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Evaluation of corporate performance: Kroger Co.
The corporate finance essay seeks to assess the financial performance of Kroger Co. The essay follows APA formatting. It will assess financial statement reviews to assess the strengths and weaknesses of the company. It will also calculate ratios such as liquidity, financial leverage, and asset management to assess the financial performance of the company and its financial health. The insight gathered from the ratio analysis and financial statement assessment will help in making recommendations to stakeholders or investors on whether to invest in Kroger Co.βs stock or not.
* The sample essays are for browsing purposes only and are not to be submitted as original work to avoid issues with plagiarism.
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Evaluation of Corporate Performance: Kroger Co.
Student Name
Institution Affiliation
Course
Instructor Name
Date
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Evaluation of Corporate Performance: Kroger Co.
Introduction
Kroger Co. is the leading American wholesale enterprise founded in 1883. The company
is headquartered in Cincinnati, Ohio. It operates supermarkets, multi-department stores, and
e-commerce platforms under various banners (Kroger Co., 2024). Examples of its operations
include Kroger, Ralphs, Harris Teeter, and Fred Meyer. Being one of the leading retail
enterprises in the US, Kroger serves millions of customers daily (Yahoo Finance, 2024). Its key
competitors include companies like Walmart, Costco, and Amazon. The company focuses on
innovation, customer loyalty programs, and sustainability initiatives to maintain its competitive
edge. It has over 10,000 employees, making it a significant player in the consumer goods sector
(Yahoo Finance, 2024). Its operation has contributed to positive performance. The report will
assess key Kroger Co. financial metrics for 2023 to evaluate strength and general corporate
performance and give recommendations on stock investments in the company
Financial Statement Review
The balance sheet revealed that the company had a strong retail operation and financial
performance. In 2023, Kroger Co. had current and noncurrent assets worth 12,948 million and
37,557 million USD, respectively (Kroger Co., 2024). The total assets for the year ending 2023
were $50,505 million.
Kroger's total assets improved from 49,623 million in 2022 to 50,505 million in 2023
(Kroger Co., 2024). This indicated that the company maintains a significant investment in
property, plant, and equipment, reflecting its extensive retail operations. Its total liabilities were
$38,904 million, with can't liabilities at $16,968 million, while noncurrent liabilities were
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$21,936 million (Kroger Co., 2024). Noncurrent liabilities were slightly higher than the current
liabilities, indicating that the company financed most of its operations using long-term loans and
leases rather than short-term loans. The total equity was $11,601 (Kroger Co., 2024). This was
less than the total liabilities, indicating that the company used more loans and liabilities to
finance its operations.
The income statement also highlighted Kroger Co's financial position. According to
Kroger's financial statements, its total sales for 2023 reached $150,093 million, reflecting a
minor increase from the $148,258 million reported in 2022 (Kroger Co., 2024). This growth
indicates that the company managed to maintain and improve its market presence despite
economic challenges. The organization's operating expenses remained significant in 2023.
Operating expenses were $116,675 million in 2023. This was almost identical to the previous
year's $116,480 million (Kroger Co., 2024). The operating and general administrative expenses
increased from $23,848 million in 2022 to $26,252 million in 2023, indicating higher operational
costs. The rents and depreciation or amortization increased from $2,965 in 2022 to $3,125
million in 2023 (Kroger Co., 2024).
The operating profits declined from $4,126 in 2022 to $3,096 million in 2023 (Kroger
Co., 2024). This drop suggests challenges in maintaining profitability, possibly due to rising
operating costs. The net earnings attributable to Kroger Co. for 2023 amounted to $2,164
million, down from $2,244 million in 2022 (Kroger Co., 2024). This decline continues to
highlight the impact of increased costs on the bottom line. In general, Kroger Co. shows
resilience with steady revenue growth and strong market positions. However, its operating profits
and net earnings were declining, indicating that the company needs to focus on cost management
and operation efficiency to maintain its profitability.
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The net cash flow from operating activities for 2023 was $6,788 million. This significant
inflow of cash indicates that Kroger generated a healthy amount of cash from its core business
operations. The net cash flow from investing activities was -$3,750 million (Kroger Co., 2024).
This negative cash flow suggests that Kroger spent more on investments than it earned from its
investment activities. Key investing activities included capital expenditure line investing in new
stores, equipment, and maintenance. The net cash flow from financing activities was -$2,170
million. This negative cash flow implies that Kroger paid out more cash for financing activities
than it received.
