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    Business Economic Factors of Toys “R” Us

    University: BPP University School of Business and Technology

    • Unit No: 5
    • Level: Undergraduate/College
    • Pages: 15 / Words 3869
    • Paper Type: Assignment
    • Course Code: ECO511
    • Downloads: 252
    Question :

    Task

     You have to make financial analyse to find out the financial solutions for the last three years from their balance sheet. Follow the attached structure.

    Title: An Analysis and evaluation of financial performance. Produce a report of 2500 words and provide the key accounting ratios to analyse the financial performance and position of TOYS R US. Also made comparative numerical ratios for each of the last three years and explain the trends with the help of these ratios.

    Evaluate and justify three key strategic decisions which you believe the organisation should take as a result of the financial analysis.

    Executive summary

    1. Introduction

    Demonstrate your organisation TOYS R US and what has happened to this company.

    2. Examine and analyse the impact of economy has on business organisation.

    Micro forces that contributes towards the business failure.

    2.1 Supply and Demands of goods

    1. Fundamental principles of supply and demand
    2. Elasticity of demand and elasticity of supply
    3. Use company of your choice- Use Statistical data if available.

    2.2 Evaluation of Micro Factors- Immigration lreduce wages and Takes Jobs (example)

          With no immigration, 300 locals work for  10 an hour.

           With immigration, the supply of labour increases, the wage rate falls to  8 an hour.

            The number of jobs increases to 325.

            Only 275 locals are willing to work for €8 an hour, so immigrants get the 25 new jobs and    take 25 jobs from locals.

     2.4 Macro forces that contributed towards the company failure.

    • Growth- data and statistics
    • Unemployment – data and statistics
    • Inflation- data and statistics
    • Balance of Trade deficits- data and statistics
    • Cyclical fluctuations- data and statistics

    The Unemployment rate

     The unemployment rate is the percentage of the workforce that is unemployed.

    The unemployment rate is (Number unemployed + workforce) *100

    In June 2016, the number employed was 31.8 million and the number unemployed was 1,6 million.

    The workforce was (31.8+1.6) million =33.4 million.

    So, the unemployment rate was (1.6+31.8) *100, or

    1.  Apply employment – Inflation-GDP and other economic data to how these have affected your company.

    Analyse Financial Information from a range of business organisation.

    3.1 Profitability Ratios

    Profitability ratios is a defined as financial metrics used by investors to analyse the ability of a company to gain income and profit earning capacity, balance sheet assets, operating costs, and shareholder's equity during a certain period of time. It highlights how well company utilizes its assets to provide profit and value to its shareholders.

    Gross Profit percentage = GP/Ne Sales*100

    Interpretation of information to develop decision making

    3.2 Liquidity Ratios

    Liquidity Ratios are used to measure the ability of an organisation to pay off its short term obligations. It is mainly used by creditors and lenders to decide whether to extend credit or debit respectively to companies.

    Current Ratios= Current assets/ Current liabilities

    3.3 Leverage Ratios

          Leverage ratios are used to identify the relative level of debt that a business has incurred.

    Debt Ratio= Total Liabilities /Total Assets

    3.3 Efficiency Ratios

     The total asset turnover ratios compare the sale of a company to its asset base.  It measures the ability of an organisation and analyse the operation of a business.

    Asset Turnover= Net Sales/ Average total assets

    4.0 Provide proper course of Action informed b Accounting tools and concepts

    Analyse the viability of a product using investment appraisal techniques. In a new strategy aiming to increase products range of Imad's luxury Ltd. Has been presented with 3 new produce opportunities. You have been asked to examine which company want to produce and sell.

    O investment

    80000

    1,50,000

    80000

    1 cash in Flow

    35000

    30000

    40000

    2 cash in flow

    35000

    45000

    40000

    3 cash in flow

    40000

    75000

    20000

    4 cash in flow

    50000

    75000

    25000

    Total

      1,60,000

      2,25,000

      1,25,000

    Answer :

    INTRODUCTION

    Economics is the study of business environment by using various quantitative method and other factors which influence the production, profitability and decisions making process (Acquisti, Taylor and Wagman, 2016). Basically business economics define the relationship of entity with capital, material or labour. For the better understanding of this concept Toys “R” Us is selected. Company founded by Charles Lazarus in 1948 and its headquarter is situated in Wayne, New Jersey, United States. In 2018, company announced to close their U.S & British stores because of macro or micro impacts. This assessment covers various topics such as factors which influence entire economy, evaluate financial information, investment appraisal techniques etc.

