To: James Harding
Subject: Analysis of Best Buy’s financial statements of year ending February 2014
This memorandum is a clear and detailed analysis of Best Buy’s financial statements of year ending February 2014. I have analyzed the statements in the following perspectives: revenues and expenses, assets and liabilities, financial flexibilities, ownership structure, estimations and faithful representations. Considering overall conditions I have analyzed, I recommend to buy the stock of Best Buy for a long time and buy a 10 year long bonds.
Revenues and Expenses Analysis
Best Buy Co., Inc., as a worldwide retailer ...view middle of the document...
As a retailer, Best Buy’s major cost is from the price of merchandise from their original supplier. These costs are accounted as cost of goods sold, which is listed in the income statement, right below the Revenue account. According to the Consolidated Statement of Earnings (57), the cost of good sold, which is $32.72 billion, cuts off about 75% of Best Buy’s Revenue. And this percentage is relatively stable over the last three fiscal years form the Income Statement table. Besides, the selling, general and administrative expenses (SG&A) is also an important portion of Best Buy’s costs, as the SG&A account is responsible for $8.391 billion cost, about 1/5 of Revenue.
Assets and Liability Analysis
The total assets of fiscal year ending 2014 are worth $14.013 billions. Compared to the total assets of two previous years, $14 billions demonstrates a 13% decrease. The assets that the company used to generate revenues are merchandise inventories, derivative instruments and property, plant and equipment (PP&E). These accounts are all included in the balance sheet.
Merchandise inventory, $ 5.376 billion, is the largest portion of current assets in the balance sheet. It is evaluated with the lower of cost or market method and is adjusted with the consideration of losses and markdowns. Therefore, the inventory account is relatively reliable and conservative and there would not be manipulative fluctuations. The PP&E account, listed as a long-lived asset, shows the physical long-lived assets that the company uses to generate revenues.
The debt structure of Best Buy is composed short-term debt and long-term debt. Both of them are listed on the Balance Sheet. For the fiscal year ending February 2014, the total debt is $1.657 billion. The short-term part is 0, meaning that the company had paid off the short-term debt that was due 2014. The current portion of long-term debt is only $45 million, which can be easily paid off by the $ 2,678 million current asset account, cash and cash equivalents. As for the long-term debts, there are several long-term notes payable, financial and capital lease contractual obligations due within 20 years. The debt to earnings ratio of this year is 2.4, exhibiting a huge improvement from last year’s ratio, which was (6.3), and a strong capability of paying debt with earnings (Other Financial Measures, 46).
Financial flexibility is usually used to examine companies’ ability to deal with costs and debts with their assets. There are two indications of the flexibility: liquidity and solvency. These indications express the capability to pay short-term liabilities and to handle long-term debts, respectively.
First, the liquidity can be expressed by current ratio, the ratio of total current assets to total current liabilities. It is 1.4 for the fiscal year ending February 2014, showing that Best Buy has moderate ability to pay for short-term...