Pro Forma Financial Statements
Suppose there was a 10% growth in both sales and COGS, the balance sheet and income
statement for the next fiscal year will significantly change. The projected income statement will
be as follows:
Statement for FY2024
Category
2023 (in Million
$)
2024 Projection (in Million
$)
Sales
$150,093
$165,102
COGS
$116,675
$128,343
Gross Profit
$33,418
$36,759
Operating Expenses
- Operating, General & Admin
$23,848
$26,233
- Depreciation & Amortization
$3,125
$3,438
- Rent
$891
$980
Total Operating Expenses
$27,864
$30,651
Operating Income
$5,554
$6,108
Other Gains (Losses)
$220
$242
Earnings Before Tax
$5,774
$6,350
Income Tax Expense
$1,733
$1,906
Net Earnings
$2,164
$2,380
Projected Balance Sheet for FY2024
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Category
2023 (in
Million $)
2024 Projection (in
Million $)
Assets
Cash & Temporary Cash
Investments
$1,015
$1,117
Store Deposits in-Transit
$1,074
$1,181
Receivables
$1,276
$1,404
Inventory (LIFO)
$24,196
$26,615
Prepaid & Other Current Assets
$1,160
$1,276
Total Current Assets
$31,213
$34,593
Property, Plant & Equipment (Net)
$21,276
$22,404
Operating Lease Assets
$6,996
$7,696
Intangibles (Net)
$2,690
$2,959
Goodwill
$8,690
$9,559
Other Assets
$758
$834
Total Assets
$49,623
$55,045
Liabilities
Current Portion of Long-Term Debt
$310
$341
Current Portion of Operating Lease
Liabilities
$1,146
$1,261
Accounts Payable
$10,148
$11,163
Accrued Salaries & Wages
$1,133
$1,246
Other Current Liabilities
$3,273
$3,600
Total Current Liabilities
$16,010
$17,611
Long-term Debt
$11,676
$12,844
Noncurrent Operating Lease
Liabilities
$6,679
$7,347
Deferred Income Taxes
$1,672
$1,839
Pension & Postretirement Benefit
Obligations
$1,472
$1,619
Other Long-term Liabilities
$1,500
$1,650
Total Liabilities
$39,009
$42,910
Shareowners' Equity
Common Shares
$1,918
$1,918
Additional Paid-In Capital
$2,941
$3,235
Accumulated Other Comprehensive
Loss
$(1,045)
$(1,150)
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Retained Earnings
$7,800
$8,580
Treasury Stock
$(1,918)
$(1,918)
Total Shareowners' Equity - The
Kroger Co.
$10,696
$11,665
Noncontrolling Interests
$(82)
$(90)
Total Equity
$10,614
$11,755
Total Liabilities and Equity
$49,623
$55,045
Ratio Analysis
βRatio analysis is a quantitative method used to analyze the financial performance,
profitability, operational efficiency, liquidity solvency, and organizations financial healthβ
(Bahodirovich, 2024). The report will use two ratios from the categories below to assess the
general organization's financial health and long-term sustainability. This will help stakeholders
make judgments on whether to invest in the organization's stock.
Liquidity
Current ratio
βCurrent ratio will measure the organization's ability to pay short-term obligationsβ
(Jihadi et al., 2021).
Current ratio
π‘ππ‘ππ ππ’πππππ‘ ππ π ππ‘π
, π‘ππ‘ππ ππ’πππππ‘ ππππππππ‘πππ
=
32,213
16,010
=1.95
A current of 1.95 indicates Kroger has nearly twice the current assets to cover its current
liabilities, showing strong liquidity.
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Quick ratio
Quick ratio =
πππ‘ππ πΆπ’πππππ‘ π΄π π ππ‘π βπΌππ£πππ‘πππ¦
πππ‘ππ πΆπ’πππππ‘ πΏπππππππ‘πππ
= (31,213 -26,688)/16,010
Quick ratio= 0.28
A quick ratio of 0.28 shows Kroger's depended on short-term loans or liabilities,
indicating lower liquidity.
Financial leverage
βFinancial leverage ratios will measure the extent to which the company relies on debt to
finance its key operationsβ (Bahodirovich, 2024). Two key ratios that will be used in this
category are the debt-to-equity ratio and the assets management ratio.
Debt to equity
The ratio measures the organization's financial leverage. Its formula is as follows;
debt to equity ratio =
π‘ππ‘ππ ππππππππ‘πππ
π‘ππ‘ππ πππ’ππ‘π¦
= = 3.68
39,009
10,614
A debt-to-equity ratio of 3.68 implies Kroger is highly leveraged, with significant debt
compared to equity. Therefore, the company financed most of its activities by suing debts rather
than the owners' equity.
