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Financial Analysis
Reitmans
Alimentation Couche-Tard
Sales
COGS
Gross Profit
Depreciation + Exp
Operating Profit
Investment Income
Interest
EBIT
Tax Exp
Net Income
Cash
AR
Inventory
Prepaid Exp
Current Assets
Investments
Capital Assets
Goodwill
Future Income Tax
LTA
Total Assets
Taxes payable
Current LT Debt
Current Liabilities
LT Debt
Other LT Liabilities
Total Liabilities
Equity
L + E
Reitmans was able to improve its profitability in 2005, compared with 2004. The company's gross profit improved to 13.55% from 9.99%; its operating profit improved to 9.7% from 5.98%; and its net profit improved to 7.33% from 4.7%. This shows that the improvement in the company's profitability is largely attributable to the improvement in the top line, with the cost of goods sold being a lower percentage of revenues in 2005 than 2004. Whether this is a function of driving down costs with suppliers or increasing prices to consumers cannot be ascertained from the financial statements, but from the comments in the annual report. Reitmans achieved superior gross margins in a couple of ways. The most important was advanced purchases of U.S. dollar inventories when the Canadian dollar was at a high value, lowering the cost of the goods in C$ terms. The company also cited "effective cost containment at both the store and overhead levels and the significant efficiency improvements in the operation of our supply chain activities" (p.12, 2005 Annual Report). For its part, Couche-Tard saw its profit only improve marginally, from 1.54% to 1.84%. The gross and operating profits saw very little change over the course of the two years.3-4.
Reitmans
Couche-Tard
2005
2004
2010
2009
Current Ratio
1.70631
1.909195
1.167743
1.070342
Debt-Equity
0.408824
0.699933
1.289971
1.45543
Gross Margin
13.55%
9.99%
15.53%
15.44%
Net Margin
7.33%
4.70%
1.84%
1.54%
Equity-Asset
70.98%
58.83%
43.67%
40.73%
From this analysis, both firms have improved the debt-equity and asset-equity ratios. However, the improvement for Reitmans is significantly better than the improved for Couche-Tard. Reitmans paid down a substantial amount of its debt over the course of the year, and this allowed it to reduce its debt-equity ratio from 70% to 41%. Couche-Tard's debt-equity ratio is lower than it was at 1.28 compared with 1.45, but is still much higher than Reitmans. Couche-Tard did not add any new long-term debt, but it did not pay any down, so its improvement was not as great.
5. In the long run, Reitmans would make the better investment. There are two reasons for this recommendation. The first is that the company has improved its financial ratios significantly. By paying down so much of its long-term debt, Reitmans has set the stage for a dramatic improvement in its equity market value in the coming With less of the company's profits going towards debt service, more of those profits are going to retained earnings. For the equity investor, this can only be viewed as a good thing. The other reason is that the company is continuing to grow. Reitmans is consistently adding stores, and new concepts to its lineup. This is allowing the company to grow its operations steadily over the years, despite being in a relatively mature market......