Ratios
Profit Margin Interpretation: Profit margin turn into positive
value than last year. It is 2.3% in 2000 & in 1999
it was (1%).

Analysis:
• In 2000 the profit margin is 2.3% is not
satisfying but better than negative value.
Profit margin
3% • Margins above 25% indicate financial efficiency
2.3%
2% for manufacturing company but as it is a retailer
2%
company then their profit margin may be less.
1%
• As they are retailer of different company's
1% Profit margin
product that’s may force them to fix a low profit
0%
1999 2000
-1%
margin.
(1%)
-1%

-2%
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 Assets Turnover Ratio

Interpretation: assets turnover ratio increase

1.41 to 1.46 in 2000.

Analysis:
• The ratio shows how efficiently the company
Assets Turnover Ratio uses its assets for generate sales.
1.47
• Higher ratios imply that the company is
1.46
1.46 generating more revenue per dollar of assets.
1.45

1.44 • in 2000, Toys “R” US was having $8,126

1.43
Assets Turnover Ratio
million assets using this assets they succeed to
1.42

1.41 1.41 generate sales of $11,862 million.

1.4

1.39

1.38
1999 2000 21
Return on Assets
Interpretation: Return on assets increase in
2000 from (1.6%) to 3.3%.

Analysis:
• ROA is an indicator of how profitable a company
Return on Assets is relative to its total assets.
4.00% • ROA gives indicates how efficiently management
3.3%
3.00% using its assets to generate earnings.

2.00% • In 2000 the company's ROA is good because the

Return on Assets company generate positive value.
1.00%

0.00% But in 1999, company had loss that indicates

1999 2000
-1.00%
inefficiency in handling assets.
(1.6%)
-2.00%
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Return on Equity Interpretation: in 2000, ROE risen 7.6% than
negative value in 1999.

Analysis:
• ROE shows that how many dollar a company
earned for each dollar of its stockholders’
investment.
• Because of loss in income the ROE calculation
in 1999 is not satisfactory.
• If shareholders' equity goes down, ROE goes
up. Thus, share buybacks can artificially boost
ROE.

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Long-Term Solvency Ratios:
Debt to equity ratio
Interpretation: D/E ratio increase 33.7% to
38.7% in 2000.
Analysis:
•If a lot of debt is used to finance increased
operations (high debt to equity), the
company could potentially generate more
earnings than it would have without this
Debt to equity ratio
outside financing.
34.80%
34.7%
34.60% •Effect: If this were to increase earnings by
34.40%
a greater amount than the debt cost
34.20%

34.00%
(interest), then the shareholders benefit as
Debt to equity ratio
33.80% more earnings are being spread among the
33.60% 33.7% same number of shareholders.
33.40%

33.20%
1999 2000 24
 Interest coverage ratio
Interpretation: in 2000, Toys “R” Us , inc.
gain their ability to pay its interest expense
with the ratio 5.7 times.

Analysis:

• this ratio denotes company's ability to meet

Interest coverage ratio up its interest expense with EBIT.
6
• the higher the rate that means company is
5.7
5 risk free from bankruptcy.
4 • moreover inability in paying interest expense
3 also increase expense & liabilities.
Interest coverage ratio
2
How to be able: keeping more EBIT &
1
0.127 lower interest expense
0
1999 2000
-1

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Cash flow Adequacy:
Cash flow to sales Interpretation: Cash flow to sales
ratio decrease 9% to 7% in 2000.
that indicates inefficiency to collect
cash in terms of sales.

Analysis:
• Here in 2000, Toys “R” Us, Inc.
Cash flow to sales fails to improve in converting sales
10% into cash, the ratio is lowering.
9% • For a low ratio company may not
8% 9% be able to grow because it has
7%
7% insufficient cash flow to invest in
6%
their Product & services.
5%
Cash flow to sales
4%

3%

2%

1%

0%
1999 2000
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Cash flow to asset ratio

Interpretation: the decrease in Cash

flow to assets indicates inefficiency in
using assets of the company to collect
cash from its sales. In 2000, ratio
decrease 12% to 10%.

Analysis:
• Investors also use the cash flows to
total asset ratio to measure the
efficiency of a company’s cash
collection using its assets.
• for the lower ratio company may find
difficulty to attract investors.

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Findings

 9.30% increasing of Total liability will be troublesome for the company in the
coming year.
 Disaster in working capital will also force company to collect short term debt
to meet up its operation need thus increasing rate in their debt will going on.
 In the coming year they need a handsome amount of working capital as their
number of stores are increasing in their different operational zone
 Company will find difficulties to get any financial help from any financial
institutions for their high debt to equity ratio.
 In 1999 they didn’t take the selling opportunity because of having low
investment in their top items, but in this year they must need to prioritize
these top items first.

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Recommendations

 Company needs to focus on cash sales rather than credit sales.

 Company should have control over its operating expenses as it has a number of
outlets.
 They need to focus on adult sports product like cricket; football & many others
as a part of their business by not restricts them within baby’s toys.
 They must need to limit their increasing liability; otherwise they will fell into
bankruptcy or equity crisis.
 They can prioritize more in top selling product, where they did a mistake in
1999 by not giving enough nourishment on those products.

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Conclusion

“Toys “R” Us” company is well known around the world as a retailer of toys, they
have their own identity as a giant retailer of toys in the world. Though the
company is doing badly in last few years but still they have the possibility to
comeback in the market and acquired their position strongly. If they are
success in product differentiation according to the need of each segment and
can control its short or long term debt then every ratio will turn into positive
result. Their good product & service concept can boost up their sales.

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