Interest coverage ratio
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The ratio investigates the enterpriseβs potential to pay interest on its debts (Bustani et al.,
2021). The formula for this ratio is as follows;
Interest coverage ratio =
ππππππ‘πππ ππππππ‘π
πππ‘ππππ π‘ ππ₯ππππ ππ
=3096/441 = 7.02
With an interest coverage ratio of 7.02, Kroger can comfortably cover its interest
expenses, indicating strong financial health.
Asset management
Inventory turnover
The ratio measures how frequently an organization's investor is sold and replaced
Inventory turnover =
πΆππ π‘ ππ πΊππππ ππππ (πΆππΊπ)
ππ£πππππ πππ£πππ‘πππ¦
=142,073/9,756
= 14.56
An inventory turnover of 14.56 indicates effective inventory management, with frequent
restocking.
Receivable turnover
The ratio measures how efficiently and easily the company collected trade receivables.
The formula is as follows;
Receivable turnover= = 116
148,258
1,276
A receivables turnover of 116 shows Kroger efficiently collects its receivables quickly.
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Profitability
Operating profit margin
The ratio calculates the amount of profits generated from operating activities.
OPM = *100
ππππππ‘πππ ππππππ‘π
πππ‘ π ππππ
= (3,096/ 148,258)*100
=2.088%
An operating profit margin of 2.088% shows a small profit for the company before other
expenses and taxes are excluded. This means that the companyβs profitability will be minimal.
Net profit margin
The ratio calculates the amount of profits generated from the income after all expenses
are deducted (Bustani et al., 2021).
Net profit margin =
πππ‘ ππππππ
πππ‘ π ππππ *100
= (2,089/ 148,258)*100
= 1.41%
A net profit margin of 1.41% reflects thin profit margins for Kroger, suggesting room for
improvement in cost management. Cost management methods will help the company reduce its
costs, thus improving its profitability. This will help in attracting investors to purchase its stock.
Market value
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Market value will be calculated using the PE and P/B.
Price per earnings ratio (P/E)
P/E will compare the stock price to its incomes per share. This will provide insight as to
whether to invest in the company.
P/E=
ππππππ‘ πππππ πππ πβπππ
πΈπππππππ πππ πβπππ
According to Yahoo Finance, the PE ratio for Kroger Co is 15.49 (Yahoo Finance, 2024).
This indicates that investors would pay 15.49 per Kroger's Co shares.
Price to book ratio (P/B)
The P/B ratio has the following formula:
P/B= total shareholdersβ equity/number of shares
The insight on the number of shares was limited. However, Yahoo Finance provided
insight on P/B for Kroger CO, which is 12.34 (Yahoo Finance, 2024). This means that interested
persons will pay 12.34 for every 1 dollar of Kroger's book value per share.
Per-Share
Only one ratio, earnings per share, was used to calculate this metric. EPS uses the
following formula:
EPS=
πππ‘ πππππππ
ππ’ππππ ππ π βππππ
The data on net earnings were available in the financial statements. However, I could not
find the data on the number of shares. Therefore, the report used the EPS that had already been
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calculated by Yahoo Finance. According to Yahoo Finance, the EPS for Kroger Co is 3.78
(Yahoo Finance, 2024). This indicated that for every share, investors will earn 3.78.
Activity
Activity ratios will use the inventory turnover and asset turnover ratios to show the
performance of the organization's practices.
Inventory turnover
Inventory turnover =
πΆππ π‘ ππ πΊππππ ππππ (πΆππΊπ)
ππ£πππππ πππ£πππ‘πππ¦
=142,073/9,756
= 14.56
An Inventory Turnover Ratio of 14.56 indicates that Kroger Co. is efficiently managing
its inventory, selling and replacing it 14.56 times during the fiscal year. This reflects strong
demand for Kroger's products and effective inventory management practices.
Asset turnover ratios
Asset turnover ratio=
π ππππ πππ£πππ’π
π‘ππ‘ππ ππ π ππ‘π
=
150,039
49,623
Asset turnover ratio =3.023
This indicated that every 1 USD invested in Assets contributed to $3.023 in revenues in
2023.
Cash Flow
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Operating cash flow ratio
Operating cash flow ratio =
ππππππ‘πππ πππ βππππ€
17,238
=6,788/17238 = 0.39
An Operating Cash Flow Ratio of 0.39 indicates that Kroger Co. is generating only 0.39,
incorporating cash flow for every 1 of its short-term liabilities. This suggests potential liquidity
challenges and reliance on external financing to meet obligations.
