Financial Ratio Analysis

CLC-Financial Ratio Analysis and Internal Factor Evaluation (IFE) Matrix

Fabienne Schmidt, Matthew Orr, Michael Lucarelli, Rimbu Titus, Sunya Rogers

Colangelo College of Business, Grand Canyon University

MGT-660: Strategic Management

Dr. McDonald

June 15, 2022

Historical Ratios Table

Ratios are important for a company to make informed decisions about investments as well as to have a look at how the company is doing. Below are the two tables describing Dick’s Sporting Goods financial ratios. The first one presents the financial ratios for 2021 and 2022 and the second one compares Dick’s 2021 financial ratios to the industry average.

Historical Ratios

01/2021

04/2022

Current Ratio

1.47

1.88

Quick Ratio

0.71

0.87

Total Debt-to-Total-Assets Ratio

0.45

0.45

Total Debt-to-Equity Ratio

0.18

1.08

Times-Interest-Earned Ratio

15

14

Inventory Turnover

3.09

3.09

Fixed Assets Turnover

0.24

0.30

Total Assets Turnover

1.33

1.40

Accounts Receivable Turnover

175

168

Average Collection Period

2.60

2.60

Gross Profit Margin %

38%

32%

Operating Profit Margin %

17%

9%

ROA %

18.16%

16.41%

ROE %

53%

59%

Historical Ratios

Dick’s 4/2022

Industry Ave

Current Ratio

1.88

1.42

Quick Ratio

0.87

0.71

Total Debt-to-Total-Assets Ratio

0.45

0.33

Total Debt-to-Equity Ratio

1.08

3.20

Times-Interest-Earned Ratio

14

22

Inventory Turnover

3.09

5.44

Fixed Assets Turnover

0.30

0.70

Total Assets Turnover

1.40

1.85

Accounts Receivable Turnover

168

67

Average Collection Period

2.60

3.10

Gross Profit Margin %

32%

34%

Operating Profit Margin %

9%

11%

ROA %

16.41%

0.30%

ROE %

59%

-21%

Analysis of the Research

The financial ratio analysis is used in the financial analysis by taking information readily available from financial statements and presenting it as a set of individual numbers that are easily comprehended. Ratio analysis also facilitates comparisons among companies of different sizes, or in making comparisons of one company’s position over time. When analyzing Dick’s Sporting Goods, we will compare many of the ratios with the industry average which will let us see how Dick’s compares to their competitors and this will allow us to evaluate if Dick’s is performing better than average in their industry.

Dick’s Sporting Goods’ financial ratios show that in most cases Dick’s is performing very well. Their current ratio of 1.88 is better than the industry average of 1.42 and has increased from 1.47 year over a year. This shows that Dick’s Sporting Goods is in a better position to meet its short-term debt payments than its competitors and is also in a better position than a year ago. Likewise, the quick ratio of 0.81 is also better than the industry average of 0.71 and an increase year over year. Over the last few years, Dick’s current and quick ratios have improved showing it is in a better financial position when it comes to short-term debt. The current ratio and quick ratio are measures of Dick’s liquidity. Good liquidity ratios mean Dick’s can cover its short-term debt payments better than its competition.

One area that Dick’s Sporting Goods needs to address is its debt financing. Their solvency ratios show that the total debt to equity ratio is almost three times higher than the industry average at 3.20 compared to 1.08 for the industry. This means creditors are providing three times the amount of funds compared to the ownership. That being said their total assets to debt ratio is 0.45 showing that only 45% of the value of their assets is debt. A high debt-to-equity ratio is not necessarily a negative indicator for companies that are growing. Dick’s debt-to-equity ratio has increased year over year showing they are more dependent on debt to finance their operations than in the prior year.

On the positive side, Dick’s times-interest-earned-ratio of 14 shows that Dick’s overall interest expense is small compared to its earnings. It has 14 times more earnings than interest payments each year. An inventory turnover ratio of 3.09 means Dick’s on average will sell all its inventory and replace it about 3 times a year. For the industry to have a 2 to 4 inventory turnover ratio is good. Dick’s is turning their inventory over at a good rate meaning they are not holding a lot of obsolete inventory.

Dick’s profitability ratios also show that the company is doing well. Profitability ratios quantify a company’s ability to generate income and cash flow. Dick’s fixed turnover ratio of 0.30 is right in the average for retail stores and their Asset turnover ratio of 1.4 shows they are generating a reasonable amount of sales for the assets used to create the sales revenue. Dick’s profit margins of 32% are right in line with the industry average. Their ROA% of 18.1% is well above the industry average of 0.3% and their ROE% is also well above the industry average of -20.9%. Overall Dick’s is in a good position to continue to dominate its industry.

One suggestion would be to address the higher-than-average total-debt-to-equity ratio for Dick’s to buy back some of the stock in the company. According to Yahoo Finance (n.d.) the company’s stock is undervalued and since its debt-to-equity ratio is a bit higher than average it could benefit the company to reinvest in itself. Protecting it from pressures from outside debt holders and decreasing the outstanding shares in the market in turn could raise the value of the stock price increasing the company’s value.

