Business Economic Factors of Toys “R” Us

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 AssetsÂ	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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