Select a pair of companies from the following list:
• Lowe’s (LOW) and Home Depot (HD)
• Dollar General (DG) and Dollar Tree (DLTR)
• UPS (UPS) and FedEx (FDX)
• McDonald’s (MCD) and Wendy’s (WEN)
• Southwest Airlines (LUV) and United Continental Holdings (UAL)
• Target (TGT) and Kohl’s (KSS)
• Agco (ACGO) and Deere (DE)
• Macy’s (M) and Dillard’s (DDS)
• Sherwin Williams (SHW) and PPG (PPG)
• General Electric (GE) and Honeywell International (HON)
• Coke (KO) and Pepsi (PEP)
If any of the companies is one that the class doing a project on, you must select another pair of companies.
Review the most recent annual reports for each of the two companies to gain an understanding of each company’s products and services, the markets they serve, and their financial performance.
Complete a financial analysis to determine which of the two companies is the better performing by looking at the most recent full-year financial reports, and comparing a number of financial
performance metrics of the two companies.
A good performing company is one whose returns are better than the industry average over a long period, and generally measured by ROIC (return on invested capital).
A company that achieves superior financial performance generally has consistent annual revenue and profit growth; high profit margins; high sales per employee; high sales per square foot of floor
space (retail or manufacturing); high inventory turns, and a strong balance sheet, when compared to other firms in their industry.
Superior financial performance is the result a good business strategy that is executed well and often includes investments in appropriate technology; visionary leadership; talented and dedicated
employees; a customer focus; having and maintaining a competitive advantage, and a strong operational focus on strategic goals.
Based on your analysis, explain which of the two companies has the better overall financial performance and why the better company achieves better performance than its competitor does. What does
the company do well to achieve the superior financial performance? What can they improve on to even do better?
EXAMPLE OF FINANCIAL ANALYSIS:
Financial Metric Company 1 Company 2
Profit Margin 4.39% 3.45%
Net Income to Sales 2.42% 2.55%
Return on Assets 8.57% 6.22%
Return on Equity 23.0% 36.6%
Debt to Equity 0.71 2.11
Return on Invested Capital 18.6% 21.7%
Earnings Growth (3yr. avg.) -1.7% +15.4%
Revenue Growth (3 yr. avg.) 4.2% 2.7%
Inventory Turns 8.3 15.0
Sales/Square Foot $437 161
Sales/Employee $218,400 $277,328
Net Income/Employee $6,876 $7,243
Free Cash Flow $7.4 bn $0.86 bn
Free Cash Flow $ per Revenue $ 5% 1%
Company 2 has overall better financial performance, as its Return on Invested Capital is 21.7% compared to 18.6% for Company 1.
If you were a shareholder, your return potential would be better with Company 2 (based on historical data). Company 2 also does a better job in managing its inventory, and has more productive
employees with higher sales and net income per employee.
Company 1 has better asset utilization with higher sales per square foot and higher return on assets.
Company 1 does better in profit margins, and generates more free cash flow both on an overall basis and on a per dollar of sales basis.
Company 2 is faster growing in earnings (15.4% per year), and does a much better job with inventory turns (15.0 vs. 8.3).
If Company 2 could lower their floor space or increase their sales with the same floor space, they would improve their sales per square foot and improve their profitability. This would also help
generate more free cash flow, as it would reduce the investment and costs required for facilities.
Each paper should have: an abstract, an introduction, an analysis section, conclusions based on the analysis, recommended actions, and a brief summary of the paper’s key points, and a reference