Internal Factor Evaluation

Below is the detailed Internal Factor Evaluations (IFE) matrix of Dick’s Sporting Goods. It lists the company’s ten greatest strengths followed by its ten greatest weaknesses.

 

 

Explanation of Findings

The internal factor evaluation matrix is a tool used to indicate the internal health status of a company. An effectively formulated matrix should expose the factors contributing to the weakness and portray the influential power of the company’s strength. Companies must utilize this tool as it is crucial in identifying potentially what needs addressing and improving on the company’s strengths. In the competitive market, in which Dick’s Sporting Goods operates, it is critical to the continued success of the company that Dick’s sports address its shortcomings and expands on its strengths. The consequence of not addressing the issues exposed in this matrix is a steady decline in market value.

However, each critical success factor is designed to highlight the key indicators influencing productivity following its importance. On the matrix, it’s clear Dick’s Sporting Goods is an established company in this market space. They are a recognizable retailer of authentic sporting equipment. Also, they are experiencing positive market growth. Furthermore, they have a capable distribution strategy to support their improving online retail services. In addition, the ratings stated in this matrix are an indicator that Dick’s Sporting Goods is maximizing its strengths and needs improvement to its weaknesses. Several strengths factors are rated well in contrast to its poorly rated weaknesses.

However, the results from the score column on the matrix table are calculated by multiplying the weight score and ratings. This is designed to expose how effectively the company is operating overall. The scoring system consists of a 1 to 4 scale, making 2.5 the average optimal score. Dick’s Sporting Goods has an average internal factor evaluation matrix, scoring a 2.48. In this highly competitive market, Dick’s Sporting Goods should focus on improving these numbers. Significant attention needs to be placed on its weaknesses and continuous improvements need to be maintained to maximize its strengths.

Explanation of Strategies

For every firm to achieve its set goals and objectives, there should be ways that help maximize its strength and minimize its weaknesses. The SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis can be used to ensure a company’s maximum production (Mikalef et al., 2020). Apart from strengths and weaknesses, assessing these strategies helps in the exploitation of available opportunities and defense against existing threats. The following strategies will help Dick’s sporting goods firm minimize its weaknesses. Dick’s firm seeks guidance from firms that are doing well around and borrows a leaf from them. The employees at Dick’s identify their weaknesses and own them, you can only change your weaknesses to strengths only after accepting them. Dick’s should also strive to hire the best employees in town, people with skills and experience to help run the firm effectively.

Lastly, the firm should always be prepared for any opportunities and threats that may come along. On another hand, the strengths of Dick’s Sporting Goods firm can be maximized in the following ways; As a manager, concentrate on the employees’ strengths and not their weaknesses. Employees who feel positive about themselves produce good results. Develop a reinforcement strategy for every work well done. Provide opportunities for every employee to discover their strengths, and allow different ideas and innovations from them. Create internal workshops to learn from one another (Xie et al., 2019).

The firm should be ready to adapt to the environment where sales take place. For effective growth, the company should embrace the culture it’s surrounded with. It should also create a strong customer service base to allow the free flow of feedback. Through feedback from customers, whether negative or positive, a company can improve on areas that require change for its development.

References

About us. (n.d). DICK’S Sporting Goods – https://investors.dicks.com/about-us/default.aspx

Annual report (2021). DICK’S Sporting Goods. https://investors.dicks.com/financials/annual-reports/default.aspx

David, F. R., David, F. R., & David, M. E. (2020). Strategic management concepts and cases: A competitive advantage approach (17th ed.). Cengage Learning.

Dick’s Sporting Goods Inc. (n.d.). Gurufocus. https://www.gurufocus.com/stock/DKS/summary#back-to-top

Dick’s Sporting Goods Inc. (DKS). (n.d.). Investing.com. https://www.investing.com/equities/dicks-sporting-goods-inc-ratios

DICK’S Sporting Goods, Inc. (DKS). (n.d.). Yahoo Finance. https://finance.yahoo.com/quote/DKS?p=DKS&.tsrc=fin-srch

Macrotrends-The premier research platform for long-term investors. (n.d.). Macrotrends. https://www.macrotrends.net/

Expert industry research you can trust. (n.d.). IBISWorld. https://www-ibisworld-com.lopes.idm.oclc.org/

Hulland, J. S., & Kleinmuntz, D. N. (1994). Factors influencing the use of internal summary evaluations versus external information in choice. Journal of Behavioral Decision Making, 7(2), 79–102. https://doi.org/10.1002/bdm.3960070202

Mikalef, P., Krogstie, J., Pappas, I. O., & Pavlou, P. (2020). Exploring the relationship between big data analytics capability and competitive performance: The mediating roles of dynamic and operational capabilities. Information & Management, 57(2), 103169. https://doi.org/10.1016/j.im.2019.05.004

Xie, J., Nozawa, W., Yagi, M., Fujii, H., & Managi, S. (2019). Do environmental, social, and governance activities improve corporate financial performance? Business Strategy and the Environment, 28(2), 286-300. https://doiorg.lopes.idm.oclc.org/10.1002/bse.2224

2020 Purpose playbook. (n.d.). DICK’S Sporting Goods. https://s27.q4cdn.com/812551136/files/doc_downloads/2020PurposePlaybook.pdf