    MAIN BODY

    1. Identify factors which impact economy

    1.1 Supply & Demand of Goods

    Principle of Supply & Demand:

    Principle of Supply is the fundamental theory of economics which is used by the organizations in order to identify the supply of goods & services in comparison to price of products when other factors are constant and that is the reason for the upward slope of supply curve:

    • If price of products & services increases then supply of goods also increases.
    • If price of commodity reduces then supply of products & services also reduces.

    In this principle price & supply has positive relationship, in context of Toys “R” Us when price of toys increases then production automatically increases due to high demand in the market and vice versa.

    Principle of Demand is the another economic theory where price & demand of goods and services has inverse relationship (Camerer and et.al., 2016). It is also based on two principles such as:

    • If price of commodities increases then demanded quantity reduces.
    • On the other hand, if price of products & services decline then damned of goods increases.

    In the law of demand, quantity and price has negative relation that become the reason of downward slope of demand curve. In the Toys “R” Us company, demand can maximises if they reduce the price of toys in the market. 

    Elasticity of Demand & Supply:

    Elasticity of supply is define as the % change in the supplied quantity divided by % change in the price of goods & services. With the help of this formula, Toys “R” Us can evaluate elasticity of their supply which further help the management to make effective decisions to maximise their sales.

    Elasticity of demand also known as price elasticity which helps the business to know about flexibility of their goods. It is calculated by dividing change in the % of demanded quantity by % change in the price of commodity (Ciaian, Rajcaniova and Kancs, 2016). Toys “R” Us can use this method to evaluate the elasticity of their products which are demanded in the market.

    (Source: Demand & Supply Curve of Toys “R” Us, 2020)

    1.2 Analysis of micro factors

    There are various micro factors which affect the Toys “R” Us company which contributes towards the business failure and it is discussed below:

    Immigration Lowers Wages: Immigration will increase the supply of labours but reduces its wage rate. Such as for non immigrated staff, labour rate is £ 10 per hour and the another side for immigrated workers, wage rate is £ 8 per hour. It will affect the business operations because due to low wages people are not willing to work.

    Takes Jobs: Increase in the number of jobs attract people and because of the need of employment they work on lower wage as well (Gilman, 2018). But in this case, local people are willing to work on £ 8 per hour further it will increase the dissatisfaction or further affect the retention of employees.

    Above mention both factors contribute towards the failure of Toys “R” Us business because retention ratio decreases because of low wages and there are only local people who are willing to work on that wage.

    1.3 Macro factors which affect the business towards failure

    In the business economics environment, there are various external factors which affect the organizations and its operational activities or contribute towards business failure. There are some macro environment factors which affect the Toys “R” Us company which is discussed below:

    Growth: Toys “R” Us filed bankruptcy which has affected the overall sales or growth of the company which is clearly visible in the below mention graph. Where consumers shifted to its competitors such as WalMart or Amazon because they offer toys on low price in comparisons to Toys “R” Us.

    (Source: Growth in Toys companies, 2020.)

    Unemployment: It is one of the essential factor which impact the economic growth of every country. High rate of unemployment will negatively impact the business performance which reduces the income per capital (Rodrik, 2018). Unemployment rate reduces but still its affect the growth of Toys “R” Us which contributed towards business failure.

    2. Evaluate financial information of business organizations

    2.1 Profitability Ratios

    It is an financial metrics which required to calculate for the analysis of business ability to generate earnings in relation to its revenue, operational cost, shareholder's equity etc. It is the overview of business assets and how well company used to maximise their profit (Shiller, 2017). By using Toys “R” Us financial information calculating gross profit and its calculation mentioned below:

    Gross profit ratio: It is the profitability ratio which represent the relationship between net sales or gross profit (Annual report of Toys “R” Us Company, 2019). This ratio used to identify the operational performance of the company. Its formula or calculation mentioned below:

    Formula:

    Gross Profit Ratio = Gross Profit / Net Sales * 100

    Calculations:

    Items

    2015 ($)

    2016 ($)

    2017 ($)

    Gross Profit

    4,430

    4,226

    4,108

    Net Sales

    12,361

    11,802

    11,540

    Gross Profit Ratio

    35.83%

    35.80%

    35.59%

    Interpretation:

    With the help of above data it will be analysed that, there is not enough changes in the gross profit ration throughout the years but it decreases. In 2015, it was 35.83% and in 2017 it remain 35.59%. Toys “R” Us is stable or not getting growth during 2015 to 2017 but they need to take actions to improve it.

    2.2 Liquidity Ratios

    This ratio used to calculation the liquidity of company or their ability to pay their financial obligations (Alkaraan, 2017). It is very essential for the organization to maintain enough liquidity in order to run their business.

