Financial Statement and Ratio Analysis

¶ … Borders Group

Day's Sales in Inventory

Inventory Turnover

Working Capital

Current Ratio

Cash Ratio

Sales/WC

OCF/current maturities

Borders Group

Debt Ratio

OCF/Total Debt

Borders Group

Net Margin

ROA

ROE

Gross Margin

ROA and ROE are n/a because there were no returns, as the company recorded a net loss for the year.

Borders Group

EPS

OCF/Cash Dividends

The results above illustrate that Borders has not had a good couple of years. The company is losing money, and this is reflected in the loss per share, and the lack of returns on assets and equity. The gross margin seems adequate to deliver profit, but it has decreased in the past year. The net margin, however, has been negative in both years, because the company has posted losses Borders has a lot of debt, with a high debt ratio, and low operating cash flow to debt ratio. While its immediately liquidity is not an issue in terms of its current ratio, a major point of concern for the company is how little cash it has. Borders has a low cash ratio, and a lot of inventory on the books. The inventory turnover is not particularly good for a company that may face a cash crunch at some point in the near future. So while Borders is not in immediate jeopardy, the company is not performing well and in terms of its liquidity does not appear to have much margin for error.

f. The company's income was reasonably steady for 2007 and 2008, but dropped in 2009. This is not surprising -- most companies saw revenue declines in 2009, as this was the depth of the recession. However, Borders was not in a great financial position in 2007, so the decline in revenue in 2009 has only put it more at risk.

g. Despite the revenue problems, Borders is generating more cash from operations over the past couple of years, in part because it has worked to lower its inventory levels, and lower its payables. The company has taken other steps to ensure its financial health -- lowering capital expenditures, selling off surplus assets and paying down its debts. All of these steps serve to improve the cash position of the company in the face of declining revenues.

h. The company has little margin for error despite its moves. The ROA is a deceptive measure and should not be used here -- it shows that the company is still losing money but the reality is that we are talking about cash. Operating cash flows are a better way to evaluate returns than net income when you are focused on cash flow, and net cash flow from continuing operations has improved in each of the past two years. Further, the operating cash flow to total debt has also improved. The debt ratio has increased, but that is mainly because of the net loss cutting down the company's retained earnings. Again, this isn't a reflection of cash flows -- the total debt is decreasing, just not as fast as the non-cash items cut down the retained earnings. On a cash flow basis, Borders has taken the appropriate measures to weather the recession.

Case 11-5.

a.

Borders Common Size

2008

2009

2010

Sales

91.20%

78.51%

Other Revenue

42.3

78.72%

77.54%

Total Revenue

91.05%

78.50%

COGS

93.12%

82.12%

Gross Margin

85.09%

68.09%

These figures shows that Borders continues to bleed revenue. The company has not been able to improve its margins in response to the revenue problem -- its COGS is not falling as fast as its revenue. This means that Borders continues to see a shrinking gross margin.

b.

2008

2009

2010

Sales

Other Revenue

42.3

1.19%

33.3

1.03%

32.8

1.18%

Total Revenue

COGS

75.06%

76.64%

78.51%

Gross Margin

26.13%

24.39%

22.66%

These figures confirm that the gross margin has been declining over the past three years for Borders. In particular, COGS has continued to grow as a percentage of sales. This is a discouraging trend for Borders.

c.

2010

2009

Cash Flow/Debt

0.04

0.2

ROA

n/a

n/a

Debt Ratio

0.89

0.84

These figures show that the financial situation for Borders worsened in 2010. The cash flow/debt has declined at this point, to a very low level. The company still does not record an accounting profit. The debt ratio continues to increase, as the retained earnings now have negative value. There is significant cause for concern at this point for Borders -- while other areas of the economy were emerging from recession in 2010, Borders saw a steep decline in revenues. While management has performed well in terms of contracting the company and seeking to deal with the problem, the reality is that Borders' financial condition has deteriorated over the past year.