Cash flow to net income ratio
Cash flow to net income ratio=
ππππππ‘πππ πππ β ππππ€
πππ‘ ππππππ
= 6,788/ 2,164 = 3.14
A ratio of 3.14 means that Kroger Co. is generating 3.14 in cash flow from operations for
every 1 dollar of net income. This indicates that Kroger's cash flow from operations is
significantly higher than its net income, which is a positive sign of strong cash
generation and high-quality earnings.
Return on Equity (ROE) Using the DuPont System
ROE= Net Profit Margin * Assets Turnover * Equity Multiplier
We calculated profit margin and asset turnover
Net profit margin = 1.41% or 0.0141
Asset turnover ratio =3.023
Equity Multiplier=Total Assets /Total Shareholdersβ Equity = 49,623/10,043
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Equity multiplier =4.94
Therefore, ROE= 0.0141*3.02*4.94 = 0.21
Economic Value Added (EVA)
EVA = Net Operating Profit After Taxes (NOPAT) β (cost of capital*invested capital)
Net Operating Profit after Taxes (NOPAT)
NOPAT=Operating Profit Γ (1βTax Rate)
From the 2023 data:
Operating Profit: $3,096 million
Tax Rate: Assuming a tax rate of approximately 24% (reflecting industry averages)
NOPAT=3,096Γ (1β0.24) = 3,096Γ0.76 =2,352.96 million
Capital - $28,717 million
Cost of capital
Assuming the weighted capital is 6%, then the cost of capital will be (28,717Γ0.06)
1,723.02 million.
Therefore, EVA = 2,352.96β1,723.02=629.94 million
Kroger Co.'s EVA of $629.94 million indicates that the company's management has
created substantial value beyond the required return on its capital.
Synopsis and Recommendation
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In 2023, Kroger Co. demonstrated resilient performance with a total revenue of $148.3
billion, a net income of $2.3 billion, and a strong operating cash flow of $6.8 billion (Kroger Co.,
2024). The company also showed robust liquidity with a current ratio of 1.95. However,
profitability measures, such as a net profit margin of 1.5%, indicate room for improvement.
Based on the analysis, I would recommend purchasing Kroger Co. stock. Despite some
profitability challenges, Krogerβs steady revenue growth, robust market, and efficient cash
management suggest a stable investment. Therefore, the company is likely to recover its
profitability in the long run after addressing its efficiency challenges and cost management.
Thus, investors should not be wary of short-term decline in profitability.
International Expansion Risks
If Kroger were to expand internationally, they would face currency exchange risks. This
could possibly lead to loss due to fluctuations in foreign exchange rates. The company is likely
to face compliance costs and legal challenges in different markets (Ding, 2024). The company is
also likely to face cultural risks. Different consumers in different countries have diverse
consumption behaviors. The company has to meet the demands of customers to increase their
satisfaction, which may be difficult. However, management of these risks is important since it
will help Kroger expand successfully internationally.
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References
Bahodirovich, K. B. (2024). FINANCIAL LEVERAGE RATIOS AND ANALYSIS. Ethiopian
International Journal of Multidisciplinary Research, 11(11), 418β426.
http://www.eijmr.org/index.php/eijmr/article/view/2164
Bustani, B., Kurniaty, K., & Widyanti, R. (2021). The Effect of Earning Per Share, Price to Book
Value, Dividend Payout Ratio, and Net Profit Margin on the Stock Price in the Indonesia
Stock Exchange. Jurnal Maksipreneur: Manajemen, Koperasi, Dan Entrepreneurship,
11(1), 1. https://doi.org/10.30588/jmp.v11i1.810
Ding, H. (2024). Retracted: International expansion and audit opinion shopping: A signaling
perspective. Journal of Corporate Accounting & Finance, 35(2).
https://doi.org/10.1002/jcaf.22700
Jihadi, M., Vilantika, E., Hashemi, S. M., Arifin, Z., Bachtiar, Y., & Sholichah, F. (2021). The
Effect of Liquidity, Leverage, and Profitability on Firm Value: Empirical Evidence from
Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), 423β431.
Kroger Co. (2024). Notice of 2024 Annual Meeting of Shareholders 2024 Proxy Statement and
2023 Annual Report on Form 10-K.
https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_KR_2023.pdf
Yahoo Finance. (2024). Kroger Company (The) (KR) Valuation Measures & Financial Statistics.
Finance.yahoo.com. https://finance.yahoo.com/quote/kr/key-statistics/
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* The sample essays are for browsing purposes only and are not to be submitted as original work to avoid issues with plagiarism.
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