    Current Ratio: With the help of this ratio, firms able to identify their capability to meet their short term obligation which required to pay within one year. Calculation is based on Toys “R” Us company and formula mentioned below:

    Formula:

    Current Ratio = Current Assets / Current Liability

    Calculations:

    Items

    2015 ($)

    2016 ($)

    2017 ($)

    Current Assets

    3,154

    3,288

    3,389

    Current Liability

    2,799

    2,798

    2,738

    Current Ratio

    1.12

    1.17

    1.23

    Interpretation:

    In 2015, current ratio of Toys “R” Us is 1.12 and 2016 it was 1.17 or in the last 1.23 ratio in 2017 (Financial Information of Toys “R” Us, 2015). Idea ratio is 2:1 but not even single year can fulfil this requirement to manage liquidity in their business.

    2.3 Leverage Ratios

    It is used to measure debt in comparison to assets which helps in evaluating overall obligations which business has pay by using their assets (Crosby and Henneberry, 2016). Its formula or calculation based on the Toys “R” Us company by using financial information for the years.

    Debt ratio: It is the financial ratio which identify the total percentage of company's assets in comparison to debt. It helps in describing financial health of the company, so management will take further decisions accordingly.

    Formula:

    Debt Ratio = Total Liabilities / Total Assets

    Calculations:

    Items

    2015 ($)

    2016 ($)

    2015 ($)

    Total Liabilities

    7350

    7410

    7350

    Total Assets 

    7,115

    6,910

    7,115

    Debt Ratio

    1.033

    1.072

    1.033

    Interpretation: It has been interpreted that debt ratio achieve the idea range which is 1:1 where they need to manage their assets according to their liabilities. There is not enough difference through out the years. They need to perform well or management should use more effective strategies for growth.

    *Working Notes:

    Total Liabilities:

    2017 = 2799+ 4642 = 7441

    2016 = 2798 + 4612 = 7410

    2015 = 2738 + 4612 = 7350

    2.4 Efficiency Ratios

    It is used to calculate the ability of assets to generate revenue for the company or manage their liability as well (Higham, Fortune, and Boothman, 2016). By using assets turnover ratio, individuals evaluate the efficiency of Toys “R” Us company. It is calculated below:

    Formula:

    Assets Turnover Ratio = Net Sales / Average Total Assets

    Calculations:

    Items

    2015 ($)

    2016 ($)

    2017 ($)

    Net Sales

    12,361

    11,802

    11,540

    Average Total Assets

    7332

    7013

    6909

    Assets Turnover Ratio

    1.685

    1.682

    1.670

    Interpretation: With the help of above results this graph prepared which shows the trends of assets turnover ratio. From 2015 to 2017, ratios are 1.687, 1.682 or 1.670 respectively which reduces but all have minor changes. Management should work on it, to improve its results in order to achieve their desired goals & objectives.

    Working Notes:

    Average Total Assets = ( Beginning assets + Ending assets ) / 2

    2017 = ( 6910 + 6908 ) / 2 = 6909

    2016 = ( 7115 + 6910 ) / 2 = 7012.5 or 7013

    2015 = ( 7549 + 7115 ) / 2 = 7332

    3. Investment Appraisal Techniques

    3.1 Payback Period

    It refers to the time which is taken in order to recover the cost which has been incurred initially in investment (Kengatharan and Prashanth Diluxshan, 2017). It is a very useful technique of capital budgeting which is used to compare one project with the another to see which one of them would be useful as well as cost-efficient for company.

    3.2 Net Present Value

    It is the value of all positive and negative cash flows over the entire life of an investment. Analysis of NPV is important for an enterprise because it essentially determines how much value a project has in front of the organisation in comparison to other projects.

    3.3 Internal Rate of Return

    It is a guideline which is used to see whether the project would be profitable or not for the firm in future. The rule says that the IRR should be greater than the minimum required rate of return. However, if the IRR is lower than the cost of capital then the project must be foregone.

    3.4 Accounting Rate of Return

    It is the rate of return on a project or an investment compared to its initial cost which was incurred. It is mainly used to decide on investing and acquiring purposes. It is an important tool of Capital Budgeting (Milenković and et.al., 2016). It can be used for comparison of multiple projects to see which one of them is most profitable.

    Below mention calculation based on Toys “R” Us which wants to introduce new products. They have 3 new production opportunities and managers need to identify which one is better to launch in the market. With the help of investment appraisal technique, management need to evaluate which one is better and which product company should produce or sell.

