Group project critical thinking examples

Staples Inc.

Staples Inc has become the world’s largest office products company. The company produces a wide range of products including office supplies, copy and print, technology, facilities and breakroom and furniture. According to the 2011 annual report, Staples recorded sales of twenty five billion dollars in the last financial year. In the financial circles, by revenue base, Staples ranks second in ecommerce worldwide. This company is among the top Fortune 500. The company operates on an international level having a total of eighty eight thousand associates all over the world. As at 2011, it had operation bases in twenty six countries scattered across North and South America, Europe, Asia and Australia.

In the financial markets, Staples continue to perform well. In addition to realising sales to the tune of twenty five billion, it generated a total free cash flow of one point two billion dollars. It paid a total of zero point nine billion dollars to shareholders in form of dividends and share repurchases and reinvested a total of slightly over four hundred million dollars.

Staples have become a leader in its domain. The market reception has been overwhelmingly positive. Today, each office or entity one walks into be it in Europe or America, or selected countries in Asia and Australia, one finds a product from Staples. It is the increased spread and market concentration that could be attributed to the success of Staples. The organization has succeeded in the development of an international brand. One feature typically common with Fortune 500 firms is the fact that they pass out as household names. Another salient feature is the product diversification approach. Staples Inc. does not confine itself to a given line of products. They have maintained a huge product range and invest in a portfolio of other products essentially spreading their risks in the market.

Ratio Analysis

Ratio analysis involves the computation of ratios and analysis for purposes of effective and informed decision making. The ratio analysis for Staples Inc would be in respect of 2011 Annual Report.

Liquidity ratios

Liquidity ratio = Current asset/ Current liability
= 6290820/4074278 = 1. 544
Quick acid test ratio = Current asset – Inventory / Current liability
= 6290820 – 2431835 / 4074278 = 0. 947
The liquidity ratios give the financial status of the firm. They show to what extent the firm is able to offset its current liabilities.

Profitability ratios

Sales turnover ratio = sales / average inventories
= 25022192/ 2431845 = 10. 289
Fixed asset utilization ratio = sales / fixed assets
= 25022192 / 2080361 = 12. 028
Profit margin = profit / sales
= 983833/ 25022192 = 0. 039
Interest ratio = interest / profit
= 173151/ 983833 = 0. 176

The profitability ratios show the firm’s progress in terms of profits made. The typical profitability ratio include the profit margin which shows the percentage of sales that translates into direct profits, the fixed asset utilization ratio which shows the extent to which the firm’s fixed assets are being utilized and the sales turnover which is an indication of the how many times the inventory can be sold over a specified duration usually the whole year. The sales turnover ratio of Staples as at 2011 was times 10. 289. This means that the inventory could be sold ten times within the year. The fixed asset utilization ratio stood at 12. 028. This could be read to mean the fixed asset was being utilized at 12. 028%. The profit margin standing at 3. 9% means that only 3. 9% of sales in Staples translated into profit.

Cost of capital

In a typical financial set up, capital would be constituted by debt and equity. Organizations need to strike the optimal capital structure. Payments for the use of debt capital are what are known as cost of debt capital. In Staples Inc debt capital is split into two groups, the short term debt and long term debt. The former refers to debt that matures within one year while the latter refers to debt that would mature in more than one year. The amount of short term debt as at 2011 was 439, 143 dollars while the long terms debts amounted to 1, 599, 037 dollars. The cost of debt as an expense in the income statement was represented with interest expense item. In 2011, interest expense run at 173, 751 dollars.

Equity capital is composed of common stock at 553 billion dollars, additional paid in capital of 4, 551, 299 dollars and retained earnings at 7, 199, 060 dollars.

Like other companies, Staples leverages on debt capital so as to earn high returns for minimum risks. This is because the cost of debt capital is relatively cheaper due to minimal risks inherent in debt as opposed to risks in equity capital holding. Cost of capital should be conceived as a broad aspect of decision making concerning optimal capital structure. Ordinarily, decision making on the optimal capital structure takes into consideration a number of factors. Two factors play out as the critical factors; cost of capital and the extent of business risk. Decision making is skewed towards minimising the cost of capital while still not exposing the company to high risk in terms of threats of bankruptcy. To strike a balance, the optimal capital structure has to be identified in which cost of capital is lowered while business risks remain lowest.

References

Banks, E. (2010). Finance: The Basics. New York: Taylor & Francis.

Daft, R. L. (2011). Management. New York: Cengage Learning.
Damodaran, A. (2010). Applied Corporate Finance. New York: John Wiley & Sons.
Groppelli, A. A., & Nikbakht, E. (2006). Finance. New York: Barron’s Educational Series.
Hansen, D. R., & Mowen, M. M. (2006). Managerial Accounting. New York: Cengage Learning.
Staples Inc. (2011). Staples Annual Financial Statement. Boston: Staples Inc. Retrieved from http://thomson. mobular. net/thomson/7/3218/4642/document_0/SPLS_2011AR. pdf