Assume you are doing a financial analysis for Kroger Inc. Here is one of the inc
ID: 2618477 • Letter: A
Question
Assume you are doing a financial analysis for Kroger Inc. Here is one of the income statements that you analyze (all figures in $ Millions):
498
Based on your analysis of the income statements. What can be said about the progress. Which areas are improving? Sales increased from 2004 to 2005 yet net profit decreased . Why do you think they decreased net income in 2005 with higher sales. sales? 2006 seems to be better. What did the fix?
year 2006 2005 2004 total sales 60,553 56,434 53,791 cost of goods sold 45,565 42,140 39,637 seeling, general &admin expenses 11,688 12,191 11,575 depreciation 1,265 1,256 1,209 operating income 2,035 847 1,370 other income 0 0 0 ebit 2,035 847 1,370 interest expense 510 557 604 earnings before tax 1,525 290 766 taxes (35%) 534 102 268 net income 991 189498
Explanation / Answer
While analyzing common size income statement we can observe that there is 1% increase in cost of good sold with respect to sales which reduces the operating income by 1% and similar trend observed in EBT that decrease the EBT to .5% of sales. Thats why new profit decreased in 2005 with respect to 2004.
Though cost of good sold is higher than 2005 and 2004 but there is huge reduction in SGA expenses with respect to sales by almost 2.3% from previous year which is further reflected into operating income and EBT. That's why there is huge increase in net income of company.
year 2006 2005 2004 2006 2005 2004 total sales 60,553 56,434 53,791 100.00% 100.00% 100.00% cost of goods sold 45,565 42,140 39,637 75.25% 74.67% 73.69% seeling, general &admin expenses 11,688 12,191 11,575 19.30% 21.60% 21.52% depreciation 1,265 1,256 1,209 2.09% 2.23% 2.25% operating income 2,035 847 1,370 3.36% 1.50% 2.55% other income 0 0 0 0.00% 0.00% 0.00% ebit 2,035 847 1,370 3.36% 1.50% 2.55% interest expense 510 557 604 0.84% 0.99% 1.12% earnings before tax 1,525 290 766 2.52% 0.51% 1.42% taxes (35%) 534 102 268 0.88% 0.18% 0.50% net income 991 189 498 1.64% 0.33% 0.93%