MBA FPX 5014 Assessment 1 Financial Condition Analysis: Costco

Student Name

Capella University

MBA-FPX5014 Applied Managerial Finance

Prof. Name:

Date

Executive Summary

This report analyzes the financial health of Best Buy, which is being considered as a potential merger partner for PacificCoast Technology. The analysis is based on Best Buy’s financial statements from 2016 to 2018 to assess its financial status and evaluate the feasibility of a merger with PacificCoast Technology. By examining these financial statements, various financial ratios and relevant financial information are identified to determine whether the merger would be a prudent decision for PacificCoast Technology. The financial statements indicate that Best Buy’s assets are strong, and the company has the capability to liquidate assets to pay off its debts easily. However, as a retail chain, Best Buy is highly dependent on its inventory, which constitutes a significant part of its total assets.

It is recommended that PacificCoast Technology consider the liabilities associated with Best Buy. Nevertheless, Best Buy presents a strategic opportunity for PacificCoast Technology to elevate its market presence.

Company Background

Best Buy Co., Inc. is a well-known retail chain specializing in electronics and home appliances in the United States. Established in 1966, Best Buy is a major player in the technology retail market, operating over a thousand stores across the US, Canada, and Mexico. As a publicly traded company, Best Buy has managed to sustain its market position despite technological advancements and competition from companies like Amazon. Revenue figures have often exceeded Wall Street expectations, with Best Buy’s stock price rising by more than 50 percent in 2017 alone (Roose, 2017).

Company Financial Analysis

To assess the financial health of Best Buy Co., Inc., the fiscal financial statements for 2018 are analyzed to derive ratios that reflect the company’s financial position and its potential to support PacificCoast Technology’s future plans.

Ratio Analysis

Assets/Liabilities Ratio: $9,829 / $7,817 = 1.257
Quick Ratio: (Inventory/Current liabilities) = ($9,829 – $5,209) / $7,817 = 0.522
Debt to Equity Ratio: Total Debt / Total Equity = $9,437 / $3,612 = 2.61

Best Buy’s assets exceed its liabilities, with $1.26 in assets for every $1.00 in liabilities, suggesting that the company can liquidate assets to meet its debt obligations. The quick ratio indicates heavy reliance on inventory to cover short-term liabilities (Best Buy Fiscal 2018 Annual Report).

Best Buy’s CEO, Corie Barry, mentioned a 1.6% growth in the second quarter, adding to the 6.2% growth from the previous year. Improved profitability driven by gross profit rate expansion and disciplined expense management demonstrates Best Buy’s ability to maintain financial health (investors.bestbuy.com, 2018). Best Buy’s future financial health will depend on refining processes and addressing non-GAAP adjustments that can impact financial outcomes.

Financial Ratios for 2016-2018

2016:

Current Ratio: 13,519 / 6,925 = 1.95
Quick Ratio: (13,519 – 5,051) / 6,925 = 1.22
Debt to Equity Ratio: 8,264 / 4,378 = 1.89

2017:

Current Ratio: 13,856 / 7,122 = 1.95
Quick Ratio: (13,856 – 4,864) / 7,122 = 1.26
Debt to Equity Ratio: 8,443 / 4,709 = 1.79

2018:

Current Ratio: 1.257
Quick Ratio: 0.522
Debt to Equity Ratio: 2.61

The ratios indicate a slight decline in Best Buy’s ability to cover its debts with assets over the three-year period, although the current ratio remains above 1.0, maintaining the company’s liquidity. Best Buy’s ability to convert inventory into cash depends on effectively attracting customers and managing sales. Selling inventory on credit further delays the conversion of inventory into cash (Merritt, 2019).

Conclusions and Recommendations

Compared to the industry, Best Buy’s financial strength is robust, with the industry’s quick ratio at 0.3 and an average debt-to-equity ratio of 0.06. Best Buy could improve its financial ratios by enhancing accounts receivable processes, reducing debt faster, and minimizing overhead expenses.

PacificCoast Technology should consider Best Buy as a merger candidate due to its sustained market presence and strong financial health over recent years. Merging with Best Buy would provide PacificCoast Technology an opportunity to gain a strong foothold in the retail electronics and appliances market.

References

Merritt, C. (2017, November 21). What Has More Liquidity—Merchandise Inventory or Accounts Receivable? Retrieved from https://smallbusiness.chron.com/liquidity-merchandise-inventory-accounts-receivable-59810.html

Roose, K. (2017, September 18). Best Buy’s Secrets for Thriving in the Amazon Age. Retrieved from https://www.nytimes.com/2017/09/18/business/best-buy-amazon.html

Best Buy Financial Ratios for Analysis 2005-2019: BBY. Retrieved from https://www.macrotrends.net/stocks/charts/BBY/best-buy/financial-ratios