    Payback Period:

    Year

    Product 1

    Cumulative cash inflow

    Product 2

    Cumulative cash inflow

    Product 3

    Cumulative cash inflow

    0

    95,000

    -

    134,000

    100,000

    -

    1

    25,000

    25000

    40,000

    40,000

    20,000

    20,000

    2

    34,000

    59000

    45,000

    85,000

    38,000

    58,000

    3

    40,000

    99000

    49,000

    134,000

    48,000

    106,000

    4

    55,000

    154000

    59,000

    193,000

    52,000

    158,000

    Formula:

    Payback Period = Year before full recovery + Unrecoverable cost / cash flow during the year

    Product 1 = 2 + (36000 / 40000)

    = 2.9 years

    Product 2 = 3 years.

    Product 3 = 2 + ( 42000 / 48000 )

    = 2.87 years

    Net Present Value:

    Product 1:

    Year

    Product 1

    PV @ 10%

    DCF

    PV @ 35%

    DCF

    0

    95000

    1

    -95000

    1

    -90000

    1

    25000

    0.909

    22725

    0.741

    18518.5185185185

    2

    34000

    0.826

    28084

    0.549

    18655.6927297668

    3

    40000

    0.751

    30040

    0.406

    16257.6842960931

    4

    55000

    0.683

    37565

    0.301

    16558.7525237985

    NPV

    23414

    -20009.3519318231 or -20009

    IRR = 10 + {23414 / [ 23414 - (- 20009 )]} * ( 35 – 10)

    = 10 + {0.539 * 25}

    = 10 + 13.47

    = 23.47 %

    Product 2:

    Year

    Product 2

    PV @ 10%

    DCF

    PV @ 20%

    DCF

    0

    134,000

    1

    -134000

    1

    -134000

    1

    40,000

    0.909

    36360

    0.833

    33333

    2

    45,000

    0.826

    37170

    0.694

    31250

    3

    49,000

    0.751

    36799

    0.578

    28357

    4

    59,000

    0.683

    40297

    0.482

    28453

    NPV

    16626

    -12,607

    IRR = 10 + {16,626 / [ 16,626 - (-12,607 )]} * ( 20 – 10)

    = 10 + {0.568 * 10}

    = 10 + 6.08

    = 56.87 %

    Product 3:

    Year

    Product 3

    PV @ 10%

    DCF

    PV @ 25%

    DCF

    0

    100000

    1

    -100000

    1

    -100000

    1

    20000

    0.909

    18180

    0.833

    15143.94

    2

    38000

    0.826

    31388

    0.694

    21783.272

    3

    48000

    0.751

    36048

    0.579

    20871.792

    4

    52000

    0.683

    35516

    0.482

    17118.712

    NPV

    21132

    -25082.284 or -25082

    IRR = 10 + { 21132 / [ 21132 - (- 25082 )]} * ( 25 – 10)

    = 10 + {0.457 * 15}

    = 10 + 6.855

    = 16.855 %

    Accounting Rate of Return:

    ARR = Average Net Profit / Initial Investment * 100

    Items

    Product 1

    Product 2

    Product 3

    Average Net Profit

    38500

    48250

    39500

    Initial Investment

    95000

    134000

    100000

    ARR

    40.52 %

    36 %

    39.5 %

    *Working Notes:

    Average Net profit:

    Product 1 = 154000 / 4 = 38500

    Product 2 = 193000 / 4 = 48250

    Product 3 = 158000 / 4 = 39500

    Overall Analysis:

    Product

    PP

    NPV

    IRR

    ARR

    1

    2.9

    23414

    23.47

    40.52

    2

    3

    16626

    56.87

    36

    3

    2.87

    21132

    16.855

    39.5

    Above mention table represent the comparison of different products which helps Toys “R” Us to understand which product is suitable to invest. With the help of various investment appraisal techniques, management make decisions to introduce Product 1. Payback period of product 1 is 2.9 which is higher than product 3 or lower than product 2. but other than this factor there are various fluctuation in the value of NPV, IRR or ARR. So managers of Toys “R” Us decided to produce Product 1 and sell in the market to generate high revenue.

    CONCLUSION

    On the basis of above report it has been concluded that management of the company need to evaluate micro as well as macro factors before making any strategy. These factors affect the overall growth, production or revenue as well. In addition, with the help of financial analysis company able to measure their financial position in the market which further helps in attracting more stakeholders such as investors or customers.

    RECOMMENDATIONS

    With the help of reviewing above content, it has been recommended that company need to take some key strategic decisions in order to improver their operational efficiency as well as effectiveness. It is discussed below:

    • Toys “R” Us should hire professionals who helps them to make effective decisions or improve their financial result (Throsby, 2016). Company unable to meet their results with ideal ratio as well as there is no growth from 2015 to 2017. They need to make effective strategy to improve overall output.
    • Company need to make their employees skilled which helps in increasing their productivity as well as performance that is automatically beneficial for the business to generate more revenue.
    • Adopt effective marketing strategy to generate demand which helps in increasing production as well as sales revenue.

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